UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MAY 31, 2003, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission file number 0-11380
ATC HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2650500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1983 Marcus Avenue, Lake Success, New York 11042
(Address of principal executive offices) (Zip Code)
(516) 750-1600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Class A Common Stock and Class B Common Stock
outstanding on July 14, 2003 were 23,615,706 and 256,191 shares, respectively.
ATC HEALTHCARE, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
May 31, 2003(unaudited) and February 28, 2003 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended May 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended May 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DESCRIPTION
OF MARKET RISK 17
Item 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION 18
ITEM 1. LEGAL PROCEDINGS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
PART I. FINANCIAL INFORMATION
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
May 31, 2003 February 28, 2003
(Unaudited)
------------------- --------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 786 $ 585
Accounts receivable, less allowance
for doubtful accounts of $1,446
and $1,784, respectively 26,348 26,876
Deferred income taxes 1,787 1,787
Prepaid expenses and other current assets 3,308 3,087
------------------- --------------------
Total current assets 32,229 32,335
Fixed assets, net 2,448 2,670
Intangibles 7,132 7,186
Goodwill 33,129 33,449
Deferred income taxes 2,188 2,076
Other assets 827 899
------------------- --------------------
Total assets $77,953 $78,615
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,137 $1,332
Accrued expenses 6,410 6,192
Book overdraft 3,204 2,580
Current portion of due under bank financing 635 679
Current portion of notes and guarantee payable 720 896
------------------- --------------------
Total current liabilities 12,106 11,679
Notes and guarantee payable 31,609 31,463
Due under bank financing 22,832 24,249
Other liabilities 77 78
------------------- --------------------
Total liabilities 66,624 67,469
------------------- --------------------
Commitments and contingencies
Convertible Series A Preferred Stock ($.01 par value 4,000 shares authorized,
2,000 and 1,200 shares issued and
outstanding at May 31, 2003 and February 28, 2003, respectively) 1,018 600
------------------- --------------------
STOCKHOLDERS' EQUITY:
Class A Common Stock - $.01 par value; 50,000,000 shares authorized; 23,615,706
and 23,582,552 shares issued and outstanding at May 31, 2003
and February 28, 2003, respectively 235 235
Class B Common Stock - $.01 par value;
1,554,936 shares authorized;
256,191 shares issued and outstanding at May 31, 2003
and February 28, 2003, respectively 3 3
Additional paid-in capital 13,679 13,679
Accumulated deficit (3,606) (3,371)
------------------- --------------------
Total stockholders' equity 10,311 10,546
------------------- --------------------
Total liabilities and stockholders' equity $77,953 $78,615
=================== ====================
See notes to condensed consolidated financial statements.
3
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Three Months
Ended
May 31, May 31,
2003 2002
---- ----
REVENUES:
Service revenues $34,043 $37,699
- ------------------------------------------------------------------------ ------------- ------------
COSTS AND EXPENSES:
Service costs 26,562 28,716
General and administrative expenses 6,408 7,172
Depreciation and amortization 587 350
- ------------------------------------------------------------------------ ------------- ------------
Total operating expenses 33,557 36,238
- ------------------------------------------------------------------------ ------------- ------------
INCOME FROM OPERATIONS 486 1,461
- ------------------------------------------------------------------------ ------------- ------------
INTEREST AND OTHER EXPENSES (INCOME):
Interest expense, net 848 736
Other expense (income), net (32) 1
- ------------------------------------------------------------------------ ------------- ------------
Total interest and other expenses 816 737
- ------------------------------------------------------------------------ ------------- ------------
(LOSS) INCOME BEFORE INCOME TAXES (330) 724
INCOME TAX (BENEFIT) PROVISION (112) 297
- ------------------------------------------------------------------------ ------------- ------------
NET (LOSS) INCOME (218) 427
Dividends accreted to Preferred Shareholders 17 --
- ------------------------------------------------------------------------ ------------- ------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (235) $ 427
======================================================================== ============= ============
(LOSS) EARNINGS PER COMMON SHARE - BASIC: $ (.01) $ .02
======================================================================== ============= ============
(LOSS) EARNINGS PER COMMON SHARE - DILUTED: $ (.01) $ .02
======================================================================== ============= ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 23,859 23,747
======================================================================== ============= ============
Diluted 23,859 27,516
======================================================================== ============= ============
See notes to condensed consolidated financial statements.
4
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
May 31, May 31,
2003 2002
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (218) $ 427
Adjustments to reconcile net (loss) income to net cash provided by
operations:
Depreciation and amortization 646 390
Deferred income taxes (112) --
In kind interest 228 --
Accrued interest on acquisition notes payable -- 217
Changes in operating assets and liabilities:
Accounts receivable 528 491
Prepaid expenses and other current assets (221) (360)
Other assets 10
(43)
Accounts payable and accrued expenses
7 24
Other long-term liabilities (1) (5)
---------------------------------
Net cash provided by operating activities 867 1,141
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (138) (154)
Finalization of acquisition purchase price 150 --
Acquisition of business -- (50)
Cash received for repayment of notes receivable -- 21
---------------------------------
Net cash provided by (used in) investing activities 12 (183)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes and capital lease obligations (1,547) (986)
Repayment of term loan facility (417) --
Issuance of common and preferred stock 401 50
Book overdraft 624 --
Borrowings (payments) under credit facility 261 (922)
---------------------------------
Net cash used in financing activities (678) (1,858)
---------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 201 (900)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 585 1,320
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $786 $420
=================================
Supplemental Data:
Interest paid $431 $ 503
=================================
Income taxes paid $ 86 $ 24
=================================
See notes to condensed consolidated financial statements.
5
ATC HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in Thousands, Except Where Indicated Otherwise, and for Per Share
Amounts)
1. FINANCIAL STATEMENTS - The accompanying condensed consolidated financial
statements as of May 31, 2003 and for the three months ended May 31, 2003 and
2002 are unaudited. In the opinion of management, all adjustments, consisting of
only normal and recurring accruals, necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for the
periods presented have been included. The condensed consolidated balance sheet
as of February 28, 2003 was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles. The accompanying condensed consolidated financial statements should
be read in conjunction with the condensed consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K of ATC Healthcare, Inc.
(the "Company") for the year ended February 28, 2003. Certain prior period
amounts have been reclassified to conform with the May 31, 2003 presentation.
The results for the three-month period ended May 31, 2003 are not necessarily
indicative of the results for the full year ending February 29, 2004.
2. EARNINGS PER SHARE -Basic earnings (loss) per share is computed using the
weighted average number of common shares outstanding for the applicable period.
Diluted earnings (loss) per share is computed using the weighted average number
of common shares plus common equivalent shares outstanding, unless the inclusion
of such common equivalent shares would be anti-dilutive. Earnings per share for
the three months ended May 31, 2002 include common stock equivalents of
3,769,210 shares relating to the dilutive effect of stock options. For the three
months ended May 31, 2003, common stock equivalents would have been
anti-dilutive.
3. PROVISION (BENEFIT) FOR INCOME TAXES - Management believes that it is more
likely than not that the Company's deferred tax assets will be realized through
future profitable operations. This is based upon the fact that the company has
had profitable operations in each of its quarters since September 1, 2000
through the third quarter ended November 30, 2003, which quarterly results are
profitable before a charge for the guarantee of certain debt of a former related
party, Tender Loving Care Health Care Services, Inc. ("TLCS"). Losses incurred
in the fourth quarter of fiscal 2003 and first quarter of fiscal 2004 were
primarily due to an unexpected shortfall in hospital patient volumes, which
volumes appear to be returning in the second quarter of fiscal 2004.
Management believes that it will return to profitable operations during fiscal
2004. As of February 28, 2003, the Company has a Federal net operating loss of
approximately $2.4 million which expires in 2020 through 2023.
4. RECENT ACQUISITIONS - In January 2002, the Company purchased substantially
all of the assets of Direct Staffing, Inc. ("DSI"), a licensee of the Company
serving the territory consisting of Westchester County, New York and Northern
New Jersey, and DSS Staffing Corp. ("DSS"), a licensee of the Company serving
New York City and Long Island, New York for a purchase price of $30,195. These
two licensees were owned by an unrelated third party and by a son and two
sons-in-law of the Company's Chairman of the Board of Directors who have
received an aggregate 60% of the proceeds of the sale. Under the original
purchase agreement, the Company had agreed to pay contingent consideration equal
to the amount by which (a) the product of (i) Annualized Revenues (as defined in
the purchase agreement) and (ii) 5.25 exceeds (b) $17,220, but if and only if
the resulting calculation exceeds $20 million. However, under the June 13, 2003
amendment discussed below, the obligation was terminated.
The Company has obtained a valuation on the tangible and intangible assets
associated with the transaction and has allocated $6,400 to customer lists
(which is being amortized over 10 years), $200 to a covenant not to compete
(which is being amortized over 8 years) and the remaining balance to goodwill.
