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, 2004, 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 June 29, 2004 were 24,682,223and 242,917shares, 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, 2004(unaudited) and February 29, 2004 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended May 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended May 31, 2004 and 2003 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 PROCEEDINGS 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, 2004
(UNAUDITED) FEBRUARY 29, 2004
--------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 486 $ 543
Accounts receivable, less allowance
for doubtful accounts of $707
and $737, respectively 25,177 27,216
Prepaid expenses and other current assets 5,786 4,700
-------------- --------------
Total current assets 31,449 32,459
Fixed assets, net 774 848
Intangibles 6,192 6,423
Goodwill 32,256 32,256
Deferred income taxes 1,984 1,984
Other assets 591 757
-------------- --------------
Total assets $ 73,246 $ 74,727
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,089 $ 1,595
Accrued expenses 5,646 6,468
Book overdraft 2,260 2,242
Current portion of due under bank financing 1,342 1,310
Current portion of notes and guarantee payable 1,240 1,148
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Total current liabilities 12,577 12,763
Notes and guarantee payable 31,152 31,241
Due under bank financing 22,408 24,232
Convertible Debentures 561 --
Warrant Liability 95 --
Other liabilities 371 371
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Total liabilities 67,164 68,607
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Commitments and contingencies
Convertible Series A Preferred Stock
($.01 par value 4,000 shares authorized,
2,000 shares issued and outstanding at
May 31, 2004 and February 29, 2004, respectively) 1,084 1,067
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STOCKHOLDERS' EQUITY:
Class A Common Stock - $.01 par value;
75,000,000 shares authorized;
24,665,537shares issued and outstanding at May 31, 2004
and February 29, 2004, respectively 247 247
Class B Common Stock - $.01 par value;
1,554,936 shares authorized; 245,617
shares issued and outstanding at May 31, 2004
and February 29, 2004, respectively 3 3
Additional paid-in capital 14,421 14,421
Accumulated deficit (9,673) (9,618)
-------------- --------------
Total stockholders' equity 4,998 5,053
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Total liabilities and stockholders' equity $ 73,246 $ 74,727
============== ==============
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,
2004 2003
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REVENUES:
Service revenues $ 29,307 $34,043
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COSTS AND EXPENSES:
Service costs 22,664 26,562
General and administrative expenses 5,227 6,408
Depreciation and amortization 335 587
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Total operating expenses 28,226 33,557
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INCOME FROM OPERATIONS 1,081 486
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INTEREST AND OTHER EXPENSES (INCOME):
Interest expense, net 1,104 848
Other expense (income), net (10) (32)
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Total interest and other expenses 1,094 816
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LOSS BEFORE INCOME TAXES (13) (330)
INCOME TAX PROVISION (BENEFIT) 25 (112)
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NET LOSS (38) (218)
Dividends accreted to Preferred Shareholders 17 17
- --------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (55) (235)
==========================================================================
LOSS PER COMMON SHARE - BASIC: $ (.00) $ (.01)
==========================================================================
LOSS PER COMMON SHARE - DILUTED: $ (.00) $ (.01)
==========================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 24,911 23,859
==========================================================================
Diluted 24,911 23,859
==========================================================================
See notes to condensed consolidated financial statements.
4
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For The Three Months Ended
--------------------------
May 31, May 31,
2004 2003
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (38) $ (218)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 403 646
Deferred income taxes -- (112)
In kind interest 237 228
Amortization of discount on convertible debenture 16
Provision for Doubtful accounts (30)
Changes in operating assets and liabilities:
Accounts receivable 2,069 528
Prepaid expenses and other current assets (1,086) (221)
Other assets 109 10
Accounts payable and accrued expenses (328) 7
Other long-term liabilities -- (1)
--------------------------
Net cash provided by operating activities 1,352 867
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (26) (138)
Finalization of acquisition purchase price -- 150
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Net cash provided by (used in) investing activities (26) 12
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under new credit facility 229 261
Payment of notes and capital lease obligations (1,889) (1,547)
Repayment of term loan facility (366) (417)
Payment of debt issuance costs (15) --
Book overdraft 18 624
Issuance of common and preferred stock -- 401
Issuance of Convertible Notes and Warrants 640 --
--------------------------
Net cash used in financing activities (678) (1,383)
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (57) 201
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 543 585
--------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 486 $ 786
==========================
Supplemental Data:
Interest paid $ 752 $ 431
==========================
Income taxes paid $ 34 $ 86
==========================
Dividends $ 17 $ 14
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, 2004 and for the three months ended May 31, 2004 and
2003 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 29, 2004 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 29, 2004. Certain prior period
amounts have been reclassified to conform with the May 31, 2004 presentation.
