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 November 30, 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 December 1, 2004 were 25,216,877 and 192,217 shares,
respectively.
ATC HEALTHCARE, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
November 30, 2004 (unaudited) and February 29, 2004 3
Condensed Consolidated Statements of Operations (unaudited)
three and nine months ended November 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (unaudited)
nine months ended November 30, 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 11-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DESCRIPTION OF MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION 22
ITEM 1. LEGAL PROCEDINGS 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
ITEM I. FINANCIAL INFORMATION
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
November 30, February 29,
2004 2004
(Unaudited)
---------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 876 $ 543
Accounts receivable, less allowance
for doubtful accounts of $856
and $737, respectively 20,573 27,216
Prepaid expenses and other current assets 5,448 4,700
---------------------------
Total current assets 26,897 32,459
Fixed assets, net 622 848
Intangibles 5,721 6,423
Goodwill 31,807 32,256
Deferred income taxes 1,069 1,984
Other assets 1,323 757
---------------------------
Total assets $ 67,439 $ 74,727
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,402 $ 1,595
Accrued expenses 5,486 6,468
Book overdraft 1,595 2,242
Current portion due under bank financing 21,674 1,310
Current portion of notes and guarantee payable 1,591 1,148
---------------------------
Total current liabilities 32,748 12,763
Notes and guarantee payable 29,662 31,241
Due under bank financing -- 24,232
Convertible debentures 585 --
Warrant liabilities 95 --
Other liabilities 41 371
---------------------------
Total liabilities 63,131 68,607
---------------------------
Commitments and contingencies
Convertible Series A Preferred
Stock ($.01 par value 4,000 shares
authorized, 2,000 shares issued and
outstanding at November 30, 2004 and
February 29, 2004) 1,120 1,067
---------------------------
STOCKHOLDERS' EQUITY:
Class A Common Stock - $.01 par value;
75,000,000 shares authorized; 24,855,035 and
24,665,537 shares issued and outstanding at November 30, 2004
and February 29, 2004, respectively 249 247
Class B Common Stock - $.01 par value;
1,554,936 shares authorized;
192,217 and 245,617 shares issued and outstanding at November
30, 2004 and February 29, 2004, respectively 2 3
Additional paid-in capital 14,190 14,421
Accumulated deficit (11,253) (9,618)
---------------------------
Total stockholders' equity 3,188 5,053
---------------------------
Total liabilities and stockholders' equity $ 67,439 $ 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 For the Nine Months
Ended (unaudited) Ended
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
--------- --------- --------- ----------
REVENUES:
Service revenues $ 24,543 $ 32,383 $ 80,742 $ 100,066
- --------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Service costs 19,882 25,649 63,749 78,847
General and administrative expenses 5,494 5,476 15,859 17,890
Depreciation and amortization 338 580 1,006 1,761
Office closing and restructuring 449 2,589 449 2,589
- --------------------------------------------------------------------------------------------------------
Total operating expenses 26,163 34,294 81,063 101,087
- --------------------------------------------------------------------------------------------------------
(LOSS) FROM OPERATIONS (1,620) (1,911) (321) (1,021)
- --------------------------------------------------------------------------------------------------------
INTEREST AND OTHER EXPENSES (INCOME):
Interest expense, net 1,033 1,095 3,258 3,058
Other (income), net (2) (694) (89)
Adjustment of TCLS Guarantee (2,293) -- (2,293) --
- --------------------------------------------------------------------------------------------------------
Total interest and other expenses (1,262) 1,095 271 2,969
- --------------------------------------------------------------------------------------------------------
(LOSS) BEFORE INCOME TAXES (358) (3,006) (592) (3,990)
INCOME TAX PROVISION 939 2,041 990 1,929
- --------------------------------------------------------------------------------------------------------
NET (LOSS) $ (1,297) $ (5,047) $ (1,582) $ (5,920)
========================================================================================================
DIVIDENDS ACCRETED TO PREFERRED SHAREHOLDERS $ 18 $ 17 $ 53 $ 50
NET (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,315) $ (5,064) $ (1,635) $ (5,970)
- --------------------------------------------------------------------------------------------------------
(LOSS) PER COMMON SHARE - BASIC: $ (.05) $ (.20) $ (.07) $ (.25)
========================================================================================================
- --------------------------------------------------------------------------------------------------------
(LOSS) PER COMMON SHARE - DILUTED $ (.05) $ (.20) $ (.07) $ (.25)
========================================================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 24,934 24,882 24,919 24,325
========================================================================================================
Diluted 24,934 24,882 24,919 24,325
========================================================================================================
See notes to condensed consolidated financial statements.