The purchase price was initially evidenced by two series of promissory notes
issued to each of the four owners of DSS and DSI. The first series of notes (the
"First Series"), in the aggregate principal amount of $12,975, bore interest at
the rate of 5% per annum and was payable in 36 consecutive equal monthly
installments of principal, together with interest thereon, with the first
installment becoming due on March 1, 2002. The second series of notes (the
"Second Series"), in the aggregate principal amount of $17,220, bore interest at
the rate of 5% per annum and was payable as follows: $11 million, together with
interest thereon, on April 30, 2005 (or earlier if certain capital events occur
prior to such date) and the balance in 60 consecutive equal monthly installments
of principal, together with interest thereon, with the first installment
becoming due on April 30, 2005. Payment of both the First Series and the Second
Series was collateralized by a second lien on the assets of the acquired
licensees.
On June 13, 2003, the debt between the Company and the noteholders was amended
to reduce the aggregate monthly payments and extend the terms thereof. In
connection therewith, the subordination agreement between the Company, the
6
noteholders and the Company's primary lender was also amended. The two series of
promissory notes to the former owners of DSS and DSI have been condensed into
one series of notes. One of the promissory notes is for a term of seven years,
in the principal amount of $8,578, bears interest at the rate of 5% per annum,
with a minimum monthly payment (including interest) of $40, with the first
installment becoming due on June 13, 2003, and minimum monthly payments
(including interest) of $80 beginning on June 1, 2004, thereafter, with a
balloon payment of $3,700 due on May 7, 2007. The balance on the first note
after the balloon payment is payable in minimum monthly installments of $80 over
the remaining three years of the note, subject to certain limitations under the
amended subordination agreement. The other three promissory notes are for ten
years, in the aggregate principal amount of $17,491, bear interest at the rate
of 5% per annum, with minimum monthly payments (including interest) of $25, in
the aggregate, with the first installment becoming due on June 13, 2003, and
minimum monthly payments (including interest) of $51, in the aggregate beginning
on June 1, 2004, thereafter. Any unpaid balances at the end of the note terms
will be due at that time. If the Company achieves certain financial ratios, its
minimum monthly payments under all four of the notes will be increased, as
provided in the amended subordination agreement. Payment of the notes is
collateralized by a second lien on the assets of the original franchises. In
conjunction with the amendment of the notes, one of the note holders reduced his
note by approximately $2,800, subject to the Company's compliance with the
modified subordination agreement.
In June 2002 the Company bought out a management contract with a company
("Travel Company") which was managing its travel nurse division. The purchase
price of $620 is payable over two years beginning in December 2002. The Company
is amortizing the cost of the buyout over the five years that were remaining on
the management contract.
During fiscal 2003, the Company purchased substantially all of the assets and
operations of 8 temporary medical staffing companies totaling $3,041, of which
$2,071 was paid in cash and the remaining balance is payable under notes payable
with maturities through January 2007. The notes bear interest at rates between
6% to 8% per annum. The purchase prices were allocated primarily to goodwill
(approximately $2,282).
The acquisitions were accounted for under the purchase method of accounting; and
accordingly, the accompanying consolidated financial statements include the
results of the acquired operations from their respective acquisition dates.
5. DEBT - During April 2001, the Company entered into a Financing Agreement with
a lending institution, whereby the lender agreed to provide a revolving credit
facility of up to $25 million. The Financing Agreement was amended in October
2001 to increase the facility to $27.5 million. Amounts borrowed under the New
Financing Agreement were used to repay $20,636 of borrowing on its existing
facility. As a result, the Company recognized a loss of approximately $850
(before a tax benefit of $341), which includes the write-off of deferred
financing costs and an early termination fee.
Availability under the Financing Agreement is based on a formula of eligible
receivables, as defined in the Financing Agreement. The borrowings bear interest
at rates based on LIBOR plus 3.65%. At February 28, 2002, the interest rate was
5.65%. Interest rates ranged from 5.4% to 8.2% in fiscal 2002. An annual fee of
0.5% is required based on any unused portion of the total loan availability.
In November 2002, the lending institution with which the Company has the secured
facility, increased the revolving credit line to $35 million and provided for an
additional term loan facility totaling $5 million. Interest accrues at a rate of
3.95% over LIBOR on the revolving credit line and 6.37% over LIBOR on the term
loan facility. The Facility expires in November 2005. The term loan facility is
for acquisitions and capital expenditures. Repayment of this additional term
facility will be on a 36 month straight line amortization.
The Agreement contains various restrictive covenants that, among other
requirements, restrict additional indebtedness. The covenants also require the
Company to meet certain financial ratios.
In November 2002, the interest rates were revised to 4.55% over LIBOR on the
revolving line and 7.27% over LIBOR on the term loan facility as part of a loan
modification.
As of May 31, 2003 and 2002, the outstanding balance on the revolving credit
facility was $21,253 and $22,678, respectively. The Company had outstanding
borrowings under the term loan of $2,215 as of May 31, 2003. The Company has an
outstanding letter of credit of $800 at May 31, 2003.
On June 13, 2003, the Company received a waiver from the lender for
non-compliance of certain Facility covenants as of February 28, 2003. Interest
rates on both the revolving line and term loan facility were increased 2% and
7
can decrease if the Company meets certain financial criteria. In addition,
certain financial ratio covenants were modified. The additional interest is not
payable until the current expiration date of the Facility which is November
2005.
Guarantee of TLCS Liability - The Company is contingently liable on $2.3 million
of obligations owed by TLCS which is payable over eight years. The Company is
indemnified by TLCS for any obligations arising out of these matters. On
November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company has recorded a provision
of $2.3 million representing the balance outstanding on the related TLCS
obligations. The Company has not received any demands for payment with respect
to these obligations. The next payment is due in September 2003. The obligation
is payable over 8 years. The Company believes that it has certain defenses which
could reduce or eliminate its recorded liability in this matter.
6. REVENUE RECOGNITION - A substantial portion of the Company's service revenues
are derived from a unique form of franchising under which independent companies
or contractors ("licensees") represent the Company within a designated
territory. These licensees assign Company personnel, including registered nurses
and therapists, to service clients using the Company's trade names and service
marks. The Company pays and distributes the payroll for the direct service
personnel who are all employees of the Company, administers all payroll
withholdings and payments, bills the customers and receives and processes the
accounts receivable. The revenues and related direct costs are included in the
Company's consolidated service revenues and operating costs. The licensees are
responsible for providing an office and paying related expenses for
administration including rent, utilities and costs for administrative personnel.
The Company pays a monthly distribution or commission to its domestic licensees
based on a defined formula of gross profit generated. Generally, the Company
pays licensees approximately 55% (60% for certain licensees who have longer
relationships with the Company). There is no payment to the licensees based
solely on revenues. For the three months ended May 31, 2003 and 2002, total
licensee distributions were approximately $1,777 and $2,340, respectively, and
are included in the general and administrative expenses.
The Company recognizes revenue as the related services are provided to customers
and when the customer is obligated to pay for such completed services. Revenues
are recorded net of contractual or other allowances to which customers are
entitled. Employees assigned to particular customers may be changed at the
customer's request or at the Company's initiation. A provision for uncollectible
and doubtful accounts is provided for amounts billed to customers which may
ultimately be uncollectible due to billing errors, documentation disputes or the
customer's inability to pay.
Revenues generated from the sales of licensees and initial licensee fees are
recognized upon signing of the licensee agreement, if collectibility of such
amounts is reasonably assured, since the Company has performed substantially all
of its obligations under its licensee agreements by such date. Included in
revenues for the three months ended May 31, 2003 and 2002 is $0 and $430,
respectively, of licensee fees.
7. INTANGIBLE ASSETS - On March 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Intangible Assets" (SFAS
142). SFAS 142 includes requirements to annually test goodwill and indefinite
lived intangible assets for impairment rather than amortize them; accordingly,
the Company no longer amortizes goodwill and indefinite lived intangibles.
8. CONTINGENCIES
The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. Management
believes the disposition of the lawsuits will not have a material effect on its
financial position, results of operations or cash flows.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
"Rescission of FAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002". This Statement amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions as well as other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company adopted SFAS No. 145 in fiscal 2003.
8
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities". This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is effective for fiscal years beginning after
December 31, 2002. The adoption of SFAS No. 146 had no impact on the
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure" that amends FASB Statement No. 123
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 amends the
disclosure requirements of APB Opinion No. 28, "Interim Financial Reporting" and
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. SFAS No.
148 is effective for fiscal years ending after December 15, 2002. The adoption
of SFAS No. 148, except for the disclosure requirements, had no impact on the
consolidated financial statements.