The results for the three-month period ended May 31, 2004 are not necessarily
indicative of the results for the full year ending February 28, 2005.
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. For the three months
ended May 31, 2004 and 2003, common stock equivalents would have been
anti-dilutive.
3. PROVISION (BENEFIT) FOR INCOME TAXES - For the three month period ended May
31, 2004 the Company recorded an expense for income taxes of $25 on a pretax
loss of $13 as compared to a benefit for income taxes of $112 on a pretax loss
of $330 for the three month period ended May 31, 2003. The current provision
consists entirely of state and local income taxes.
4. RECENT ACQUISITIONS - On February 28, 2003, the Company purchased
substantially all of the assets and operations of eight 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). In April
2003, the Company sold its interest in one of these temporary medical staffing
companies to its franchisee for $130.
5. FINANCING ARRANGEMENTS - 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 to $27.5 million. Amounts
borrowed under the New Financing Agreement were used to repay $20.6 million of
borrowing on its existing facility.
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 lending institution with which the Company has the secured
Facility, increased the revolving credit line to $35 million and provided for
additional term loan facility totaling $5 million.
On June 13, 2003, the Company received a waiver from the lender for
non-compliance of certain Facility covenants as of February 28, 2003. Interest
rates on both the revolving line and term loan Facility were increased 2% and
can decrease if the Company meets certain financial criteria.
In addition, certain financial ratio covenants were modified. The additional
interest is not payable until the current expiration date of the Facility in
November 2005.
On January 8, 2004, an amendment to the Facility was entered into modifying
certain financial ratio covenants as of November 30, 2003.
On May 28, 2004, an amendment to the Facility was entered into to modifying
certain financial ratio covenants as of February 29, 2004.
6
On July 15, 2004 the Company received a waiver from the lender for
non-compliance of certain Facility covenants as of May 31, 2004.
As of May 31, 2004, the outstanding balance on the revolving credit Facility was
$21.0. The Company had outstanding borrowings under the term loan of $2.7
million as of May 31, 2004. At May 31, 2004 interest accrued at a rate per annum
of 6.55% over LIBOR on the revolving credit Facility and 9.27% over LIBOR on the
term loan.
6. CONVERTIBLE DEBENTURES - The Company issued on April 2, 2004 $500 of
Convertible Notes due April 2, 2005 (the "April Maturity Notes") and warrants to
purchase 250,000 shares of Class A common stock at $0.75 per share. The April
Maturity Notes do not bear interest, cannot be prepaid and are to be repaid on
their April 2, 2005 maturity date by the issuance of Class A Common Stock at a
price of $.50 per share. In addition, to the extent the Company after October 2,
2004 and prior to the maturity date issues Common Stock or securities
convertible into Common Stock, the holders of the April Notes may convert those
Notes at the effective price at which the Common Stock is so issued.
Pursuant to the terms of the registration rights agreement entered in connection
with the transaction, the Company is required to file with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act of 1933, as amended, covering the resale of the common stock underlying the
April Maturity Notes purchased and the common stock underlying the warrants.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," and the terms of
the warrants and the transaction documents, the warrants were accounted for as a
liability.The fair value of the warrants which amounted to $95 on date of grant
was recorded as a reduction to the April Maturity Notes. The warrant liability
will be reclassified to equity on the effective date of the registration
statement, evidencing the non-impact of these adjustments on the Company's
financial position and business operations.