4
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
(Unaudited)
November 30, November 30,
2004 2003
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,582) $ (5,920)
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization 1,005 1,760
Office closing and restructuring charge 449 2,589
Amortization of debt financing costs 213 194
Amortization of discount on convertible debenture 40 --
Adjustment of TLCS Liability (2,293) --
Provision for doubtful accounts 120 (882)
Deferred Income Taxes 915 1,872
Accrued Interest 711 691
Changes in operating assets and liabilities net of
Effects of acquisitions
Accounts receivable 6,524 502
Prepaid expenses and other current assets (749) (1,177)
Other assets (713) (21)
Accounts payable and accrued expenses (173) 370
Other long-term liabilities (330) (37)
-----------------------------
Net cash provided (used) by operating activities 4,137 (59)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (76) (133)
Finalization of acquisition purchase price -- 150
Acquisition of business -- (20)
-----------------------------
Net cash used in investing activities (76) (3)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes and capital lease obligations (2,934) (1,442)
Repayment of term loan facility (1,155) (1,018)
Book overdraft (648) (275)
Debt Financing costs (67) (77)
Issuance of preferred and Common Stock 62 1,147
Cost pertaining to S-1 registration and issuance of Common Stock (292) --
Borrowings (payments) due under credit facility 666 1,579
Issuance of Convertible Notes and Warrants 640 --
-----------------------------
Net cash used in financing activities (3,728) (86)
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 333 (148)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 543 585
-----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 876 $ 437
=============================
Supplemental Data:
Interest paid $ 2,131 $ 1,717
=============================
Income taxes paid $ 56 $ 86
=============================
Dividends $ 53 $ 50
=============================
See notes to condensed consolidated financial statements.
5
ATC HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in Thousands, Except Where Indicated Otherwise, and for Per Share
Amounts)
1. BASIS OF PRESENTATION - The accompanying condensed consolidated financial
statements as of November 30, 2004 and for the three and nine months ended
November 30, 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 and results of
operations 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 November 30, 2004 presentation.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred losses of $1,582 and $6,180 for the nine
month period ended November 30, 2004, and the year ended February 29, 2004,
respectively. As a result of the Company's bank debt, which comes due in
November 2005, being classified as a current liability, the Company has negative
working capital of $(5.9)million. The Company's ability to continue as a going
concern is dependent upon its ability to restructure its bank debt, generate
sufficient cash flow from operations and continued availability from the
Company's equity line of credit. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue as a going concern.
Results for the three and nine month periods ended November 30, 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 and nine
months ended November 30, 2004, 7,882 and 7,482 common stock equivalents,
respectively, have been excluded from earnings per share and for the three and
nine months ended November 30, 2003, 6,736 common stock equivalents have been
excluded from the earnings per share calculation, as their inclusion would have
been anti-dilutive.
3. PROVISION (BENEFIT) FOR INCOME TAXES - For the three months and nine months
ended November 30, 2004 the Company recorded an expense for income taxes of $939
and $990 respectively compared to tax expense of $2,041 and $1,929,
respectively, for the three and nine months ended November 30, 2003. The current
provision provides for state and local income taxes representing minimum taxes
due to certain states as well as the reduction in deferred taxes for the quarter
ended November 30, 2004 of $915 that pertains to the reversal of the TLC
Guarantee.
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 Licensee 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.
6
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.
On July 15, 2004 the Company received a waiver in perpetuity from the lender for
non-compliance of certain Facility covenants as of May 31, 2004.
On October 13, 2004 the Company received a waiver in perpetuity from the lender
for non-compliance of certain Facility covenants as of August 31, 2004.
On January 13, 2005 the Company received a waiver in perpetuity from the lender
for non-compliance of certain Facility covenants as of November 30, 2004.
As of November 30, 2004, the outstanding balance on the revolving credit
Facility was $19.3 million. The Company had outstanding borrowings under the
term loan of $2.4 million as of November 30, 2004. At November 30, 2004 interest
accrued at a rate per annum of 6.85% over LIBOR on the revolving credit Facility
and 9.27% over LIBOR on the term loan.
6. CONVERTIBLE DEBENTURES and PROMISSORY NOTES - 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
significant change in the fair value of the warrants at November 30, 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 the
Company's common stock at a price per share of 100% of the lowest closing bid
price for the three days immediately preceding the conversion date.
On November 11, 2004 the Company issued a promissory note in the principal
amount of $425 to Cornell Capital Partners, LP for a $425 advance against the
Standby Equity Distribution Agreement. The Note is to be repaid from draw downs
on the Standby Equity Distribution Agreement. At November 30, 2004 $382 was
outstanding on the Promissory Note which is included in notes and guarantee
payable.
7
7. 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 a licensee 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 November 30, 2004 and 2003, total
licensee distributions were approximately $1.6 million, and for the nine months
ended November 30, 2004 and 2003 total licensee distributions were approximately
$4.7 million and $5.1 million, 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 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 nine months ended November 30, 2004 and 2003 is $865 and $457
of licensee fees, respectively.
8. LICENSEE SALES
The Company includes in its service revenues, service costs and general and
administrative costs, revenues and costs associated with its Licensees.
Summarized below is the detail associated with above discussed items for the
three and nine months ended November 30, 2004 and 2003, respectively.