In November 2002, the FASB issued Interpretation 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
issued or modified subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. There has been no impact from the adoption of this pronouncement.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, ("FAS 150"). This statement establishes standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. This
Statement shall be effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. There has been no impact
from the adoption of this pronouncement.
10. Recent Sales of Unregistered Securities - On March 10, 2003, the Company
sold 300 shares of its 7% Convertible Series A Preferred Stock ("the Preferred
Stock") and received cash proceeds of $150,000. The purchasers of the stock were
two executive officers of the Company. This stock is convertible to Common Stock
at the price of $.80 per share which is 120% of the weighted average market
close price of the Company's Common Stock for the ten day trading period ending
on the date of the purchase of the Convertible Preferred Stock. On April 30,
2003, the Company sold 500 shares of its 7% Convertible Series A Preferred Stock
("the Preferred Stock") and received cash proceeds of $250,000. The purchasers
of the stock were two executive officers of the Company and two accredited
investors. This stock is convertible to Common Stock at the price of $.93 per
share which is 120% of the weighted average market close price of the Company's
Common Stock for the ten day trading period ending on the date of the purchase
of the Convertible Preferred Stock.
11. Pro Forma Information - The Company applies the intrinsic value method in
accounting for its stock-based compensation. Had the Company measured
compensation under the fair value method for stock options granted, the
Company's net (loss) income and net (loss) income per share basic and diluted
would have been as follows:
9
Quarter Ended
May 31, 2003 May 31, 2002
Net (loss) income- as reported $ (218) $ 427
Net (loss) income - pro forma (218) 395
Basic (loss) income per share as reported $ (0.01) $ 0.02
Basic (loss) income per share pro forma (0.01) 0.02
Diluted (loss) income per share as reported (0.01) 0.02
Diluted (loss) income per share pro forma (0.01) 0.02
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in Thousands, Except Where Indicated Otherwise, and for Per Share
Amounts)
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements appearing in
Item 1.
Results of Operations
Total revenues decreased by $3.7 million or 9.7% for the three months ended May
31, 2003 ("the 2003 period") to $34.0 million from $37.7 million for the three
months ended May 31, 2002 ("the 2002 period"). Same store sales for locations
open during the last two fiscal years decreased 16.3% due to the fact that
demand for temporary nurses is going through an unexpected short-term period of
contraction as hospitals began experiencing flat to declining admission rates.
Service costs were 78.0% and 76.2% of total revenues for the 2003 and 2002
periods, respectively. Margins have declined because of the decreased demand
causing pressure on margins and increased insurance costs. Service costs
represent the direct costs of providing services to patients or clients,
including wages, payroll taxes, travel costs, insurance costs, medical supplies
and the cost of contracted services.
General and administrative expenses were $6.4 million for the 2003 period versus
$7.2 million for the 2002 period. General and administrative costs, expressed as
a percentage of total revenues, were 18.9% and 19.0% for the 2003 and 2002
periods, respectively. The decrease in the 2003 period is primarily due to
decreased royalty payments to licensees due to decreased revenues.
Interest expense,(net) for the 2003 period increased to $848 from $736 in the
2002 period primarily due to the interest costs associated with the Company's
term loan facility and to increased interest rates associated with its revolving
line of credit.
Liquidity and Capital Resources
Cash and cash equivalents increased by $201 as of May 31, 2003 as compared to
February 28, 2003 as a result primarily of cash provided by operations of $867
offset by cash used in financing activities of $678.
In April 2001, the Company obtained a new financing facility (the "Facility")
with a new lending institution for a $25 million, three year term, revolving
loan, $20.6 million of which was used to pay down borrowings under the Company's
previous financing facility. The Facility limit was increased to $27.5 million
in October 2001. Under the Facility, the Company may borrow amounts up to 85% of
the Company's eligible accounts receivable subject to a maximum of $27.5
million. Interest on borrowings under the Facility is at the annual rate of
3.65% over LIBOR in addition to a .5% annual fee for the unused portion of the
total loan availability. The Company recorded a charge of approximately $500
thousand (net of an income tax benefit of $300 thousand) in the first quarter of
the fiscal year ended February 2002 as a result of the write-off of previously
deferred costs and an early prepayment fee associated with termination of the
former Facility.
In November 2002, the lending institution with which the Company has the
Facility, increased the revolving credit line to $35 million and provided for an
additional term loan facility totaling $5 million. Interest accrues at a rate of
3.95% over LIBOR on the revolving credit line and 6.37% over LIBOR on the term
loan facility. The New Facility expires in November 2005. The term loan facility
is for acquisitions and capital expenditures. Repayment of this additional term
facility will be in 36 equal monthly installments.
In November 2002, the interest rates were revised to 4.55% over LIBOR on the
revolving line and 7.27% over LIBOR on the term loan facility as part of a loan
modification.
On June 13, 2003, the Company received a waiver from the lender for
non-compliance with certain Facility covenants as of February 28, 2003. Interest
rates on both the revolving line and term loan facility were increased 2% and
can decrease if the Company meets certain financial criteria. In addition,
certain financial ratio covenants were modified. The additional interest is not
payable until the current expiration date of the Facility which is November
2005.
11
At the same time, the lender and DSS and DSI note holders amended the
subordination agreements. As a result of that amendment, the two series of
promissory notes to the former owners of DSS and DSI have been condensed into
one series of notes. One of the promissory notes is for a term of seven years,
in the principal amount of $8,578,105, bears interest at the rate of 5% per
annum, with a minimum monthly payment (including interest) of $40 with the first
installment becoming due on June 13, 2003, and minimum monthly payments
(including interest) of $80 beginning on June 1, 2004, thereafter, with a
balloon payment of $3,700 due on May 7, 2007. The balance on the first note
after the balloon payment is payable in minimum monthly installments of $80,000
over the remaining 3 years of the note, subject to certain limitations under the
amended subordination agreement. The other three promissory notes are for ten
years, in the aggregate principal amount of $17,491, bear interest at the rate
of 5% per annum, with minimum monthly payments (including interest) of $25 in
the aggregate, with the first installment becoming due on June 13, 2003, and
minimum monthly payments (including interest) of $51 in the aggregate beginning
on June 1, 2004, thereafter. Any unpaid balances at the end of the note terms
will be due at that time. If the Company achieves certain financial ratios, its
minimum monthly payments under all four of the notes will be increased, as
provided in the amended subordination agreement. Payment of the notes is
collateralized by a second lien on the assets of the original franchises. In
conjunction with the amendment of the notes, one of the note holders reduced his
note by approximately $2,800, subject to the Company's compliance with the
modified subordination agreement.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $400.
Operating cash flows have been our primary source of liquidity and historically
have been sufficient to fund our working capital, capital expenditures, and
internal business expansion and debt service. The Company's cash flow has been
aided by the recent sales of unregistered securities and by the debt
restructuring completed on June 13, 2003. We believe that our capital resources
are sufficient to meet our working capital requirements for the next twelve
months. We expect to meet our future working capital, capital expenditure,
internal business expansion, and debt service from a combination of operating
cash flows and funds available under the Facility.
Business Trends
Sales and margins have been under pressure as demand for temporary nurses is
currently going through a period of contraction. Hospitals are experiencing flat
to declining admission rates and are placing greater reliance on full-time staff
overtime and increased nurse patient loads. Because of difficult economic times,
nurses in many households are becoming the primary breadwinner, causing them to
seek more traditional full time employment. The U.S. Department of Health and
Human Services said in a July 2002 report that the national supply of full-time
equivalent registered nurses was estimated at 1.89 million and demand was
estimated at 2 million. The 6 percent gap between the supply of nurses and
vacancies in 2000 is expected to grow to 12 percent by 2010 and then to 20
percent five years later. As the economy rebounds, the prospects for the medical
staffing industry and the Company should improve as hospitals experience higher
admission rates and increasing shortages of healthcare workers.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. From time to time, the Company also provides
forward-looking statements in other materials it releases to the public as well
as oral forward-looking statements. These statements are typically identified by
the inclusion of phrases such as "the Company anticipates," "the Company
believes" and other phrases of similar meaning. These forward-looking statements
are based on the Company's current expectations. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The potential risks and
uncertainties which would cause actual results to differ materially from the
Company's expectations include, but are not limited to, those discussed below in
the section entitled "Risk Factors." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
12
Risk Factors
Currently We Are Unable to Recruit Enough Nurses to Meet Our Clients'
Demands for our Nurse Staffing Services, Limiting the Potential Growth of Our
Staffing Business
We rely significantly on our ability to attract, develop and retain nurses and
other healthcare personnel who possess the skills, experience and, as required,
licenses necessary to meet the specified requirements of our healthcare staffing
clients. We compete for healthcare staffing personnel with other temporary
healthcare staffing companies, as well as actual and potential clients, some of
which seek to fill positions with either regular or temporary employees.
