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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 0-11380

ATC HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

(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 ý    No o

        The number of shares of Class A Common Stock and Class B Common Stock outstanding on January 17, 2003 were 23,546,948 and 256,431 shares, respectively.

ATC HEALTHCARE, INC. AND SUBSIDIARIES

INDEX

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PART I.    FINANCIAL INFORMATION

ATC HEALTHCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

See notes to condensed consolidated financial statements.

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ATC HEALTHCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

See notes to condensed consolidated financial statements

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ATC HEALTHCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

See notes to condensed consolidated financial statements.

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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.    FINANCIAL STATEMENTS

        The accompanying condensed consolidated financial statements as of November 30, 2002 and for the three and nine months ended November 30, 2002 and 2001 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 28, 2002 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The accompanying condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ATC Healthcare, Inc. (the "Company") for the year ended February 28, 2002. Certain prior period amounts have been reclassified to conform with the November 30, 2002 presentation.

        The results for the three and nine month periods ended November 30, 2002 are not necessarily indicative of the results for the full year ending February 28, 2003.

2.    EARNINGS PER SHARE

        Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding for the applicable period. Diluted earnings (loss) per share is computed using the weighted average number of common shares plus common equivalent shares outstanding, unless the inclusion of such common equivalent shares would be anti-dilutive. Earnings per share for the three and nine months ended November 30, 2001 include common stock equivalents of 1,874 and 720, respectively. For the three and nine months ended November 30, 2002, common stock equivalents would be antidilutive.

3.    PROVISION (BENEFIT) FOR INCOME TAXES

        Prior to the fiscal year ended February 28, 2002, the Company had provided a valuation allowance for the full amount of its deferred tax assets because of the substantial uncertainties associated with the Company's ability to realize a deferred tax benefit. However, based on the Company's continued expected profitability, the deferred tax benefit has been recorded as of February 28, 2002.

4.    DEBT

        In April 2001, the Company entered into a new $25 million secured facility (the "Facility") with a lending institution which expires in April 2004. The Company's previous credit facility was repaid in full concurrent with the closing of the Facility. In connection with the early retirement of its debt, the Company wrote-off the unamortized balance of deferred financing fees and recorded an extraordinary charge of $854 in the quarter ended May 31, 2001.

        The Company may borrow up to 85% of the Company's eligible accounts receivable. Interest accrues at a rate per annum of 4.05% over LIBOR. There is also a .5% annual fee for the unused portion of the total loan availability. During October 2001, the Company's Facility agreement was amended to increase the revolving credit line to $27.5 million. The Facility agreement contains various financial and other covenants and conditions, including but not limited to the following: debt service coverage, interest coverage, net worth, tangible net worth, current ratio and accounts receivable turnover.

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        In November 2002, the lending institution with which the Company has the secured facility, increased the revolving credit line to $35 million and provided for an additional term loan facility totaling $5 million. Interest accrues at a rate of 3.95% over LIBOR on the revolving credit line and 6.37% over LIBOR on the term loan facility. The Facility expires in November 2005. The term loan facility is for acquisitions and capital expenditures. Repayment of this additional term facility will be on a 36 month straight line amortization.

        The Company is in technical default of certain Facility covenants as of November 30, 2002 including ratio requirements of debt service coverage, net worth, EBITDA (earnings before income taxes, depreciation and amortization) and debt to tangible net worth. The lending institution has not called a formal default on the Company. The Company and lending institution are in discussions to resolve the matter. Until such time of resolution, the debt has been classified as a current liability.

5.    RECENT ACQUISITIONS

        In January, 2002, the Company purchased substantially all of the assets of Direct Staffing, Inc. ("DSI"), a licensee of the Company serving the territory consisting of Westchester County, New York and Northern New Jersey, and DSS Staffing Corp. ("DSS"), a licensee of the Company serving New York City and Long Island, New York for a purchase price of $30,195. These two licensees were owned by an unrelated third party and by a son and two sons-in-law of the Company's Chairman of the Board of Directors who have received an aggregate 60% of the proceeds of the sale. The Company will be required to pay contingent consideration equal to the amount by which (a) the product of (i) Annualized Revenues (as defined in the asset purchase agreement) and (ii) 5.25 exceeds (b) $17,220, but if and only if the resulting calculation exceeds $20 million.

        The company has obtained a valuation on the tangible and intangible assets associated with the transaction and has allocated $6,400 to customer lists (which is being amortized over 10 years), $200 to a covenant not to complete (which is being amortized over 8 years) and the remaining balance to goodwill.

        The purchase price is evidenced by two series of promissory notes issued to each of the four owners of DSS and DSI. The first series of notes (the "First Series"), in the aggregate principal amount of $12,975, bears interest at 5% per annum and is payable in 36 consecutive equal monthly installments of principal, together with interest thereon, with the first installment having become due on March 1, 2002. The second series of notes (the "Second Series"), in the aggregate principal amount of $17,220, bears interest at the rate of 5% per annum and is payable as follows: $11 million, together with interest thereon, on April 30, 2005 (or earlier if certain capital events occur prior to such date) and the balance in 60 consecutive equal monthly installments of principal, together with interest thereon, with the first installment becoming due on April 30, 2005. If the contingent purchase price adjustment is triggered on April 30, 2005, the then aggregate principal balance of the Second Series shall be increased by such contingent purchase price. Payment of both the First Series and the Second Series is collateralized by a second lien on the assets of the acquired licensees.