- ---------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
November 30, 2004 November 30, 2003 November 30, 2004 November 30, 2003
- ---------------------------------------------------------------------------------------------
Company Service
Revenue $12,018 $18,738 $41,518 $ 59,865
- ---------------------------------------------------------------------------------------------
Licensee Service
Revenue $12,525 $13,645 $39,224 $ 40,201
- ---------------------------------------------------------------------------------------------
Total Revenue $24,543 $32,383 $80,742 $100,066
- ---------------------------------------------------------------------------------------------
Company Service
Costs $ 9,904 $14,584 $32,029 $ 46,358
- ---------------------------------------------------------------------------------------------
Licensee Service
Costs $ 9,978 $11,065 $31,720 $ 32,489
- ---------------------------------------------------------------------------------------------
Total Service Costs $19,882 $25,649 $63,749 $ 78,847
- ---------------------------------------------------------------------------------------------
Company General
and administrative
costs $ 4,248 $ 4,250 $12,505 $ 14,246
- ---------------------------------------------------------------------------------------------
Licensee Royalty $ 1,246 $ 1,226 $ 3,354 $ 3,644
- ---------------------------------------------------------------------------------------------
Total General and
administrative costs $ 5,494 $ 5,476 $15,859 $ 17,890
- ---------------------------------------------------------------------------------------------
8
The Company settled various disputes with its Atlanta Licensee by selling its
Franchise rights to the Licensee for $875. The purchase price is evidenced by a
note which is payable over 60 months at an interest rate of 4.75%. In addition,
various other issues which were being disputed through litigation with the
licensee were settled resulting in an amount to be paid to the Licensee of $200,
various amounts owed to the Company of $61 were extinguished and an offset to
the note in the amount of $170. The note due to the Company, which is guaranteed
by the Licensee, is reflected in notes receivable and the amount to be paid to
the Licensee is reflected in accrued expenses. The Company recorded in other
income the net amount of $444.
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. As
described in note 10 the Company has written-off $449,000 of goodwill associated
with office closings as compared to $889,000 of goodwill associated with closed
offices in November 2003.
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 of which $889,000 was for the write-off of
goodwill. 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 November 30, 2004 the Company has
paid $653 for severance and other costs associated with the office closings. As
of November 30, 2004 the Company's accounts payable and accrued expenses
included $154 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 of the related
leases which expire at various dates through January 2007. In the third quarter
of Fiscal 2005 the Company has written-off $449,000 of goodwill associated with
offices that were closed during the quarter.
11. GUARANTEE OF TLCS LIABILITY - The Company is contingently liable on $2.3
million of obligations owed by TLCS which is payable over eight years. On
November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company had recorded a provision
of $2.3 million representing the balance outstanding on the related TLCS
obligations. The Bankruptcy Court has approved the plan for concluding the TLCS
Bankruptcy. The plan provides for, among other things, that claims falling
within this guarantee should be paid in full. The assets of TLCS have been sold
by the bankruptcy court and the Company has been advised that the sale price is
sufficient to cover the claims of TLC creditors. The Company which is entitled
to be indemnified by TLCS if it has to pay any monies on the guarantee, has
filed claims for such indemnification in TLCS Bankruptcy case. Those claims have
not been disputed. Based on the above facts the Company and its legal counsel
have concluded that it is no longer probable that the Company will be liable for
any amounts under the guarantee and at November 30, 2004 the Company has
reversed the provision for such guarantee.
12. 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 these lawsuits will not have
a material effect on its financial position, results of operations or cash
flows.
13. RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued a revision to Statement 123 (123R), Share-Based Payment,
which requires companies to record the fair value of all stock options as a
charge to operations. Companies will be required to measure the cost of employee
services received in exchange for an award of equity instruments based on the
fair value of the award on the grant date. Statement 123R is effective at the
beginning of the first interim or annual reporting periods beginning after June
15, 2005. the adoption of this standard will have no impact on the Company's
financial position and the Company has not yet concluded as to what impact it
may have on its results of operations.
Management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on the accompanying financial statements.
9
14. 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:
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) For the three For the three For the nine For the nine
months ended months ended months ended months ended
November 30,2004 November 30,2003 November 30, 2004 November 30,2003
- -------------------------------------------------------------------------------------------------------------
Net (loss) as reported $ (1,297) $ (5,047) $ (1,582) $ (5,920)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Deduct total stock based employee compensation expense determined under fair
value based on methods for all
awards $ 283 $ 61 $ 874 $ 110
- -------------------------------------------------------------------------------------------------------------
Pro forma net (loss) $ (1,580) $ (5,108) $ (2,456) $ (6,030)
- -------------------------------------------------------------------------------------------------------------
Basic net (loss) per share as
reported $ (.05) $ (.20) $ (.07) $ (.25)
- -------------------------------------------------------------------------------------------------------------
Pro forma basic (loss) per
share as reported $ (.06) $ (.21) $ (.10) $ (.25)
- -------------------------------------------------------------------------------------------------------------
Diluted (loss) per share as
reported $ (.05) $ (.20) $ (.07) $ (.25)
- -------------------------------------------------------------------------------------------------------------
Pro forma diluted (loss) per
share as reported $ (.06) $ (.21) $ (.10) $ (.25)
- -------------------------------------------------------------------------------------------------------------
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. received 18,182 shares of our common stock.