Currently, there is a shortage of qualified nurses in most areas of the United
States and competition for nursing personnel is increasing. At this time we do
not have enough nurses to meet our clients' demands for our nurse staffing
services. This shortage of nurses limits our ability to grow our staffing
business. Furthermore, we believe that the aging of the existing nurse
population and declining enrollments in nursing schools will further exacerbate
the existing nurse shortage. In addition, in the aftermath of the terrorist
attacks on New York and Washington, we experienced a temporary interruption of
normal business activity. Similar events in the future could result in
additional temporary or longer-term interruptions of our normal business
activity, which would adversely affect our financial results.
The Costs of Attracting and Retaining Qualified Nurses and Other Healthcare
Personnel May Rise More than We Anticipate
We compete with other healthcare staffing companies for qualified nurses and
other healthcare personnel. Because there is currently a shortage of qualified
healthcare personnel, competition for these employees is intense. To induce
healthcare personnel to sign on with them, our competitors may increase hourly
wages or other benefits. If we do not raise wages in response to such increases
by our competitors, we could face difficulties attracting and retaining
qualified healthcare personnel. In addition, if we raise wages in response to
our competitors' wage increases and are unable to pass such cost increases on to
our clients, our margins could decline.
We Operate in a Highly Competitive Market and Our Success Depends on our Ability
to Remain Competitive in Obtaining and Retaining Hospital and Healthcare
Facility Clients and Temporary Healthcare Professionals.
The temporary medical staffing business is highly competitive. We compete in
national, regional and local markets with full-service staffing companies and
with specialized temporary staffing agencies. Some of these companies may have
greater marketing and financial resources than we do. Competition for hospital
and healthcare facility clients and temporary healthcare professionals may
increase in the future and, as a result, we may not be able to remain
competitive. To the extent competitors seek to gain or retain market share by
reducing prices or increasing marketing expenditures, we could lose revenues or
hospital and healthcare facility clients and our margins could decline, which
could seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative recruitment channels could
lead our hospital and healthcare facility clients to bypass our services, which
would also cause our revenues and margins to decline.
Our Business Depends upon our Continued Ability to Secure and Fill New Orders
from our Hospital and Healthcare Facility Clients, Because We Do Not Have
Long-Term Agreements or Exclusive Contracts With Them.
We do not have long-term agreements or exclusive guaranteed order contracts with
our hospital and healthcare facility clients. The success of our business
depends upon our ability to continually secure new orders from hospitals and
other healthcare facilities and to fill those orders with our temporary
healthcare professionals. Our hospital and healthcare facility clients are free
to place orders with our competitors and may choose to use temporary healthcare
professionals that our competitors offer them. Therefore, we must maintain
positive relationships with our hospital and healthcare facility clients. If we
fail to maintain positive relationships with our hospital and healthcare
facility clients, we may be unable to generate new temporary healthcare
professional orders and our business may be adversely affected.
Decreases in Patient Occupancy at Our Clients' Facilities May Adversely
Affect the Profitability of Our Business
Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our clients' facilities. When a
hospital's occupancy increases, temporary employees are often added before
full-time employees are hired. As occupancy decreases, clients may reduce their
use of temporary employees before undertaking layoffs of their regular
employees. We also may experience more competitive pricing pressure during
periods of occupancy downturn. In addition, if a trend emerges toward providing
healthcare in alternative settings, as opposed to acute care hospitals,
13
occupancy at our clients' facilities could decline. This reduction in occupancy
could adversely affect the demand for our services and our profitability.
Healthcare Reform Could Negatively Impact Our Business Opportunities,
Revenues and Margins.
The U.S. government has undertaken efforts to control increasing healthcare
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the recent past, the U.S. Congress has
considered several comprehensive healthcare reform proposals. The proposals were
generally intended to expand healthcare coverage for the uninsured and reduce
the growth of total healthcare expenditures. While the U.S. Congress did not
adopt any comprehensive reform proposals, members of Congress may raise similar
proposals in the future. If any of these proposals are approved, hospitals and
other healthcare facilities may react by spending less on healthcare staffing,
including nurses. If this were to occur, we would have fewer business
opportunities, which could seriously harm our business.
State governments have also attempted to control increasing healthcare costs.
For example, the state of Massachusetts has recently implemented a regulation
that limits the hourly rate payable to temporary nursing agencies for registered
nurses, licensed practical nurses and certified nurses' aides. The state of
Minnesota has also implemented a statute that limits the amount that nursing
agencies may charge nursing homes. Other states have also proposed legislation
that would limit the amounts that temporary staffing companies may charge. Any
such current or proposed laws could significantly harm our business, revenues
and margins.
Furthermore, third party payors, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by hospitals
and other healthcare facilities to obtain full reimbursement from those third
party payors could reduce the demand or the price paid for our staffing
services.
We are Dependent on the Proper Functioning of Our Information Systems
Our company is dependent on the proper functioning of our information systems in
operating our business. Critical information systems used in daily operations
identify and match staffing resources and client assignments and perform billing
and accounts receivable functions. Our information systems are protected through
physical and software safeguards and we have backup remote processing
capabilities. However, they are still vulnerable to fire, storm, flood, power
loss, telecommunications failures, physical or software break-ins and similar
events. In the event that critical information systems fail or are otherwise
unavailable, these functions would have to be accomplished manually, which could
temporarily impact our ability to identify business opportunities quickly, to
maintain billing and clinical records reliably and to bill for services
efficiently.
We May be Legally Liable for Damages Resulting from our Hospital and Healthcare
Facility Clients' Mistreatment of our Healthcare Personnel.
Because we are in the business of placing our temporary healthcare professionals
in the workplaces of other companies, we are subject to possible claims by our
temporary healthcare professionals alleging discrimination, sexual harassment,
negligence and other similar activities by our hospital and healthcare facility
clients. The cost of defending such claims, even if groundless, could be
substantial and the associated negative publicity could adversely affect our
ability to attract and retain qualified healthcare professionals in the future.
If Regulations that Apply to us Change, We May Face Increased Costs That
Reduce Our Revenue and Profitability
The temporary healthcare staffing industry is regulated in many states. In some
states, firms such as our company must be registered to establish and advertise
as a nurse staffing agency or must qualify for an exemption from registration in
those states. If we were to lose any required state licenses, we could be
required to cease operating in those states. The introduction of new regulatory
provisions could substantially raise the costs associated with hiring temporary
employees. For example, some states could impose sales taxes or increase sales
tax rates on temporary healthcare staffing services. These increased costs may
not be able to be passed on to clients without a decrease in demand for
temporary employees. In addition, if government regulations were implemented
that limited the amounts we could charge for our services, our profitability
could be adversely affected.
Future Changes in Reimbursement Trends Could Hamper Our Clients' Ability to
Pay Us
Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. In recent years, federal and
state governments have made significant changes in these programs that have
reduced reimbursement rates. In addition, insurance companies and managed care
14
organizations seek to control costs by requiring that healthcare providers, such
as hospitals, discount their services in exchange for exclusive or preferred
participation in their benefit plans. Future federal and state legislation or
evolving commercial reimbursement trends may further reduce, or change
conditions for, our clients' reimbursement. Limitations on reimbursement could
reduce our clients' cash flows, hampering their ability to pay us.
Competition for Acquisition Opportunities May Restrict Our Future Growth by
Limiting Our Ability to Make Acquisitions at Reasonable Valuations
Our business strategy includes increasing our market share and presence in the
temporary healthcare staffing industry through strategic acquisitions of
companies that complement or enhance our business. We have historically faced
competition for acquisitions. In the future, such competition could limit our
ability to grow by acquisitions or could raise the prices of acquisitions and
make them less attractive to us.
We May Face Difficulties Integrating Our Acquisitions Into Our Operations
and Our Acquisitions May be Unsuccessful, Involve Significant Cash Expenditures
or Expose Us to Unforeseen Liabilities
We continually evaluate opportunities to acquire healthcare staffing companies
and other human capital management services companies that complement or enhance
our business. From time to time, we engage in strategic acquisitions of such
companies or their assets.
These acquisitions involve numerous risks, including:
- potential loss of key employees or clients of acquired companies;
- difficulties integrating acquired personnel and distinct cultures into
our business;
- difficulties integrating acquired companies into our operating,
financial planning and financial reporting systems;
- diversion of management attention from existing operations; and
- assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply
with healthcare regulations.
These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could have a material adverse effect on
our financial condition and results of operations. Any acquisition may
ultimately have a negative impact on our business and financial condition.
