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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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10.    RECENT ACCOUNTING PRONOUNCEMENTS

        In August and October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," respectively. SFAS No. 143 requires the fair value of a liability be recorded for an asset retirement obligation in the period in which it is incurred. SFAS No.144 addresses the accounting and reporting for the impairment of long-lived assets, other than goodwill, and for long-lived assets to be disposed of. Further, SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale. Both SFAS No. 143 and No. 144 are effective for all fiscal years beginning after December 15, 2001. The adoption of SFAS No. 143 and No. 144, did not have a material effect on the Company's consolidated results of operations and financial position.

        In April 2002, the Financial Accounting Standards Board issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002". This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions as well as other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after December 31, 2002. The Company does not anticipate that the adoption of SFAS No. 145 will have a material impact on the consolidated financial statements.

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for fiscal years beginning after December 31, 2002. The Company does not anticipate that the adoption of SFAS No. 146 will have a material impact on the consolidated financial statements.

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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

        Total revenues decreased by $248 or 1.0% for the three months ended November 30, 2002 to $38.3 million from $38.5 million for the three months ended November 30, 2001. For the nine months ended November 30, 2002, total revenues increased by $2,409 or 2.1% to $115.0 million from $112.6 million for the nine months ended November 30, 2001. The Company has faced increasing competition, which has put pressure on recruitment of nursing professionals.

        Service costs, which remained relatively consistent, were 76.5% and 76.3% of total revenues for the three months ended November 30, 2002 and 2001, respectively, and 76.4% and 76.8% for the nine months ended November 30, 2002 and 2001, respectively. Service costs represent the direct costs of providing services to patients or clients, including wages, payroll taxes, travel costs, insurance costs, medical supplies and the cost of contracted services.

        General and administrative expenses were $7.5 and $7.8 million for the three months ended November 30, 2002 and 2001, respectively and were $22.0 million and $22.5 million for the nine months ended November 30, 2002 and 2001, respectively. General and administrative costs, expressed as a percentage of total revenues, were 19.6% and 20.3% for the three months ended November 30, 2002 and 2001, respectively, and were 19.2% and 20.0% for the nine months ended November 30, 2002 and 2001, respectively. The reduction in general and administrative expenses as a percentage of sales can be attributed to the purchase by the Company of its largest licensee completed in January 2002, which eliminated their licensee payments. This reduction is offset by the increased expenditures for the Company's newly opened company operated locations.

        Interest expense,(net) increased to $735 for the three months ended November 30, 2002 from $418 for the comparable period in 2001 and increased to $2,244 for the nine months ended November 30, 2002 from $1,379 for the comparable period in 2001, primarily due to increased debt incurred in connection with the Company's acquisition of previously licensed businesses.

        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.

        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. Effective with fiscal 2003, the Company recorded an income tax expense at its estimated effective tax rate of 41%.

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Liquidity and Capital Resources

        Cash and cash equivalents decreased by $435 as of November 30, 2002 as compared to February 28, 2002 as a result of cash used in investing activities of $933, primarily for the purchase of fixed assets and acquisitions of businesses and cash used in financing activities of $704, offset by cash provided by operations of $1,202.

        The Company has a financing facility ("Facility") with a lending institution for a $35 million, three year term, revolving credit line. Under the Facility, the Company may borrow amounts up to 85% of the Company's eligible accounts receivable. Interest on borrowings under the Facility is at the annual rate of 3.95% over LIBOR. There is in addition a term loan facility totaling $5 million. The facility expires in November 2005. The term loan facility is for acquisitions and capital expenditures. Repayment of this additional 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), current ratio 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.

        The Company anticipates that capital expenditures for furniture and equipment, including improvements to its management information and operating systems during the next twelve months will be approximately $400.

        Operating cash flows have been our primary source of liquidity and historically have been sufficient to fund our working capital, capital expenditures, and internal business expansion and debt service. We believe that our capital resources are sufficient to meet our working capital requirements for the next twelve months. We expect to meet our future working capital, capital expenditure, internal business expansion, and debt service from a combination of operating cash flows and funds available under the credit Facility.