The company has filed with the Securities and Exchange Commission a registration
statement to register the resale of the shares issued under the Standby Equity
Distribution Agreement. The registration statement was declared effective on
November 5, 2004.
On November 26, 2004 the Company sold 104,320 shares of common stock at $0.41
per share under the Standby Equity Distribution Agreement. The proceeds form
this sale of $42 were used to reduce the promissory note to Cornell Capital
from$425 to $383.
Subsequent to November 30, 2004 the Company sold 361,952 shares of common stock
at prices ranging from $0.34 to $0.37 per share under the Standby Equity
Agreement. The proceeds from these sales were used to reduce the promissory note
to Cornell Capital.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Amounts 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
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2004 ("THE 2004 PERIOD") TO THE
THREE MONTHS ENDED NOVEMBER 30, 2003 ("THE 2003 PERIOD")
TOTAL REVENUES: Total revenues for the three month period ended November 30,
2004 were $24.5 million, a decrease of $7.8 million or 24.1% from total revenues
of $32.4 million for the three months ended November 30, 2003. The reduction in
revenues is due to closing marginally performing offices during the second half
of 2003 as well as the closing of one office and two licensee's during the three
months ended November 30, 2004. Three offices were closed during the three
months ended November 30, 2003. Until the demand for nurses returns to prior
levels, we may continue to see revenue decline in our existing businesses which
would continue our trend of losses. If revenues continue to significantly
decline, our ability to continue operations could be jeopardized. To offset the
decline in the per diem nursing revenue, we are actively recruiting new
licensees, of which three were opened in the three months ended November 30,
2004 as well as looking into other areas of revenue generation such as Vendor on
Premise and Pharmacy staffing.
Service costs were 81.0% and 79.2% for the three months ended November 30, 2004
and 2003 respectively. Service costs have increased due to higher wages which
the Company has not been able pass on to its clients . 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: General and administrative expenses were
$5.5 million for the three months ended November 30, 2004 and 2003. General and
administrative costs, expressed as a percentage of total revenues, was 22.4% for
the three month period ended November 30, 2004 versus 16.9% for the three months
ended November 30, 2003. The increase in general and administrative costs as a
percentage of revenue is due to the decrease in revenue and the Company being
unable to decrease fixed costs at the same rate of decline.
OFFICE CLOSING AND RESTRUCTURING CHARGE: For the Quarter ended November 30, 2003
The Company recorded a charge associated with the closing of certain 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. The components of
the charge were as follows:
- ------------------------------------------------------------------------------
Components Qarter ended November 30, 2003 (in thousands)
- ------------------------------------------------------------------------------
Write-off of fixed assets $ 892
- ------------------------------------------------------------------------------
Write-off of related goodwill 889
- ------------------------------------------------------------------------------
Severance costs and other Benefits 608
- ------------------------------------------------------------------------------
Other 200
-------
- ------------------------------------------------------------------------------
Total Restructuring Charge $ 2,589
- ------------------------------------------------------------------------------
As of November 30, 2003 the Company had paid essentially none of the severance
and other costs associated with the office closings. As of November 30, 2003 the
Company's accounts payable and accrued expenses included $807,000 of remaining
costs accrued consisting mainly of severance and lease costs. For the three
months ended November 30 , 2004 office charges and restructuring was composed
entirely of a write-off of goodwill in the amount of 449.
11
DEPRECIATION AND AMORTIZATION: Total Depreciation and Amortization for the three
months ended November 30, 2004 was $338 a decrease of $242 from $580 for the
three months ended November 30, 2003. The reduction is due to the write-off of
fixed assets (which charge was included in office closing and restructuring
charges) that no longer need to be depreciated.
INTEREST EXPENSE, NET: Interest expense, net for the three months ended November
30, 2004 was $1,033 as compared to $1,095 for the same period in the prior year.
GUARANTEE OF TLCS LIABILITY - The Company is contingently liable on $2.3 million
of obligations owed by TLCS which is payable over eight years. On November 8,
2002, TLCS filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code. As a result, the Company had recorded a provision of $2.3
million representing the balance outstanding on the related TLCS obligations.
The Bankruptcy Court has approved the plan for concluding the TLCS Bankruptcy.
The plan provides for, among other things, that claims falling within this
guarantee should be paid in full. The assets of TLCS have been sold by the
bankruptcy court and the Company has been advised that the sale price is
sufficient to cover the claims of TLCS creditors. The Company which is entitled
to be indemnified by TLCS if it has to pay any monies on the guarantee, has
filed claims for such indemnification in TLCS Bankruptcy case. Those claims have
not been disputed. Based on the above facts the Company and its legal counsel
have concluded that it is no longer probable that the Company will be liable for
any amounts under the guarantee and at November 30, 2004 the Company has
reversed the provision for such guarantee
PROVISION (BENEFIT) FOR INCOME TAXES: For the three months ended November 30,
2004 and 2003 the Company recorded an expense for income taxes of $939 and
$2,041 respectively. The current provision provides for state and local income
taxes representing minimum taxes due to certain states as well as the reduction
in deferred taxes for the quarter ended November 30, 2004 of $915 that pertains
to the reversal of the TLC Guarantee.