The fair value of the warrants was estimated using the Black-Scholes option-
pricing model with the following assumptions: no dividends; risk-free interest
rate of 4%; the contractual life of 4 years and volatility of 111%. There was no
change in the fair value of the warrants at May 28, 2004 from the time the
warrants were granted.
The Company issued on April 19, 2004 upon execution of the Standby Equity
Distribution Agreement, a convertible debenture in the principal amount of $140
to Cornell Capital Partners as a commitment fee. The convertible debenture has a
term of three years, accrues interest at 5% and is convertible into our common
stock at a price per share of 100% of the lowest closing bid price for the three
days immediately preceding the conversion date.
7. GUARANTEE PAYABLE -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 obligation is payable over 8 years with the next
payment due September 2004. The Company has not received any demands for payment
with respect to these obligations. The Company believes that it has certain
defenses which could reduce or eliminate its recorded liability in this matter
8. 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, 2004 and 2003, total
licensee distributions were $1.1 million and $1.8 million, respectively, and are
included in the general and administrative expenses.
7
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, 2004 and 2003 is $851 and $449,
respectively, of licensee fees.
9. GOODWILL - 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.
10. OFFICE CLOSING AND RESTRUCTURING CHARGES- In the third quarter of fiscal
2004 the Company recorded a charge associated with the closing of seven offices
in the amount of $2.6 million. The Company expects the restructure to result in
a lower overall cost structure to allow it to focus resources on offices with
greater potential for better overall growth and profitability. As of May 31,
2004 the Company has paid $345 for severance and other costs associated with the
office closings. As of May 31, 2004 the Company's accounts payable and accrued
expenses included $463 of remaining costs accrued consisting mainly of severance
and lease costs. The severance and remaining other exit costs will be paid in
fiscal 2005. The remaining lease costs will be paid through the term related of
the related leases which expire through January 2007.
11. 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.
12. RECENT ACCOUNTING PRONOUNCEMENTS - Management does not believe that any
recently issued but not yet effective, accounting standards if currently adopted
would have a material effect on the accompanying financial statements.
13. SHAREHOLDERS EQUITY
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. Had the Company determined
compensation expense based on the fair value at the grant dates for those awards
consistent with the method of SFAS 123, the Company's net income (loss) per
share would have been increased to the following pro forma amounts:
- -------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS MONTHS
ENDED ENDED
MAY 31, MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
- -------------------------------------------------------------------------------
Net loss as reported $ (38) $ (218)
- -------------------------------------------------------------------------------
Deduct total stock based employee
compensation expense determined
under fair value methods all awards
- -------------------------------------------------------------------------------
Pro forma net loss (333) (232)
- -------------------------------------------------------------------------------
Basic net loss per share as reported $ (0.00) $ (0.01)
- -------------------------------------------------------------------------------
Pro forma basic loss per share as reported forma $ (0.01) $ (0.01)
- -------------------------------------------------------------------------------
Diluted loss per share as reported $ (0.00) $ (0.01)
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Pro forma diluted loss per share as reported $ (0.01) $ (0.01)
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8
On April 19, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners L.P.. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to the investor shares
of common stock for a total purchase price of up to $5,000. For each share of
common stock purchased under the Standby Equity Distribution Agreement, the
investor will pay 97% of the lowest closing bid price of the common stock during
the five consecutive trading days immediately following the notice date. The
investor, Cornell Capital Partners, L.P. is a private limited partnership whose
business operations are conducted through its general partner, Yorkville
Advisors, LLC. Cornell Capital Partners, L.P. will retain 5% of each advance
under the Standby Equity Distribution Agreement. In addition, we engaged
Arthur's, Lestrange & Company Inc., a registered broker-dealer, to advise us in
connection with the Standby Equity Distribution Agreement. For its services,
Arthur's, Lestrange & Company Inc. is to receive 18,182 shares of our common
stock. We are obligated to prepare and file with the Securities and Exchange
Commission a registration statement to register the resale of the shares issued
under the Standby Equity Distribution Agreement prior to the first sale to the
investor of our common stock.