Business Trends

        The Company recently has experienced decreases in sales levels. There is increased competition in the medical staffing field, both from staffing companies which up to recently have not staffed in the medical staffing arena, but because of recent upward trends have moved into medical staffing, and the hospitals and nursing homes which have increased their recruiting efforts. We believe that the temporary healthcare staffing industry is strong and that with increased recruiting activities, we will be able grow our operations. There is an acute shortage in the United States of registered nurses. A recent study published by the American Hospital Association states that the average age of a nurse is 45 years old and that less than 10% of all nurses are under the age of 30. This coupled with the dynamics of an aging population and increased government requirements for staffing at hospitals and nursing homes has created a substantial demand for our services. Traditional employers of nurses such as hospitals and nursing homes are responding to these challenges and shortages by becoming much more aggressive in their recruiting of qualified personnel. We believe that the competition for qualified personnel will increase in the near future from traditional employers and from our competitors, some of which have much greater funding and resources than us. Our expectation for the near future is for sales to remain at their current level and for moderate growth to start in the next upcoming quarter.

Forward-Looking Statements

        Certain statements in this report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are typically identified by the inclusion of phrases such as "the Company anticipates", "the Company believes" and

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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, the following:

Currently we are Unable to Recruit Enough Nurses to Meet Our Clients' Demands for our Nurse Staffing Services, Limiting the Potential Growth of Our Staffing Business

        We rely significantly on our ability to attract, develop and retain nurses and other healthcare personnel who possess the skills, experience and, as required, licenses necessary to meet the specified requirements of our healthcare staffing clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. At this time we do not have enough nurses to meet our clients' demands for our nurse staffing services. This shortage of nurses limits our ability to grow our staffing business. Furthermore, we believe that the aging of the existing nurse population and declining enrollments in nursing schools will further exacerbate the existing nurse shortage. In addition, in the aftermath of the terrorist attacks on New York and Washington, we experienced a temporary interruption of normal business activity. Similar events in the future could result in additional temporary or longer-term interruptions of our normal business activity.

The Costs of Attracting and Retaining Qualified Nurses and Other Healthcare Personnel May Rise More than We Anticipate

        We compete with other healthcare staffing companies for qualified nurses and other healthcare personnel. Because there is currently a shortage of qualified healthcare personnel, competition for these employees is intense. To induce healthcare personnel to sign on with them, our competitors may increase hourly wages or other benefits. If we do not raise wages in response to such increases by our competitors, we could face difficulties attracting and retaining qualified healthcare personnel. In addition, if we raise wages in response to our competitors' wage increases and are unable to pass such cost increases on to our clients, our margins could decline.

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.

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

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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.

If Regulations that Apply to us Change, We May Face Increased Costs That Reduce our Revenue and Profitability

        The temporary healthcare staffing industry is regulated in many states. In some states, firms such as our company must be registered to establish and advertise as a nurse staffing agency or must qualify for an exemption from registration in those states. If we were to lose any required state licenses, we could be required to cease operating in those states. The introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees. For example, some states could impose sales taxes or increase sales tax rates on temporary healthcare staffing services. These increased costs may not be able to be passed on to clients without a decrease in demand for temporary employees. In addition, if government regulations were implemented that limited the amounts we could charge for our services, our profitability could be adversely affected.

Future Changes in Reimbursement Trends Could Hamper Our Clients' Ability to Pay Us

        Many of our clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced reimbursement rates. In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or preferred participation in their benefit plans. Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients' reimbursement. Limitations on reimbursement could reduce our clients' cash flows, hampering their ability to pay us.

Competition for Acquisition Opportunities May Restrict Our Future Growth by Limiting Our Ability to Make Acquisitions at Reasonable Valuations

        Our business strategy includes increasing our market share and presence in the temporary healthcare staffing industry through strategic acquisitions of companies that complement or enhance our business. We have historically faced competition for acquisitions. In the future, such competition could limit our ability to grow by acquisitions or could raise the prices of acquisitions and make them less attractive to us.