COMPARISON OF NINE MONTHS ENDED NOVEMBER 30, 2004 ("THE 2004 PERIOD") TO THE
NINE MONTHS ENDED NOVEMBER 30, 2003 ("THE 2003 PERIOD")
TOTAL REVENUES-Total revenues for the nine month period ended November 30, 2004
were $80.7 million, a decrease of $19.3 million or 19.3% from total revenues of
$100.1 million for the nine months ended November 30, 2003. Two offices and four
licensee's were closed during the nine months ended November 30, 2004 and six
offices were closed during the nine months ended November 30, 2003. Until the
demand for nurses returns to prior levels, we may continue to see revenue
decline in its existing businesses which would continue our trend of losses. If
revenues continue to significantly decline, our ability to continue operations
could be jeopardized. To offset the decline in its per diem nursing, we are
actively recruiting new licensees of which nine were opened during the nine
months ended November 30, 2004 as well as looking into other areas of revenue
generation such as Vendor on Premise and Pharmacy staffing.
Service costs were 78.9% and 78.8% for the nine months ended November 30, 2004
and 2003 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: General and administrative expenses were
$15.9 million for the nine months ended November 30, 2004 as compared to $17.9
million for the same period in 2003. General and administrative costs, expressed
as a percentage of total revenues, were 19.6% and 17.9% for the nine months
ended November 30, 2004 and 2003 respectively. The increase in the percentage of
total revenues is due to the Company not being able to reduce administrative
costs at the same pace as the revenue decline. The dollar 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 from the offices we closed
during 2004 and 2003 and the reduction of back office staff. For the nine months
ended November 30, 2004 the reduction in royalty payments represented 25 % of
the reduction in administrative expenses, savings from closed offices
represented 45% and the reduction in back office staff represented 30% of the
decrease in general and administrative expenses.
12
OFFICE CLOSING AND RESTRUCTURING CHARGE: For the nine months ended November
30, 2003 The Company recorded a charge associated with the closing of certain
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. The
components of the charge were as follows:
- -------------------------------------------------------------------------------
Components Quarter ended November 30, 2003 (in thousands)
- -------------------------------------------------------------------------------
Write-off of fixed assets $ 892
- -------------------------------------------------------------------------------
Write-off of related goodwill 889
- -------------------------------------------------------------------------------
Severance costs and other Benefits 608
- -------------------------------------------------------------------------------
Other 200
-------
- -------------------------------------------------------------------------------
Total Restructuring Charge $ 2,589
- -------------------------------------------------------------------------------
As of November 30, 2003 the Company had paid essentially none of the severance
and other costs associated with the office closings. As of November 30, 2003 the
Company's accounts payable and accrued expenses included $807,000 of remaining
costs accrued consisting mainly of severance and lease costs.
For the nine months ended November 30 , 2004 office charges and restructuring
was composed entirely of a write-off of goodwill in the amount of 449.
DEPRECIATION AND AMORTIZATION: Total Depreciation and Amortization for the nine
months ended November 30, 2004 was $1,006 a decrease of $755 from $1,761 for the
nine months ended November 30, 2003. The reduction is due to the write-off of
fixed assets (which charge was included in office closing and restructuring
charges) that no longer need to be depreciated.
INTEREST EXPENSE, NET: For the nine months ended November 30, 2004 Interest
expense, net was $3,257 as compared to $3,058 for the same period last year. The
increase in the period is primarily due to the interest costs associated with
our term loan facility and to increased interest rates associated with its
revolving line of credit which increased during the third quarter of fiscal
2005.
GUARANTEE OF TLCS LIABILITY - The Company is contingently liable on $2.3 million
of obligations owed by TLC's which is payable over eight years. On November 8,
2002, TLCS filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code. As a result, the Company had recorded a provision of $2.3
million representing the balance outstanding on the related TLCS obligations.
The Bankruptcy Court has approved the plan for concluding the TLC Bankruptcy.
The plan provides for, among other things, that claims falling within this
guarantee should be paid in full. The assets of TLC have been sold by the
bankruptcy court and the Company has been advised that the sale price is
sufficient to cover the claims of TLC creditors. The Company which is entitled
to be indemnified by TLC if it has to pay any monies on the guarantee, has filed
claims for such indemnification in TLC's Bankruptcy case. Those claims have not
been disputed. Based on the above facts the Company and its legal counsel have
concluded that it is no longer probable that the Company will be liable for any
amounts under the guarantee and at November 30, 2004 the Company has reversed
the provision for such guarantee.