Significant Legal Actions Could Subject Us to Substantial Uninsured Liabilities
In recent years, healthcare providers have become subject to an increasing
number of legal actions alleging malpractice, product liability or related legal
theories. Many of these actions involve large claims and significant defense
costs. In addition, we may be subject to claims related to torts or crimes
committed by our employees or temporary staffing personnel. In some instances,
we are required to indemnify clients against some or all of these risks. A
failure of any of our employees or personnel to observe our policies and
guidelines intended to reduce these risks, relevant client policies and
guidelines or applicable federal, state or local laws, rules and regulations
could result in negative publicity, payment of fines or other damages. To
protect ourselves from the cost of these claims, we maintain professional
malpractice liability insurance and general liability insurance coverage in
amounts and with deductibles that we believe are appropriate for our operations.
However, our insurance coverage may not cover all claims against us or continue
to be available to us at a reasonable cost. If we are unable to maintain
adequate insurance coverage, we may be exposed to substantial liabilities, which
could adversely affect our financial results.
If Our Insurance Costs Increase Significantly, These Incremental Costs
Could Negatively Affect Our Financial Results
The costs related to obtaining and maintaining workers compensation,
professional and general liability insurance and health insurance for healthcare
providers has been increasing. If the cost of carrying this insurance continues
to increase significantly, we will recognize an associated increase in costs
which may negatively affect our margins. This could have an adverse impact on
our financial condition and the price of our common stock.
15
If We Become Subject to Material Liabilities Under Our Self-Insured
Programs, Our Financial Results May Be Adversely Affected
We provide workers compensation coverage through a program that is partially
self-insured. If we become subject to substantial uninsured workers compensation
liabilities, our financial results may be adversely affected.
We Have a Substantial Amount of Goodwill on our Balance Sheet. A Substantial
Impairment of our Goodwill May Have the Effect of Decreasing Our Earnings or
Increasing Our Losses.
As of May 31, 2003, we had $33.1 million of unamortized goodwill on our balance
sheet, which represents the excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. At May 31, 2003,
goodwill represented 42% of our total assets.
Historically, we amortized goodwill on a straight-line basis over the estimated
period of future benefit of up to 25 years. In July 2001, the Financial
Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 142 requires that, subsequent to January
1, 2002, goodwill not be amortized but rather that it be reviewed annually for
impairment. In the event impairment is identified, a charge to earnings would be
recorded. We have adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
March 1, 2002. Although it does not affect our cash flow, an impairment charge
to earnings has the effect of decreasing our earnings. If we are required to
take a charge to earnings for goodwill impairment, our stock price could be
adversely affected.
Demand for Medical Staffing Services is Significantly Affected by the General
Level of Economic Activity and Unemployment in the United States.
When economic activity increases, temporary employees are often added before
full-time employees are hired. However, as economic activity slows, many
companies, including our hospital and healthcare facility clients, reduce their
use of temporary employees before laying off full-time employees. In addition,
we may experience more competitive pricing pressure during periods of economic
downturn. Therefore, any significant economic downturn could have a material
adverse impact on our condition and results of operations.
Business Conditions
Our business is dependent on the Company continuing to establish and maintain
close working relationships with physicians and physician groups, managed care
organizations, hospitals, clinics, nursing homes, social service agencies and
other health care providers. There can be no assurance that the Company will
continue to establish or maintain such relationships. The Company expects
additional competition will develop in future periods given the increasing
market demand for the type of services offered.
Attraction and Retention of Licensees and Employees
Maintaining quality licensees, managers and branch administrators will play a
significant part in the future success of the Company. The Company's
professional nurses and other health care personnel are also key to the
continued provision of quality care to patients of the Company's customers. The
possible inability to attract and retain qualified licensees, skilled management
and sufficient numbers of credentialed health care professional and
para-professionals and information technology personnel could adversely affect
the Company's operations and quality of service. Also, because the travel nurse
program is dependent upon the attraction of skilled nurses from overseas, such
program could be adversely affected by immigration restrictions limiting the
number of such skilled personnel who may enter and remain in the United States.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Sensitivity: The Company's primary market risk exposure is
interest rate risk. The Company's exposure to market risk for changes in
interest rates relates to its debt obligations under its Facility described
above. Under the Facility, the interest rate is 4.55% over LIBOR. At May 31,
2003, drawings on the Facility were $22.8 million. Assuming variable rate debt
at May 31, 2003, a one point change in interest rates would impact annual net
interest payments by $228 thousand. The Company does not use derivative
financial instruments to manage interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company carried
out, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in the Exchange Act Rules
13a-14(c) and 15d-14(c). Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the date of that evaluation. There have been no
significant changes in internal controls, or in other factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - See Note 8 in PART I. - ITEM 1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 3 - Certificate of Designation
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(B) Reports on Form 8-K
None
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 15, 2003 ATC HEALTHCARE, INC.
By: /s/ Alan Levy
--------------
Alan Levy
Senior Vice President, Finance
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
19
Sarbanes-Oxley
Section 302(a) Certifications
I, David Savitsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATC
Healthcare, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons fulfilling the
equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: July 15, 2003
/s/ DAVID SAVITSKY
-----------------------------------
David Savitsky
Chief Executive Officer
20
I, Alan Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATC
Healthcare, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons fulfilling the
equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: July 15, 2003
/s/ ALAN LEVY
--------------
Alan Levy
Senior Vice President, Finance
Chief Financial Officer
and Treasurer
21
Exhibit 3
CERTIFICATE OF DESIGNATION
OF
7% CONVERTIBLE SERIES A PREFERRED STOCK
OF
ATC HEALTHCARE, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
ATC Healthcare, Inc., a Delaware corporation (the "Corporation"), DOES
HEREBY CERTIFY:
That the following resolution was duly adopted by the Board of
Directors of the Corporation (the "Board of Directors") at a meeting duly
convened and held on February 14, 2003, pursuant to authority conferred upon the
Board of Directors by Article Fourth of the Certificate of Incorporation of the
Corporation authorizing the Corporation to issue up to 10,000 shares of
Preferred Stock, par value $1.00 per share:
"BE IT RESOLVED, that the issuance of a series of Preferred
Stock of ATC Healthcare, Inc. is hereby authorized, and the designation, voting
powers, preferences and relative, participating, optional and other special
rights, and qualifications, limitations and restrictions of the shares of such
series, in addition to those set forth in the Certificate of Incorporation of
the Corporation, are hereby fixed as follows:
Designation. The distinctive serial designation of such series is "7%
Convertible Series A Preferred Stock" ("Series A Preferred Stock"). Except as
otherwise provided herein, each share of Series A Preferred Stock shall be
identical in all respects to every other share of Series A Preferred Stock.
Number of Shares. The number of shares of Series A Preferred Stock shall
initially be 4,000. Such number may from time to time be increased (but not in
excess of the total number of authorized shares of Preferred Stock) or decreased
(but not below the number of shares of Series A Preferred Stock then
outstanding) by the Board of Directors. Shares of Series A Preferred Stock that
are redeemed, purchased or otherwise acquired by the Corporation or converted
into Class A Common Stock shall be cancelled and shall revert to authorized but
unissued shares of Preferred Stock undesignated as to series.
Definitions. As used herein with respect to Series A Preferred Stock:
"Accrued Dividends," with respect to any share of Series A Preferred Stock,
means an amount computed at the annual dividend rate for Series A Preferred
Stock, from the Closing Date or the Accrual Date, as applicable, to and
including the date to which such dividends are to be accrued (whether or not
such dividends have been declared), less the aggregate amount of all dividends
previously paid on such share whether in cash or stock. "Average Closing Price"
with respect to any period shall be calculated on a volume-weighted average
basis. Specifically, it shall be computed by (x) multiplying the Closing Price
on each Trading Day within the Trading Period by a fraction, the numerator of
which is the trading volume of the Class A Common Stock for such Trading Day on
the American Stock Exchange or within the relevant trading market if not the
American Stock Exchange, and the denominator of which is the aggregate trading
22
volume for the Trading Period, and (y) adding together the products thus
derived. "Business Day" means each Monday, Tuesday, Wednesday, Thursday or
Friday on which banking institutions in New York, New York are not authorized or
obligated by law, regulation or executive order to close. "Closing Price" on any
Trading Day with respect to the per share price of Class A Common Stock means
the last reported sales price regular way or, in case no such reported sale
takes place on such Trading Day, the average of the reported closing bid and
asked prices regular way, in each case on the American Stock Exchange or, if the
Class A Common Stock is not listed or admitted to trading on the American Stock
Exchange, on the principal national securities exchange, market or quotation
system on which the Class A Common Stock is listed or admitted to trading, or,
if such prices are not available, the Fair Market Value. "Closing Date" means
with respect to each purchaser of Series A Preferred Stock and its successors
and assigns, the date on which the Corporation executes a definitive
Subscription Agreement with respect to the purchase of shares of Series A
Preferred Stock by such purchaser. "Fair Market Value" on any date means the
price per share of Class A Common Stock approved by the Board of Directors in
good faith as the fair market value of the Class A Common Stock. "Junior Stock"
means the Common Stock and any other class or series of stock of the Corporation
hereafter authorized over which Series A Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation. "Parity Stock" means
any other class or series of stock of the Corporation that ranks on a parity
with Series A Preferred Stock in the payment of dividends or in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation.