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        DSI and DSS were paid gross licensee fees of approximately $2,101 and $5,866 for the three and nine months ended November 30, 2001. The terms and conditions of the franchise agreement between the Company, DSI and DSS were substantially similar to those of other licensees of the Company.

        In June 2002, the Company bought out a management contract with a company ("Travel Company") who was managing its travel nurse division. The conversion of the business was completed in October 2002, and the Company is now directly controlling its travel nurse division. The purchase price of $620 is payable over two years beginning in December 2002. The Travel Company had received payments from the Company of $107 and $374 for the month ended September 30, 2002 and three months ended November 30, 2001, respectively, , and $702 and $1,026 for the seven months ended September 30, 2002 and nine months ended November 30, 2001, respectively, for its management of the travel nurse division. The Company is amortizing the cost over the five years that were remaining on the management contract.

        In June 2002, the Company purchased substantially all of the assets and operations of Staff One Healthcare, which provides temporary medical staffing services to clients in Tucson, Arizona and Las Vegas, Nevada. The purchase price was $500; $300 of which was paid at closing, and the remaining $200 of which is payable in 8 quarterly installments beginning October 1, 2002.

        In June 2002, the Company purchased substantially all of the assets and operations of Staff Relief, which provides temporary medical staffing services to clients in Stratford, Connecticut. The purchase price was $109; $65 of which was paid at closing, and the remaining $44 of which was paid in November 2002.

        In October 2002, the Company purchased substantially all of the assets and operations of All Nursing, which provides temporary medical staffing services to clients in Houston, Texas. The purchase price was $200; $120 of which was paid at closing, and the remaining $80 of which is payable in 6 quarterly installments beginning November 2002.

        In October 2002, the Company purchased substantially all of the assets and operations of Accessible Staffing, which provides temporary medical staffing services to clients in Milwaukee, Wisconsin. The purchase price was $340; 6% interest only payments from January 2003 through January 2004 and equal monthly payments of principal and interest for 36 months commencing February 2004.

        In November 2002, the Company purchased substantially all of the assets and operations of Nurses, Inc., which provides temporary medical staffing services to clients in Portland, Oregon. The purchase price was $75; $30 of which was paid at closing, and the remaining $45 of which is payable in 3 monthly payments of $15 commencing December 2002.

        During the period of June through September 2002, the Company purchased substantially all the assets and operations of two companies for an aggregate total of $28 which was paid in cash.

6.    REVENUE RECOGNITION

        A substantial portion of the Company's service revenues are derived from a unique form of franchising under which independent companies or contractors ("licensees") represent the Company

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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, 2002 and 2001, total licensee distributions were approximately $2,300 and $4,828, respectively, and for the nine months ended November 30, 2002 and 2001, total licensee distributions were approximately $7,136 and $13,795, respectively, and are included in the general and administrative expenses.

        The Company recognizes revenue as the related services are provided to customers and when the customer is obligated to pay for such completed services. Revenues are recorded net of contractual or other allowances to which customers are entitled. Employees assigned to particular customers may be changed at the customer's request or at the Company's initiation. A provision for uncollectible and doubtful accounts is provided for amounts billed to customers which may ultimately be uncollectible due to billing errors, documentation disputes or the customer's inability to pay.

        Revenues generated from the sales of licensees and initial licensee fees are recognized upon signing of the licensee agreement, if collectibility of such amounts is reasonably assured, since the Company has performed substantially all of its obligations under its licensee agreements by such date. Included in revenues for the three months ended November 30, 2002 and 2001 is $20 and $0, respectively, and for the nine months ended November 30, 2002 and 2001 is $1,249 and $195, respectively.

7.    INTANGIBLE ASSETS

        On March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). SFAS 142 includes requirements to annually test goodwill and indefinite lived intangible assets for impairment rather than amortize them; accordingly, the Company no longer amortizes goodwill and indefinite lived intangibles, thereby eliminating an annual amortization charge of approximately $500, which is not deductible for tax purposes. The

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carrying amount of acquired intangible assets as of November 30, 2002 and February 28, 2002 is as follows:

        The Company currently has unamortized goodwill remaining from the acquisition of Direct Staffing, Inc. and DSS Staffing Corp. ($23,549), ATC Healthcare Services, Inc. ($4,256), All Care Nursing ($1,822), Doctors Corner ($604), Amserv ($331), International Staffing Inc. ($254), Healthcare Human Resources ($212), Staff One ($400), and other franchise and company-owned locations ($302), all of which are subject to the provisions of SFAS 142. The Company did not record any transition intangible asset impairment loss upon adoption of SFAS 142.

        Estimated amortization expense for the next five fiscal years is as follows:

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        As required by SFAS 142, the results for the third quarter of fiscal 2002 have not been restated. A reconciliation of net income, as if SFAS 142 had been adopted in Fiscal 2002, is presented below for the three and nine months ended November 30, 2002 and November 30, 2001.

8.    CONTINGENCIES

        a.    Litigation:

        The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of business. Management believes the disposition of the lawsuits will not have a material effect on its financial position, results of operations or cash flows.

9.    EXPENSE RELATED TO TLCS LIABILITY

        The Company has been contingently liable on $2.3 million of obligations owed by Tender Loving Care Health Care Services, Inc ("TLCS") which is payable over eight years. The Company is indemnified by TLCS for any obligations arising out of these matters. On November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company has recorded a provision of $2.3 million representing the balance outstanding on the related TLCS obligations. The Company has not received any demands for payment with respect to these obligations. The next payment is due in September 2003. The Company believes that it has certain defenses which could reduce or eliminate its recorded liability in this matter.

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