PROVISION (BENEFIT) FOR INCOME TAXES: For the nine months ended November 30,
2004 Company recorded an expense for income taxes of $990 as compared to $1,929.
The current provision provides for state and local income taxes representing
minimum taxes due to certain states as well as the reduction in deferred taxes
for the nine months ended November 30, 2004 of $915 that pertains to the
reversal of the TLC Guarantee.
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 its markup.
Cash and Cash equivalents increased by $333 as of November 30, 2004 as compared
to February 29, 2004 as a result of cash provided by operating activities of
$4.1 million, Cash used in investing activities of $76 and cash used in
financing activities of $3.7 million. Cash provided by operating activities was
primarily due to a decline in accounts receivable, partially offset by an
increase in prepaids and other current assets. Cash used in financing activities
was primarily used to pay notes and capital lease obligations.
13
In April 2001, we obtained a new financing facility with HFG Healthco-4 LLC for
a $25 million, three-year term, revolving loan which would have expired in April
2004. The $25 million revolving loan limit was increased to $27.5 million in
October 2001. Amounts borrowed under the $27.5 million revolving loan were used
to repay $20.6 million of borrowing on our prior facility.
In November 2002, HFG Healthco-4 LLC, 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 $35 million revolving loan
expires in November 2005. The term loan facility is for acquisitions and capital
expenditures. Repayment of this additional term facility is on a 36-month
straight-line amortization. The revolving credit line is subject to certain loan
covenants. These covenants include a debt service coverage ratio calculated by
taking the current portion of long term debt and interest paid and dividing by
four quarters of earnings before interest, taxes, depreciation and amortization,
consolidated net worth target calculated by taking total assets minus total
liabilities, earnings before interest, taxes, depreciation and amortization
target, current ratio calculated by taking current assets less current
liabilities, consolidated interest coverage ratio calculated by taking the most
recent four quarters of earnings before interest, taxes, depreciation and
amortization divided by four quarters of paid interest expense, and accounts
receivable turnover ratio.
In November 2002, the interest rates were revised to 4.55% over LIBOR on the
revolving line and 7.27% over the LIBOR on the term loan facility as part of a
loan modification.
On June 13, 2003, we received a waiver from HFG Healthco-4 LLC for
non-compliance of certain revolving loan covenants effective as of February 28,
2003. Interest rates on both the revolving line and term loan facility were
increased 2% and can decrease if we meet 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. As part of this modification, the lender and noteholders,
Direct Staffing, Inc. and DSS Staffing Corp., amended the subordination
agreement and the noteholders amended the Notes issued to pay the purchase
price. As a result of that amendment, what had been two promissory notes issued
to each of the former owners of Direct Staffing, Inc. and DSS Staffing Corp. has
been condensed into one note. The note issued to one of the former owners is for
a term of seven years, with a minimum monthly payment (including interest) of
$40,000 in year one and minimum monthly payments of $80,000 in subsequent years,
with a balloon payment of $3,700,000 due in May 2007 The balance on that note
after the balloon payment is payable over the remaining 3 years of the note,
subject to certain limitations in the subordination agreement. The notes issued
to the other three former owners are for terms of ten years, with minimum
monthly payments (including interest) of $25,000 in the aggregate in the first
year and minimum monthly payments of $51,000 in the aggregate for the remaining
years. Any unpaid balance at the end of the note term will be due at that time.
Additional principal payments are payable to the noteholders if we achieve
certain financial ratios. In conjunction with this revision, one of the note
holders agreed to reduce his note by approximately $2,800,000 provided we do not
default under the notes or, in certain instances, our senior lending facility.
On January 8, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of November 30, 2003.
On May 24, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of February 29, 2004.
On July 15, 2004 we received a waiver in perpetuity from HFG Healthco-4 LLC for
non-compliance of certain facility covenants as of May 31, 2004.
On October 13, 2004 we received a waiver in perpetuity from HFG Healthco-4 LLC
for non-compliance of certain Facility covenants as of August 31, 2004.
On January 13, 2005 we received a waiver in perpetuity from HFG Healthco-4LLC
for non-compliance of certain Facility covenants as of August 31, 2004
Working capital was $(5.9) million as of November 30, 2004 as compared to and
$19.7 million on February 29, 2004. The decline in working capital is primarily
due to Classification of the Company's credit facility as a current liability
(see discussion below). Excluding the credit facility, working capital would
have been $15.8 million as of November 30, 2004. Excluding the credit facility
the decline in working capital is primarily related to a decrease in sales and
the corresponding decline in accounts receivable.