"Trading Day" means a day on which the principal national securities exchange,
market or quotation system on which the Class A Common Stock is listed or
admitted to trading is open for the transaction of business or, if the Class A
Common Stock is not listed or admitted to trading, a Business Day. "Trading
Period" shall mean (i) for purposes of Section 6, the ten (10) Trading Days
prior to the date of the notice of redemption; and (ii) for all other purposes,
the ten (10) Trading Days prior to April 30, 2003 or the Closing Date, whichever
will result in the lower Conversion Price.
Dividends.
Rate. Holders of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, but only out of funds
legally available therefor, cumulative dividends per share of Series A Preferred
Stock at the annual rate of 7% of the Issuance Price. The Issuance Price means
$500 per share of Series A Preferred Stock, as adjusted to reflect the
occurrence of any stock split, stock dividend, stock combination, stock
subdivision or similar recapitalization affecting such share. Payment. Dividends
are payable semi-annually on the tenth day of June and December in each year
(or, if any such date is not a Business Day, on the next succeeding Business
Day), beginning December 10, 2003, to holders of record on the respective date,
not more than 60 nor less than 10 days preceding such dividend payment date,
fixed for that purpose by the Board of Directors in advance of payment of each
particular dividend. The amount of dividends payable for the initial dividend
period and any period shorter than a full semi-annual period during which shares
are outstanding shall be computed on the basis of a 360-day year of twelve
30-day months and the actual number of days elapsed in the period which is
payable. The dividend payable per share of Series A Preferred Stock for each
dividend period shall be computed by dividing the annual dividend rate by two.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payments on shares of Series A Preferred Stock which may be in
arrears.
At the option of the Corporation, dividends payable on shares of Series A
Preferred Stock shall be paid in additional shares of Series A Preferred Stock.
To the extent that dividends are
23
paid in additional shares of Series A Preferred Stock, such shares shall be
valued at the Issuance Price, and such additional shares shall be entitled to
receive dividends beginning from the date of issuance (an "Accrual
Date").Priority of Dividends. So long as any share of Series A Preferred Stock
remains outstanding, no dividend whatsoever shall be paid or declared and no
distribution shall be made on any Junior Stock, other than a dividend or
distribution payable solely in Junior Stock, and no shares of Junior Stock shall
be purchased, redeemed or otherwise acquired for consideration by the
Corporation, directly or indirectly (other than as a result of a
reclassification of Junior Stock for or into Junior Stock, or the exchange or
conversion of one share of Junior Stock for or into another share of Junior
Stock, and other than through the use of the proceeds of a substantially
contemporaneous sale of other shares of Junior Stock), unless (i) all Accrued
Dividends on all outstanding shares of Series A Preferred Stock for all past
dividend periods have been paid in full. Subject to the foregoing, and not
otherwise, such dividends and distributions (payable in cash, stock or
otherwise) as may be determined by the Board of Directors may be declared and
paid on any Junior Stock from time to time out of any funds legally available
therefor.Liquidation Rights.Voluntary or Involuntary Liquidation. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, holders of Series A Preferred Stock shall be
entitled, before any distribution or payment out of the assets of the
Corporation may be made to the holders of any Junior Stock, to receive in full
an amount per share equal to the Issuance Price, together with an amount equal
to all Accrued Dividends to the date of payment (the "Liquidation Preference").
Partial Payment. If the assets of the Corporation are not sufficient to pay the
Liquidation Preference in full to all holders of Series A Preferred Stock and
all holders of any Parity Stock, the amounts paid to the holders of Series A
Preferred Stock and to the holders of all Parity Stock shall be pro rata in
accordance with the respective aggregate Liquidation Preferences of Series A
Preferred Stock and all such Parity Stock.Residual Distributions. If the
Liquidation Preference has been paid in full to all holders of Series A
Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock
shall be entitled to receive all remaining assets of the Corporation according
to their respective rights and preferences. Merger, Consolidation and Sale of
Assets Not Liquidation. For purposes of this Section 5, the merger or
consolidation of the Corporation with any other corporation, including a merger
in which the holders of Series A Preferred Stock receive cash or property for
their shares, or the sale of all or substantially all of the assets of the
Corporation, shall not constitute a liquidation, dissolution or winding up of
the Corporation. Redemption.
24
Optional Redemption by the Corporation. At any time after April 30, 2004,
upon notice given as provided in Section 6(f), the Corporation, at the option of
the Board of Directors, may redeem in whole or in part the shares of Series A
Preferred Stock at the time outstanding which have a per share Conversion Price
(as defined in Section 7) greater than or equal to 200% of the Average Closing
Price on the date of notice of redemption. Any such redemption shall be made at
the redemption price in effect at the notice date as provided in this Section 6,
provided, however, that no shares of Series A Preferred Stock may be redeemed at
such time during which both (i) a Registration Statement under the Securities
Act of 1933, as amended, with respect to the offer and sale of Common Stock into
which any shares of Series A Preferred Stock are convertible shall not be
effective and (ii) such shares of Series A Preferred Stock may not be resold
pursuant to Rule 144(k) under the Securities Act of 1933, as amended. Redemption
Price. The redemption price for each share of Series A Preferred Stock redeemed
pursuant to Section 6(a) hereof shall be 100% of the Issuance Price together
with an amount equal to all Accrued Dividends to the date of redemption.
Mandatory Redemption. On April 30, 2009, the Corporation shall redeem all of the
outstanding shares of Series A Preferred Stock at a redemption price per share
equal to (i) the Issuance Price plus (ii) an amount equal to all Accrued
Dividends to the redemption date. Notice of Redemption. Each notice of a
redemption of shares of Series A Preferred Stock or otherwise to be provided by
the Corporation under this Section 6 shall be mailed by first class mail,
postage prepaid, addressed to the holders of record of the shares to be redeemed
at their respective last addresses appearing on the books of the Corporation.
Each such notice shall state, as appropriate, the following and may contain such
other information as the Corporation deems advisable: (a) the redemption date,
(b) the number of such shares of Series A Preferred Stock held by such holder to
be redeemed, (c) the redemption price, and (d) the place or places where one or
more certificates for such shares of Series A Preferred Stock are to be
surrendered for redemption. The "notice date" shall be the date such notice is
mailed. Such mailing shall be at least 45 days and not more than 90 days before
the date fixed for redemption. Any notice mailed as provided in this Section
6(d) shall be conclusively presumed to have been duly given, whether or not the
holder receives such notice, but failure duly to give such notice by mail, or
any defect in such notice or in the mailing thereof, to any holder of shares of
Series A Preferred Stock designated for redemption shall not affect the validity
of the proceedings for the redemption of any other shares of Series A Preferred
Stock.
Partial Redemption. In case of any redemption of only part of the shares of
Series A Preferred Stock at the time outstanding (or in the case of an optional
redemption by the Corporation pursuant to Section 6(a), only part of the
outstanding shares which have a per share Conversion Price greater than or equal
to 200% of the Average Closing Price on the date of notice of redemption), the
shares to be redeemed shall be selected either pro rata or by lot or in such
other manner as the Board of Directors may determine to be equitable. Subject to
the provisions hereof, the Board of Directors shall have full power and
authority to prescribe the terms and conditions upon which shares of Series A
Preferred Stock shall be redeemed from time to time. Effectiveness of
Redemption. If notice of redemption has been duly given and if on or before the
redemption date specified in the notice all funds necessary for the redemption
have been set aside by the Corporation, separate and apart from its other funds,
in trust for the pro rata benefit of the holders of the shares of Series A
Preferred Stock called for redemption, so as to be and continue to be available
therefor, then, notwithstanding that any certificate for any share of Series A
Preferred Stock so called for redemption has not been surrendered for
cancellation, on and after the redemption date all shares of Series A Preferred
Stock so called for redemption shall cease to be outstanding and all rights with
respect to such shares of Series A Preferred Stock shall forthwith on such
redemption date cease and terminate, except only the right of the holders
thereof to receive the amount payable on such redemption without interest.