We May Face Difficulties Integrating Our Acquisitions Into Our Operations and Our Acquisitions May be Unsuccessful, Involve Significant Cash Expenditures or Expose Us to Unforeseen Liabilities

        We continually evaluate opportunities to acquire healthcare staffing companies and other human capital management services companies that complement or enhance our business and frequently have preliminary acquisition discussions with some of these companies.

        These acquisitions involve numerous risks, including:

•

potential loss of key employees or clients of acquired companies;

•

difficulties integrating acquired personnel and distinct cultures into our business;

•

difficulties integrating acquired companies into our operating, financial planning and financial reporting systems;

•

diversion of management attention from existing operations; and

•

assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare regulations.

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        These acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition.

Significant Legal Actions Could Subject Us to Substantial Uninsured Liabilities

        In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large claims and significant defense costs. In addition, we may be subject to claims related to torts or crimes committed by our employees or temporary staffing personnel. In some instances, we are required to indemnify clients against some or all of these risks. A failure of any of our employees or personnel to observe our policies and guidelines intended to reduce these risks, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages. To protect ourselves from the cost of these claims, we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us or continue to be available to us at a reasonable cost. If we are unable to maintain adequate insurance coverage, we may be exposed to substantial liabilities.

If Our Insurance Costs Increase Significantly, These Incremental Costs Could Negatively Affect Our Financial Results

        The costs related to obtaining and maintaining professional and general liability insurance and health insurance for healthcare providers has been increasing. If the cost of carrying this insurance continues to increase significantly, we will recognize an associated increase in costs which may negatively affect our margins. This could have an adverse impact on our financial condition and the price of our common stock.

If We Become Subject to Material Liabilities Under Our Self-Insured Programs, Our Financial Results May Be Adversely Affected

        We provide workers compensation coverage through a program that is partially self-insured. If we become subject to substantial uninsured workers compensation liabilities, our financial results may be adversely affected.

Business Conditions

        The Company must continue to establish and maintain close working relationships with physicians and physician groups, managed care organizations, hospitals, clinics, nursing homes, social service agencies and other health care providers. There can be no assurance that the Company will continue to establish or maintain such relationships. The Company expects additional competition will develop in future periods given the increasing market demand for the type of services offered.

Attraction and Retention of Licensees and Employees

        Maintaining quality licensees, managers and branch administrators will play a significant part in the future success of the Company. The Company's professional nurses and other health care personnel are also key to the continued provision of quality care to the Company's patients. The possible inability to attract and retain qualified licensees, skilled management and sufficient numbers of credentialed health care professionals could adversely affect the Company's operations and quality of service.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Interest Rate Sensitivity: The Company's primary market risk exposure is interest rate risk. The Company's exposure to market risk for changes in interest rates relates to its debt obligations under its Facility described above. Under the Facility, the interest rate is 4.05% over LIBOR. At November 30, 2002, drawings on the Facility were $25.3 million. Assuming variable rate debt at November 30, 2002, a one point change in interest rates would impact annual net interest payments by $253 thousand. The Company does not use derivative financial instruments to manage interest rate risk. See Part I, Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.

ITEM 4.    CONTROLS AND PROCEDURES

        a.    Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings.

        b.    There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

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PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS—See Note 8 in PART I.—ITEM 1.

ITEM 3.    DEFAULTS ON CERTAIN INDEBTEDNESS

        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), current ratio 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.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(A)

Exhibits

Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(B)

Reports on Form 8-K

None

10.3

Amended and Restated Loan and Security Agreement, dated as of November 7, 2002, between the Company Healthcare Finance Group

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Sarbanes-Oxley
Section 302(a) Certifications

I, David Savitsky, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of ATC Healthcare, Inc.;



(2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



(3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



(4)

The other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we have:



(i)

Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



(ii)

Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and



(iii)

Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5)

The other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function):



(i)

All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and



(ii)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

(6)

The other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Alan Levy, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of ATC Healthcare, Inc.;



(2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



(3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



(4)

The other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we have:



(i)

Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



(ii)

Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and



(iii)

Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5)

The other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function):



(i)

All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and



(ii)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

(6)

The other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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QuickLinks

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS—See Note 8 in PART I.—ITEM 1.
ITEM 3. DEFAULTS ON CERTAIN INDEBTEDNESS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K