14
Operating cash flows have been the Company's primary source of liquidity and
historically have been sufficient to fund its 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. Management believes that our capital resources are sufficient to
meet our working capital requirements for the next twelve months. The Company's
existing cash and cash equivalents are not sufficient to sustain our operations
for any length of time. The Company's revolving loan facility comes due in
November 2005 and as such has been classified as a current liability as of
November 30, 2005. The Company plans on refinancing this loan facility prior to
its expiration. There can be no assurance that the Company will be able to
refinance our revolving loan facility. The Company does not have enough capital
to operate the business without the revolving loan facility. The Company is also
subject under the current loan facility to certain financial covenants. Though
the Company believes that it will meet those covenants it is possible if revenue
continues to decline and the Company cannot reduce its costs appropriately that
the Company may violate the covenants. In the past when the Company has violated
covenants the Company has been able to receive a waiver or amendment of those
covenants from the lender HFG Healthco-4 LLC. It is expected that if the Company
violates a covenant the Company will be able to receive a waiver. If the Company
is unable to receive a waiver then the Company would be in default of its
lending agreement. The Company expects to meet its future working capital,
capital expenditure, internal business expansion, and debt service from a
combination of operating cash flows, funds available under the $35 million
revolving loan facility and funds form the Standby Equity Distribution Agreement
with Cornell Capital Partners, as available. No assurance can be given, however,
that this will be the case. The Company does not have sufficient capital to run
its operations with out a financing facility and would have to look to
alternative means such as the sale of stock or the sale of certain assets to
finance operations. There can be no assurance that additional financing will be
available when required, or, if available, will be available on satisfactory
terms.
We anticipate that capital expenditures for furniture and equipment, including
improvements to our management information and operating systems during the next
twelve months will be approximately $200.
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. On November 6, 2005 the S-1 registration filed by the Company was
deemed effective by the Securties and Exchange Commission. On November 26, 2004
the Company sold 104,320 shares of common stock at $0.41 per share under the
Standby Equity Agreement. The proceeds form this sale of $42 were used to reduce
the promissory note to Cornell Capital from$425 to $383.Subsequent to November
30, 2004 the Company sold 361,952 shares of common stock at prices ranging from
$0.34 to $0.37 per share under the Standby Equity Agreement. The proceeds from
these sales were used to reduce the promissory note to Cornell Capital.
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.
15
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 51.
THE COMPANY HAS EXPERIENCED LOSSES FROM OPERATIONS AND HAS A WORKING CAPITAL
DEFICIENCY. The Company has incurred losses of $1,582 and $6,180 for the nine
month period ended November 30, 2004, and the year ended February 28, 2004,
respectively. As a result of the Company's bank debt, which comes due in
November 2005, being classified as a current liability, the Company has negative
working capital of $(5.9)million. The Company's ability to continue as a going
concern is dependent upon its ability to restructure its bank debt, generate
sufficient cash flow from operations and continued availability from the
Company's equity line of credit.
WE ARE CURRENTLY 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 substantially 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. Demand
for temporary nurses over the last year has declined due to lower hospital
emissions and nurses working full time for hospitals rather than working through
temporary staffing agencies. Accordingly, when our clients request temporary
nurse staffing we must recruit from a smaller pool of available nurses, which
our competitors also recruit from. At this time we do not have enough nurses to
meet our clients' demands for our nurse staffing services. This shortage has
existed since approximately 2000. 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. To remedy the shortage we have
increased advertising on our website and other industry visited websites to
attract new nurses to work for us. We also offer a variety of benefits to our
employees such as life insurance, medical and dental insurance, a 401 K plan, as
well as sign-on bonuses for new employees and recruitment bonuses for current
employees who refer new employees to us. In addition, we have recently started
recruiting nurses from foreign countries, including India and the Philippines.
THE COSTS OF ATTRACTING AND RETAINING QUALIFIED NURSES AND OTHER HEALTHCARE
PERSONNEL HAVE RISEN. 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
have increased hourly wages and other benefits. In response to such increases by
our competitors, we raised the wages and increased benefits that we offer to our
personnel. Because we were not able to pass the additional costs to certain
clients, our margins declined and we were forced to close 18 of our offices that
could no longer operate profitably.
16
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, such as direct recruitment and other channels
not involving staffing companies, 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. 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 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. 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.
17
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 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 LICENSING REGULATIONS THAT APPLY TO US CHANGE, WE MAY FACE INCREASED
COSTS THAT REDUCE OUR REVENUE AND PROFITABILITY. In some states, firms in the
temporary healthcare staffing industry 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
licensing 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, which would reduce
our revenue and profitability.
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. No portion of our revenue
is directly derived from Medicare and Medicaid programs. 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. Between March 2001 and February 2004, we
acquired nine unaffiliated companies. These companies had an aggregate of
approximately $11.8 million in revenue at the time they were purchased. We have
historically faced competition for acquisitions. While to date such competition
has not affected our growth and expansion, 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.
While to date, we have not experienced problems, these acquisitions involve
numerous risks, including:
o potential loss of key employees or clients of acquired companies;
o difficulties integrating acquired personnel and distinct cultures into our
business;
o difficulties integrating acquired companies into our operating, financial
planning and financial reporting systems;
o diversion of management attention from existing operations; and
o assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply with
healthcare regulations.
18
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.
Further, our revolving loan agreement with HFG Healthco-4 LLC requires that we
obtain the written consent of HFG Healthco-4 LLC before engaging in any
investing activities not in the ordinary course of business, including but not
limited to any mergers, consolidations and acquisitions. The restrictive
covenants of the revolving loan agreement with HFG Healthco-4 LLC may make it
difficult for us to expand our operations through acquisitions and other
investments if we are unable to obtain their consent.