25
Conversion Rights. Each share of Series A Preferred Stock shall be convertible
at the option of the holder thereof at any time after April 30, 2003 into fully
paid and nonassessable shares of Class A Common Stock of the Corporation
(calculated as to each conversion to the nearest 1/100th of a share) on and
subject to the following terms and conditions:
Conversion Price. The conversion price at which at each share of Series A
Preferred Stock shall be convertible into Class A Common Stock (the "Conversion
Price") shall initially be equal to the lesser of (i) 120% of the Average
Closing Price of the Class A Common Stock for the Trading Period ending April
30, 2003, and (ii) 120% of the Average Closing Price of the Class A Common Stock
for the Trading Period ending on the Closing Date, and shall be adjusted in
certain events as provided in Section 7(e). For the purposes of conversion, each
share of Series A Preferred Stock shall be convertible into a number of shares
of Class A Common Stock determined by dividing (x) the Issuance Price plus
Accrued Dividends with respect to such share, by (y) the Conversion Price of
such share. Surrender of Certificates. In order to convert shares of Series A
Preferred Stock into Class A Common Stock the holder must surrender, at the
office of any transfer agent for the Class A Common Stock or at such other
office as the Board of Directors may designate, the certificate or certificates
for the shares to be converted, duly endorsed or assigned either to the
Corporation or in blank, together with irrevocable written notice that such
holder elects to convert such shares. Such shares shall be deemed to be
converted immediately before the close of business on the date of such
surrender, and the person or persons entitled to receive the Class A Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such Class A Common Stock at such time. As promptly
as practicable on or after such date, the Corporation shall issue and deliver at
such office to the person or persons entitled to receive the same a certificate
or certificates for the number of full shares of Class A Common Stock issuable
upon such conversion, together with payment in lieu of any fraction of a share
as provided in Section 7(d). Shares Called for Redemption. In case shares of
Series A Preferred Stock are called for redemption, the right to convert such
shares shall cease and terminate at the close of business on the Business Day
before the date fixed for redemption, unless default is made in payment of the
redemption price.
Fractional Shares. No fractional shares of Class A Common Stock shall be issued
upon conversion of shares of Series A Preferred Stock, but, instead of any
fraction of a share that would otherwise be issuable, the Corporation shall pay
cash in an amount equal to the same fraction of the Closing Price on the date of
surrender of the certificate or certificates for such shares for conversion, or,
if such date is not a Trading Day, on the next Trading Day.
Adjustment of Conversion Price Anti-Dilution. The Conversion Price and the
number and kind of shares of capital stock or other property issuable on
conversion shall be adjusted from time to time as follows.
Sales of Common Stock Below Fair Market Value. In case the Corporation
shall issue or grant to any person (whether directly or by assumption in a
merger or otherwise, other than upon a Fundamental Change to which Section
7(e)(v) applies) (a) rights, warrants, options, exchangeable securities or
convertible securities (each referred to herein as "Rights") entitling such
person to subscribe for or purchase shares of Common Stock at a price per share
less than the Fair Market Value or (b) shares of Common Stock at a price per
share less than the Fair Market Value, on the record date fixed for the
determination of persons entitled to receive such Rights or such shares, the
Conversion Price in effect immediately before the close of business on the
record date fixed for such determination shall be reduced by multiplying such
Conversion Price by a fraction, of which (i) the numerator is the number of
shares of Common Stock outstanding (including all shares of Common Stock issued
or issuable upon conversion of any convertible security or upon the exercise of
any rights, warrants or options) on such record date plus the number of shares
of Common Stock which the aggregate of the offering price of the total number of
shares of Common Stock so offered for subscription or purchase pursuant to such
Rights, or so issued, would purchase at the Fair Market Value on such record
date and (ii) the denominator shall be the number of shares of Common Stock
outstanding (including all shares of Common Stock issued or issuable upon
conversion of any convertible security or upon the exercise of any rights,
warrants or options) at the close of business on such record date plus the
number of shares of Common Stock so offered for subscription or purchase
26
pursuant to such Rights, or so issued. If, after any such record date, any such
Rights or shares are not in fact issued, or are not exercised prior to the
expiration thereof, the Conversion Price shall be immediately readjusted,
effective as of the date such Rights or shares expire, or the date the Board of
Directors determines not to issue such Rights or shares, to the Conversion Price
that would have been in effect if the unexercised Rights had never been granted
or such record date had not been fixed, as the case may be. Such adjustment
shall be made successively whenever any such event shall occur. For the purposes
of this paragraph, the aggregate of the offering price received or to be
received by the Corporation shall include the minimum aggregate amount (if any)
payable upon exercise or conversion of such Rights. The value of any
consideration received or to be received by the Corporation, if other than cash,
is to be determined by the Board of Directors in good faith.
Stock Splits and Combinations. In case the Corporation shall subdivide its
outstanding Common Stock into a greater number of shares or combine its
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect immediately before the time when such subdivision or combination
becomes effective shall be adjusted so that the holder of each share of Series A
Preferred Stock converted thereafter shall be entitled to receive the number of
shares of Class A Common Stock that such holder would have received if such
shares of Series A Preferred Stock had been converted immediately prior thereto
at the Conversion Price then in effect. Such adjustment shall be made
successively whenever any such event shall occur.
Stock Dividends in Common Stock. In case the Corporation shall pay a
dividend or make a distribution in shares of Common Stock on any class of
capital stock of the Corporation, the Conversion Price in effect immediately
before the close of business on the record date fixed for determination of
stockholders entitled to receive such dividend or distribution shall be reduced
by multiplying such Conversion Price by a fraction, of which the numerator is
the number of shares of Common Stock outstanding (including all shares of Common
Stock issued or issuable upon conversion of any convertible security or upon the
exercise of any rights, warrants or options) on such record date and the
denominator is the sum of such number of shares and the total number of shares
of Common Stock issued in such dividend or distribution. Such adjustment shall
be made successively whenever any such event shall occur.
Distributions of Indebtedness, Securities or Assets. In case the
Corporation shall distribute to all holders of Common Stock (whether by dividend
or in a merger or consolidation or otherwise) evidences of indebtedness, shares
of capital stock of any class or series, other securities, cash or assets (other
than Common Stock or a dividend or distribution payable exclusively in cash and
other than as a result of a Fundamental Change), the Conversion Price in effect
immediately before the close of business on the record date fixed for
determination of stockholders entitled to receive such distribution shall be
reduced by multiplying such Conversion Price by a fraction, of which the
numerator is the Fair Market Value on such record date less the fair market
value (as determined by the Board of Directors, whose determination in good
faith shall be conclusive) of the portion of such evidences of indebtedness,
shares of capital stock, other securities, cash and assets so distributed
applicable to one share of Common Stock and the denominator is such Fair Market
Value. Such adjustment shall be made successively whenever any such event shall
occur. In case such distribution is not made after such a record date has been
27
fixed, the Conversion Price shall be readjusted to the Conversion Price that
would have been in effect if such record date had not been fixed.
Fundamental Changes. In case any transaction (including any merger,
consolidation, recapitalization or other reorganization) or a series of related
transactions shall occur as a result of which all or substantially all of the
outstanding Common Stock is converted into or exchanged for stock, other
securities, cash or assets (a "Fundamental Change"), the holder of each share of
Series A Preferred Stock outstanding immediately before such Fundamental Change
shall have the right to receive the kind and amount of stock, other securities,
cash and assets that such holder would have received if such share of Series A
Preferred Stock had been converted immediately prior thereto. The Corporation
agrees that it will not be a party to or permit any Fundamental Change to occur
unless the foregoing provisions are included in the terms thereof.
Exempted Issuances. Notwithstanding any other provision in this Section
7(e), the foregoing provisions of this Section 7(e) shall not apply to, and no
adjustment shall be made to the Conversion Price for:
shares of Common Stock issuable upon the exercise of options or other
convertible securities to be issued pursuant to the Corporation's stock option,
employee stock purchase or other employee benefit plan; provided, however, that
this exemption shall be limited to shares of Common Stock; shares of Common
Stock issuable upon the exercise of options or other convertible securities
previously issued pursuant to the Corporation's stock option, employee stock
purchase or other employee benefit plan; shares of Common Stock issuable upon
conversion of shares of Series A Preferred Stock or outstanding warrants; shares
of Class A Common Stock issuable upon conversion of Class B Common Stock;
securities that have been approved for issuance or grant by the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock; or
securities that are issued in conjunction with an acquisition or a non-financing
strategic transaction approved by the Board of Directors; provided, however,
that the number of shares of Common Stock or securities convertible into Common
Stock issued by the Corporation in conjunction with non-financing strategic
transactions that are exempt from the foregoing provisions of this Section 7(e)
shall be limited to 20% of the shares of Common Stock outstanding (including all
shares of Common Stock issued or issuable upon conversion of any convertible
security or upon the exercise of any rights, warrants or options) immediately
prior to the date of such transaction.
No Adjustment for Participating Distributions. Notwithstanding any of the
provisions of this Section 7(e), no adjustment to the Conversion Price shall be
made pursuant to a distribution by the Corporation in which the holders of
Series A Preferred Stock shares have participated on an as converted to Common
Stock basis in accordance with Section 4(c).