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 $4.7 million or 13.9% for the three months ended May
31, 2004 ("the 2004 period") to $29.3 million from $34.0 million for the three
months ended May 31, 2003 ("the 2003 period"). The reduction in revenues is due
to the Company closing marginally performing offices during the second half of
2003. Service costs were 77.3% and 78.0% of total revenues for the 2004 and 2003
periods, respectively. 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 $5.2 million for the 2004 period versus
$6.4 million for the 2003 period. General and administrative costs, expressed as
a percentage of total revenues, were 17.8% and 18.9% for the 2004 and 2003
periods, respectively. The decrease in the 2004 period is the result of the
reduction in royalty payments to licenses due to decreased revenues as well as
the savings realized by the Company for the offices the Company closed during
2003 and the reduction of back office staff.
Interest expense,(net) for the 2004 period increased to $1,104 from $848 in the
2003 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.
For the quarter ended May 31, 2004 the Company recorded a tax liability of $25
as compared to recording a tax benefit of $112 and the associated deferred tax
asset.
On July 14, 2004 the Company received a waiver from the lender for
non-compliance of certain Facility covenants as of May 31, 2004.
Liquidity and Capital Resources
The Company funds its cash needs through various equity and debt issuances and
through cash flow from operations. The Company generally pays its billable
employees weekly for their services, and remits certain statutory payroll and
related taxes as well as other fringe benefits. Invoices are generated to
reflect these costs plus the Company's markup.
Cash and Cash equivalents decreased by $57 as of May 31, 2004 as compared to
February 29, 2004 as a result of cash provided by operating activities of $1.35
million, cash used in investing activites of $26 and cash used in financing
activites of $1.38 million. Cash provided by operating activities was mainly due
to a decline in accounts receivable, cash used in investing activities was
primarily used for capital expenditures and the cash used in financing
activities was primarily used to pay notes and capital lease obligations.In
April 2001, the Company obtained a new financing facility (the "Facility") with
a new lending institution for a $25 million, three year term, revolving loan,
$20.6 million of which was used to pay down borrowings under the Company's
previous financing facility.
9
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.
On June 13, 2003, the Company received a waiver from the lender for
non-compliance with certain Facility covenants as of February 28, 2003. Interest
rates on both the revolving line and term loan facility were increased 2% and
can decrease if the Company meets certain financial criteria. In addition,
certain financial ratio covenants were modified. The additional interest is not
payable until the current expiration date of the Facility which is November
2005.
At the same time, the lender and DSS and DSI note holders amended the
subordination agreements. As a result of that amendment, the two series of
promissory notes to the former owners of DSS and DSI have been condensed into
one series of notes. One of the promissory notes is for a term of seven years,
in the principal amount of $8.6 million, bears interest at the rate of 5% per
annum, with a minimum monthly payment (including interest) of $40 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 $3.7 million due on May 7, 2007. The balance on the first
note after the balloon payment is payable in minimum monthly installments of
$80,000 over the remaining 3 years of the note, subject to certain limitations
under the amended subordination agreement. The other three promissory notes are
for ten years, in the aggregate principal amount of $17.5 million, bear interest
at the rate of 5% per annum, with minimum monthly payments (including interest)
of $25 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 $2.8 million, subject to the Company's
compliance with the modified subordination agreement.
On January 8, 2004, an amendment to the Facility was entered into modifying
certain financial ratio covenants as of November 30, 2003.
On May 28, 2004, an amendment to the Facility was entered into modifying certain
financial ratio covenants as of February 29, 2004.
On July 15, 2004 the Company received a waiver from the lender for
non-compliance of certain Facility covenants as of May 31, 2004.
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 $300.
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 sale of unregistered equity securities, securities
convertible into equity 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. No assurance can be given, however, that this will be the case. The
Company may require additional equity and debt financing to meet our working
capital needs, or to fund our acquisition activities, if any. There can be no
assurance that additional financing will be available when required, or, if
available, will be available on satisfactory terms.