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
adequate and 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 as a
percentage of revenue. Our cost of workers compensation, professional and
general liability and health insurance for healthcare providers for the fiscal
year ending February 29, 2004, and for the nine months ended November 30 , 2004
were $4.6 million and $2.7 million respectively. The corresponding gross margin
for the same time periods were 20.9%, and 21.1% respectively. 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,
OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED. Except for a few states that
require workers compensation through their state fund, we provide workers
compensation coverage through a program that is partially self-insured. Zurich
Insurance Company provides specific excess reinsurance of $300,000 per
occurrence as well as aggregate coverage for overall claims borne by the group
of companies that participate in the program. The program also provides for risk
sharing among members for infrequent, large claims over $75,000. 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 November 30, 2004, we had $31.8 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 November 30, 2004, goodwill represented 47.2% 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.
19
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. We have a $35
million dollar asset-based revolving credit line with HFG Healthco-4 LLC. As of
November 30, 2004 we had approximately $19.3 million, outstanding under the
revolving credit line with HFG Healthco-4 LLC with additional borrowing capacity
of $0.0 million. 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.
THE POSSIBLE INABILITY TO ATTRACT AND RETAIN LICENSEES MAY ADVERSELY AFFECT OUR
BUSINESS. Maintaining quality licensees, managers and branch administrators will
play a significant part in our future success. 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 our 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.
OUR SUCCESS DEPENDS ON THE CONTINUING SERVICE OF OUR SENIOR MANAGEMENT. IF ANY
MEMBER OF OUR SENIOR MANAGEMENT WERE TO LEAVE, THIS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS AND FINANCIAL PERFORMANCE. Changes in management
could have an adverse effect on our business. We are dependent upon the active
participation of Messrs. David Savitsky, our Chief Executive Officer, and
Stephen Savitsky, our President. We have entered into employment agreement with
both of these individuals. While no member of our senior management has any
plans to retire or leave our company in the near future, the failure to retain
our current management could have a material adverse effect on our operating
results and financial performance. We do not maintain any key life insurance
policies for any of our executive officers or other personnel.
20
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 6.85% over LIBOR. At November
30, 2004, drawings on the Facility were $19.3 million. Assuming variable rate
debt at November 30, 2004, a one point change in interest rates would impact
annual net interest payments by $193. The Company does not use derivative
financial instruments to manage interest rate risk. I
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.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - See Note 8 in PART I. - ITEM 1.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Information relating to shares of common stock of the Company sold by the
Company during the fiscal quarter ended November 30, 2004, which were not
registered under the Securities Act of 1933, as amended (the"Securities Act"),
is incorporated by reference to the discussion in the following portions of Part
I of this Report: In Item 1, Note 1 to the Financial Statements relating to
Convertible Debentures and Promissory Notes, and Note 14 to the Financial
Statements relating to Shareholders Equity; and in Item 2, Management Discussion
and Analysis, the section entitled "Liquidity and Capital Resources." Those
sales were made under the exemption from registration contained in Section 4(2)
of the Securities Act and Rule 152 of the Securities and Exchange Commission
issued under that Section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) The Company held its Annual Meeting of Shareholders on August 4, 2004
(B) The shareholders voted on and elected the following directors as follows:
NOMINEE FOR WITHELD
-----------------------------------------------
Bernard Firestone 24,901,900 540,318
Martin Schiller 24,901,900 540,318
The following directors who were not up for election will continue in office:
Stephen Savitsky
David Savitsky
Jonathan Halpert
(C) The share holders voted on and approved a resolution to authorize the
Company to issue a number of shares ofcommon stock in excess of 20% of the
amount of shares of such stock which is currently outstanding in connection
with a financing arrangement with Cornell Capital Partners, LP:
FOR AGAINST ABSTAIN WITHELD
--------------------------------------------------------
16,026,900 907,784 29,957 8,477,577
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 31 - Certifications
Exhibit 32 - Section 1350 Certifications
(B) Reports on Form 8-K
The Company filed a current report on Form 8-K on June 2, 2004 to
furnish its press release reporting results for the Fourth Quarter
ended February 29, 2004.
The Company filed a current report on Form 8-K on July 2, 2004 to
furnish its press release announcing it had entered into an agreement
for a five million dollar Stanby Equity Distribution Agreement with
Cornell Capital Partner LP.
The Company filed a current report on Form 8-K on July 15, 2004 to
furnish its press release reporting results for the first quarter for
the fiscal year ending February 28, 2005.
The Company filed a current report on Form 8-K on October 20, 2004 to
furnish its press release reporting results for the second quarter for
the fiscal year ending February 28, 2005.
22
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: January 14, 2005 ATC HEALTHCARE, INC.
By: /s/ Andrew Reiben
-------------------------------------------
Andrew Reiben
Senior Vice President, Finance
Chief Financial Officer and
Treasurer (Authorized Officer and
Principal Financial and Accounting Officer)
23