Deferral of Certain Conversions Requiring Adjustment. In any case in which
this Section 7(e) requires that an adjustment as a result of any event become
effective from and after a record date, the Corporation may elect to defer until
after the occurrence of such event (A) issuing to the holder of any shares of
Series A Preferred Stock converted after such record date and before the
occurrence of such event the additional shares of Class A Common Stock issuable
upon such conversion over and above the shares issuable on the basis of the
Conversion Price in effect immediately before adjustment and (B) paying to such
holder any amount in cash in lieu of a fractional share of Class A Common Stock
pursuant to Section 7(d) above. In any such case the Corporation shall issue or
cause a transfer agent to issue due bills or other appropriate evidence of the
right to receive the shares the issuance of which is so deferred.
28
Deferral of Small Adjustments. Any adjustment in the Conversion Price
otherwise required by this Section 7 may be postponed until the date of the next
adjustment otherwise required to be made if such adjustment (together with any
other adjustments postponed pursuant to this paragraph (ix) and not theretofore
made) would not require an increase or decrease of more than 1 % in such
Conversion Price. All calculations under this Section 7(e) shall be made to the
nearest cent or to the nearest 1/100th of a share, as the case may be.
Voluntary Reduction in Conversion Price. The Board of Directors may make
such reductions in the Conversion Price, in addition to those required by this
Section 7(e), as shall be determined by the Board of Directors to be advisable
in order to avoid taxation so far as practicable of any dividend or distribution
of stock or rights to acquire stock or any event treated as such for Federal
income tax purposes to the recipients.
Authority of Board of Directors. The Board of Directors shall have the
power to resolve any ambiguity or correct any error in this Section 7(e), and
its action in so doing shall be final and conclusive.
Notice of Conversion Price Adjustments. Whenever the Conversion Price is
adjusted as herein provided:
The Corporation shall compute the adjusted Conversion Price in accordance
with this Section 7 and shall prepare a certificate signed by the Corporation's
Chief Accounting Officer setting forth the adjusted Conversion Price and showing
in reasonable detail the facts upon which such adjustment is based; and
A notice stating that the Conversion Price has been adjusted and setting
forth the adjusted Conversion Price shall be mailed as soon as practicable to
the holders of record of outstanding shares of Series A Preferred Stock at their
respective last addresses appearing on the books of the Corporation.
Notice of Certain Events. In case:
The Corporation declares a dividend or other distribution on its Common
Stock which will result in an adjustment of the Conversion Price;
The Corporation authorizes the issuance to the holders of its Common Stock
of rights or warrants entitling them to subscribe for or purchase any shares of
capital stock of any class or any other subscription rights or warrants; or
Of any reclassification of the capital stock of the Corporation (other than
a subdivision or combination of its outstanding shares of Common Stock), or of
any consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation is required, or of any sale,
transfer or other disposition of all or substantially all of the assets of the
Corporation or of any other transaction or event that would constitute or result
in a Fundamental Change; or
Of the voluntary or involuntary liquidation, dissolution or winding up of
the Corporation;
then the Corporation shall mail to the holders of record of outstanding shares
of Series A Preferred Stock, at their respective last addresses appearing on the
books of the Corporation, at least 5 days before the applicable record or
effective date hereinafter specified, a notice stating (x) the date as of which
the holders of record of Common Stock to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (y) the date on which
29
such reclassification, consolidation, merger, sale, transfer, disposition,
liquidation, dissolution or winding up or Fundamental Change is expected to
become effective, and the date as of which it is expected that holders of record
of Common Stock shall be entitled to exchange their shares for securities, cash
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, disposition, liquidation, dissolution or winding up or
Fundamental Change. Failure to give notice as required by this Section 7(g), or
any defect in such notice, shall not affect the validity of any such dividend,
distribution, right, warrant, reclassification, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution or winding up or Fundamental
Change, or the vote on any action authorizing such. Reservation of Shares. The
Corporation shall at all times reserve and keep available, free from preemptive
rights, out of its authorized but unissued Class A Common Stock, solely for the
purpose of issuance upon conversion of shares of Series A Preferred Stock, the
full number of shares of Class A Common Stock then deliverable upon conversion
of all shares of Series A Preferred Stock outstanding.
Definition of Common Stock. For purposes of this Section 7, "Common Stock"
includes any stock of any class or series of the Corporation which has no
preference or priority in the payment of dividends or in the distribution of
assets in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation and that is not subject to redemption by the
Corporation. However, shares issuable upon conversion of shares of Series A
Preferred Stock shall include only shares of the class designated as Class A
Common Stock as of the first date of issuance of shares of Series A Preferred
Stock or shares of the Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and that have no preference or
priority in the payment of dividends or in the distribution of assets in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation and that are not subject to redemption by the Corporation,
provided that if at any time there shall be more than one such resulting class
or series, the shares of each such class and series then so issuable shall be
substantially in the proportion which the total number of shares of such class
and series resulting from all such reclassifications bears to the total number
of shares of all such classes and series resulting from all such
reclassifications.
Voting Rights.
General. The holders of Series A Preferred Stock shall be entitled to vote and,
except as hereinafter provided, shall vote together with the holders of Common
Stock (and of any other class or series that may similarly be entitled to vote
with the holders of Common Stock) as a single class on all matters on which
holders of Common Stock are entitled to vote.
In so voting, the holders of Series A Preferred Stock shall be
entitled to cast such number of votes as such holders would have been entitled
to cast if the Series A Preferred Stock had been converted into Class A Common
Stock on the record date for the determination of holders entitled to vote at
the Conversion Price then in effect.
30
Amendment. Holders of at least a majority of the shares of Series A Preferred
Stock at the time outstanding may amend, alter, repeal or change the rights,
preferences of privileges of the Series A Preferred Stock. Other Voting Rights.
So long as at least 1,334 shares of Series A Preferred Stock are issued and
outstanding, in addition to any other vote or consent of stockholders required
by law or by the certificate of incorporation, the vote or consent of the
holders of at least a majority of the shares of Series A Preferred Stock at the
time outstanding, voting separately as a single class, given in person or by
proxy, either in writing without a meeting or by vote at any meeting called for
the purpose, shall be necessary for effecting or validating action by the
Corporation having the effect of:
amending, altering, repealing or changing the rights, preferences or
privileges of the Series A Preferred Stock, as provided herein or in the
certificate of incorporation, whether by merger, consolidation or otherwise;
authorizing or issuing any other equity security, including any other
security convertible into or exercisable for any equity security, having a
preference over the Series A Preferred Stock with respect to voting, the payment
of dividends or in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation;
reclassifying any outstanding shares of equity securities, including any
security convertible into or exercisable for any such equity security, into
equity securities having a preference over, or being on a parity with, the
Series A Preferred Stock with respect to voting, the payment of dividends or in
the distribution of assets on any liquidation, dissolution or winding up of the
Corporation; or
increasing the authorized number of shares of Series A Preferred Stock
other than in connection with the payment of dividends on the Series A Preferred
Stock;
provided, however, that the amendment of the certificate of incorporation so as
to authorize or create, or to increase the authorized amount of, any Junior
Stock or any shares of any class or series or any securities convertible into
shares of any class or series of capital stock of the Corporation ranking on a
parity with Series A Preferred Stock in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation shall not be deemed to affect adversely the rights, preferences or
privileges of the Series A Preferred Stock; provided, further, that no such vote
or consent of the holders of Series A Preferred Stock shall be required if
provision is made for the redemption of all shares of Series A Preferred Stock
at the time outstanding at or before the time when such amendment, alteration or
repeal is to take effect or when such authorization, creation or increase in the
authorized amount of any shares or convertible securities is to be made, as the
case may be.
Other Rights. The shares of Series A Preferred Stock shall not have any
voting powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein or in the certificate of incorporation of the Corporation.
31
In Witness Whereof, ATC Healthcare, Inc. has caused this certificate to be
signed by Stephen Savitsky, its President, this 14th day of February, 2003.
ATC HEALTHCARE, INC.
By: /s/ Stephen Savitsky
----------------------------
Stephen Savitsky, President
32
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ATC Healthcare, Inc. (the "Company")
on Form 10-Q for the period ending May 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, David Savitsky, Chief
Executive Officer of the Company, hereby certify, to the best of my knowledge,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and (2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
/s/ David Savitsky
------------------
David Savitsky
Chief Executive Officer
July 15, 2003
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange of 1934.
A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
33
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ATC Healthcare, Inc. (the
"Company") on Form 10-Q for the period ending May 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
I, Alan Levy, Senior Vice President - Finance, Chief Financial Officer and
Treasurer of the Company, hereby certify, to the best of my knowledge,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and (2) The information contained in the Report
fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Alan Levy
------------
Alan Levy
Senior Vice President - Finance
Chief Financial Officer and Treasurer
July 15, 2003
This certification accompanies this Quarterly Report on Form 10-Q pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
the extent required by such Act, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange of 1934.
A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
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