On April 19, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at the Company's discretion,
periodically sell to Cornell Capital Partners shares of common stock for a total
purchase price of up to $5,000. For each share of common stock purchased under
the Standby Equity Distribution Agreement, Cornell Capital Partners will pay the
Company 97% of the lowest closing bid price of the common stock during the five
consecutive trading days immediately following the notice date. Further, the
Company has agreed to pay Cornell Capital Partners, L.P. 5% of the proceeds that
the Company receives under the Standby Equity Distribution Agreement. The
Agreement is subject to the Company filing and maintaining an effective S-1
registration.
10
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.
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.
THE COSTS OF ATTRACTING AND RETAINING QUALIFIED NURSES AND OTHER HEALTHCARE
PERSONNEL MAY RISE.
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.
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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 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 NEW ORDERS FROM OUR
HOSPITAL AND HEALTHCARE FACILITY CLIENTS.
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. Our hospital and healthcare facility clients are
free to place orders with our competitors and may choose to use temporary
healthcare professionals that our competitors offer them. Therefore, we must
maintain positive relationships with our hospital and healthcare facility
clients. If we fail to maintain positive relationships with our hospital and
healthcare facility clients, we may be unable to generate new temporary
healthcare professional orders and our business may be adversely affected.
DECREASES IN PATIENT OCCUPANCY AT OUR CLIENTS' FACILITIES MAY ADVERSELY AFFECT
THE PROFITABILITY OF OUR BUSINESS.
Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our clients' facilities. When a
hospital's occupancy increases, temporary employees are often added before
full-time employees are hired. As occupancy decreases, clients may reduce their
use of temporary employees before undertaking layoffs of their regular
employees. We also may experience more competitive pricing pressure during
periods of occupancy downturn. In addition, if a trend emerges toward providing
healthcare in alternative settings, as opposed to acute care hospitals,
occupancy at our clients' facilities could decline. This reduction in occupancy
could adversely affect the demand for our services and our profitability.
HEALTHCARE REFORM COULD NEGATIVELY IMPACT OUR BUSINESS OPPORTUNITIES, REVENUES
AND MARGIN.
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. Some of these
proposals could have adversely affected our business. While the U.S. Congress
has not adopted any comprehensive reform proposals, members of Congress may
raise similar proposals in the future. If some 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 seriously 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 for, or the price paid for our staffing
services.
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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 injuries to them caused 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 STATE 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 would be
required to cease operating in those states. The introduction of new regulations
could substantially raise the costs associated with hiring temporary employees.
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, directly or indirectly, the amounts
we could charge for our services, our profitability could be adversely affected.
FUTURE CHANGES IN REIMBURSEMENT TRENDS COULD HAMPER OUR CLIENTS' ABILITY TO PAY
US.
Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. In recent years, federal and
state governments have made significant changes in these programs that have
reduced reimbursement rates. In addition, insurance companies and managed care
organizations seek to control costs by requiring that healthcare providers, such
as hospitals, discount their services in exchange for exclusive or preferred
participation in their benefit plans. Future federal and state legislation or
evolving commercial reimbursement trends may further reduce, or change
conditions for, our clients' reimbursement. Limitations on reimbursement could
reduce our clients' cash flows, hampering their ability to pay us.
COMPETITION FOR ACQUISITION OPPORTUNITIES MAY RESTRICT OUR FUTURE GROWTH BY
LIMITING OUR ABILITY TO MAKE ACQUISITIONS AT REASONABLE VALUATIONS.
Our business strategy includes increasing our market share and presence in the
temporary healthcare staffing industry through strategic acquisitions of
companies that complement or enhance our business. We have historically faced
competition for acquisitions. In the future, such competition could limit our
ability to grow by acquisitions or could raise the prices of acquisitions and
make them less attractive to us.
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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.
We may be subject to claims related to torts or crimes committed by our
employees or temporary staffing personnel. Such claims could involve large
claims and significant defense costs. In some instances, we are required to
indemnify clients against some or all of these risks. A failure of any of our
employees or personnel to observe our policies and guidelines intended to reduce
these risks, relevant client policies and guidelines or applicable federal,
state or local laws, rules and regulations could result in negative publicity,
payment of fines or other damages. To protect ourselves from the cost of these
claims, we maintain professional malpractice liability insurance and general
liability insurance coverage in amounts and with deductibles that we believe are
appropriate for our operations. However, our insurance coverage may not cover
all claims against us or continue to be available to us at a reasonable cost. If
we are unable to maintain adequate insurance coverage, we may be exposed to
substantial liabilities, which could adversely affect our financial results.
IF OUR INSURANCE COSTS INCREASE SIGNIFICANTLY, THESE INCREMENTAL COSTS COULD
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
The costs related to obtaining and maintaining workers compensation,
professional and general liability insurance and health insurance for healthcare
providers has been increasing. If the cost of carrying this insurance continues
to increase significantly, we will recognize an associated increase in costs
which may negatively affect our margins. This could have an adverse impact on
our financial condition and the price of our common stock.
IF WE BECOME SUBJECT TO MATERIAL LIABILITIES UNDER OUR SELF-INSURED PROGRAMS OR
CERTAIN CONTINGENT LIABILITIES, 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.
14
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, 2004, we had $32.3 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, 2004,
goodwill represented 44% of our total assets.
Historically, we amortized goodwill on a straight-line basis over the estimated
period of future benefit of up to 15 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 March
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.
OUR ABILITY TO BORROW UNDER OUR CREDIT FACILITY MAY BE LIMITED.
The Company has a $35 million asset-based revolving credit line and a $3 million
term note. Our ability to borrow under the credit facility is based upon, and
thereby limited by, the amount of our accounts receivable. Any material decline
in our service revenues could reduce our borrowing base, which could cause us to
lose our ability to borrow additional amounts under the credit facility. In such
circumstances, the borrowing availability under the credit facility may not be
sufficient for our capital needs.
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.
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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 6.55 % over LIBOR. At May 31,
2004, drawings on the Facility were $ 21.0 million. Assuming variable rate debt
at May 31, 2004, a one point change in interest rates would impact annual net
interest payments by $ 210. 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.
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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
4.3 Standby Equity Distribution Agreement, dated April 19, 2004, between
Cornell Capital Partners, L.P. and the Company, incorporated by reference
to the Company's registration statement on form S-1 (File No. 333-117266)
dated July 9, 2004.
4.4 Registration Rights Agreement, dated April 19, 2004, by and between the
Company and Cornell Capital Partners, L.P., in connection with the Standby
Equity Distribution Agreement, incorporated by reference to the Company's
registration statement on Form S-1 (File No. 333-117266) dated July 9,
2004.
4.5 Escrow Agreement, dated April 19, 2004, by and between the Company, Cornell
Capital Partners, L.P. and Butler Gonzalez LLP, in connection with the
Standby Equity Distribution Agreement, incorporated by reference to the
Company's registration statement on form S-1 (File No. 333-117266) dated
July 9, 2004.
4.6 Placement Agent Agreement, dated April 19, 2004, by and among the Company,
Arthur's, Lestrange & Company Inc. and Cornell Capital Partners, L.P.,
incorporated by reference to the Company's registration statement on Form
S-1 (File No. 333-117266) dated July 9, 2004.
4.7 $140,000 principal amount Compensation Debenture, due April 19, 2007,
issued to Cornell Capital Partners, L.P., in connection with the Standby
Equity Distribution Agreement., incorporated by reference to the Company's
registration statement on Form S-1 (File No. 333-117266) dated July 9,
2004.
31.1-Certification of CEO
31.2-Certification of CFO
32.1-Certification of CEO
32.2-Certification of CFO
(B) Reports on Form 8-K
On April 8, 2004, ATC Healthcare, Inc., issued a press release announcing that
Martin Schiller Chief Financial Officer at National Equipment Corporation Joined
the Board Of ATC Healthcare, Inc.
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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, 2004 ATC HEALTHCARE, INC.
By: /s/ ANDREW REIBEN
-----------------------------------
Andrew Reiben
Senior Vice President, Finance
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
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