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EX-31.2 - ATS CORPv222625_ex31-2.htm
EX-32.2 - ATS CORPv222625_ex32-2.htm
EX-31.1 - ATS CORPv222625_ex31-1.htm
EX-32.1 - ATS CORPv222625_ex32-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
  
 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.

o
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: 0-51552
 

 
ATS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
11-3747850
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

7925 Jones Branch Drive
McLean, Virginia
 
22102
(Address of principal executive
offices)
 
(ZIP code)

(571) 766-2400
(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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer o
 
Accelerated filer o
     
Non-accelerated filer o
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
 
The number of shares of the issuer’s common stock, $0.0001 par value, outstanding as of May 12, 2011 was 22,922,508.
 
 
 

 

ATS CORPORATION

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
   
         
Item 1.
 
Financial Statements
 
3
         
   
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 (audited)
 
3
         
   
Consolidated Statements of Income (unaudited) for the three-month periods ended March 31, 2011 and March 31, 2010
 
4
         
   
Consolidated Statements of Cash Flows (unaudited) for the three-month periods ended March 31, 2011 and March 31, 2010
 
5
         
   
Notes to Consolidated Financial Statements
 
6
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
13
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
21
         
Item 4.
 
Controls and Procedures
 
21
         
PART II — OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
 
22
         
Item 1A.
 
Risk Factors
 
22
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
22
         
Item 3.
 
Defaults upon Senior Securities
 
23
         
Item 4.
 
Reserved
 
23
         
Item 5.
 
Other Information
 
23
         
Item 6.
 
Exhibits
 
24
         
SIGNATURES
 
25
 
 
2

 
  
ATS CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

     
     
March 31, 2011 (unaudited)
     
     
December 31, 2010 (audited)
     
             
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
55,698
   
$
65,993
 
Restricted cash
   
1,327,472
     
1,327,245
 
Accounts receivable, net
   
18,614,263
     
21,219,602
 
Prepaid expenses and other current assets
   
540,085
     
696,174
 
Income taxes receivable, net
   
     
61,477
 
Other current assets
   
25,989
     
25,491
 
Deferred income taxes, current
   
1,158,849
     
698,521
 
                 
Total current assets
   
21,722,356
     
24,094,503
 
                 
Property and equipment, net
   
2,573,778
     
2,714,164
 
Goodwill
   
55,370,011
     
55,370,011
 
Intangible assets, net
   
3,612,389
     
4,110,470
 
Other assets
   
133,314
     
133,314
 
Deferred income taxes
   
1,413,878
     
1,407,545
 
                 
Total assets
 
$
84,825,726
   
$
87,830,007
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
                 
Capital leases – current portion
 
$
80,023
   
$
79,572
 
Accounts payable
   
4,482,980
     
4,457,781
 
Other accrued expenses and current liabilities
   
971,933
     
2,381,941
 
Accrued salaries and related taxes
   
2,794,095
     
2,917,294
 
Accrued vacation
   
2,271,598
     
1,968,226
 
Income taxes payable, net
   
306,364
     
 
Deferred revenue
   
611,337
     
513,653
 
Deferred rent – current portion
   
320,498
     
320,498
 
                 
Total current liabilities
   
11,838,828
     
12,638,965
 
                 
Long-term debt net of current portion
   
11,437,598
     
14,400,000
 
Capital leases – net of current portion
   
123,473
     
143,648
 
Deferred rentnet of current portion
   
2,413,676
     
2,465,962
 
Other long-term liabilities
   
171,541
     
 
                 
Total liabilities
   
25,985,116
     
29,648,575
 
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock $0.0001 par value, 1,000,000 shares authorized, and no shares issued and outstanding
   
     
 
Common stock $0.0001 par value, 100,000,000 shares authorized, 31,698,643 and 31,314,745 shares issued, and 22,800,750 and 22,416,852 shares outstanding
   
3,170
     
3,156
 
Additional paid-in capital
   
133,280,907
     
132,803,839
 
Treasury stock, at cost, 8,897,893 shares held
   
(31,663,758
)
   
(31,663,758
)
Accumulated deficit
   
(42,779,709
)
   
(42,961,805
)
                 
Total stockholders’ equity
   
58,840,610
     
58,181,432
 
                 
Total liabilities and stockholders’ equity
 
$
84,825,726
   
$
87,830,007
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
  
ATS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
   
Three Months
Ended March 31,
 
   
2011
(unaudited)
   
2010
 (unaudited)
 
Revenue
 
$
24,828,826
   
$
30,511,983
 
                 
Operating costs and expenses
               
Direct costs
   
17,902,967
     
21,415,612
 
Selling, general and administrative expenses
   
5,925,768
     
6,403,221
 
Depreciation and amortization
   
638,468
     
640,837
 
Total operating costs and expenses
   
24,467,203
     
28,459,670
 
                 
Operating income
   
361,623
     
2,052,313
 
                 
Other (expense) income
               
Interest, net
   
(64,664
   
(821,155
)
Other income
   
     
500,000
 
                 
Income before income taxes
   
296,959
     
1,731,158
 
                 
Income tax expense
   
114,863
     
624,590
 
                 
Net income
 
$
182,096
   
$
1,106,568
 
                 
Weighted average number of shares outstanding
               
—basic
   
22,764,305
     
22,536,486
 
—diluted
   
22,995,786
     
22,742,880
 
                 
Net income per share
               
—basic
 
$
0.01
   
$
0.05
 
—diluted
 
$
0.01
   
$
0.05
 

The accompanying notes are an integral part of these consolidated financial statements.

 
4

 
 
ATS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Three months Ended
 March 31,
 
   
   
2011
(unaudited)
   
   
2010
(unaudited)
   
Cash flows from operating activities
           
Net income
 
$
182,096
   
$
1,106,568
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
638,468
     
640,837
 
Non-cash other income from claim settlement
   
     
(495,000
)
Non-cash interest expense SWAP agreement
   
     
328,766
 
Stock-based compensation
   
372,910
     
162,492
 
Deferred income taxes
   
(466,661
   
(405,254
)
Deferred rent
   
(52,286
)
   
(42,055
)
Gain on disposal of equipment
   
     
(5,000
Provision for bad debt
   
(42,707
   
495,422
 
                 
Changes in assets and liabilities:
               
Accounts receivable
   
2,648,046
     
1,554,554
 
Prepaid expenses
   
156,089
     
176,557
 
Restricted cash
   
(227
)
   
(138
)
Other assets
   
(498
   
(5,114
)
Accounts payable
   
25,199
     
365,864
 
Other accrued expenses and accrued liabilities
   
(1,410,008
   
(1,480,020
Accrued salaries and related taxes
   
(123,199
)
   
(1,045,862
)
Accrued vacation
   
303,372
     
239,608
 
Income taxes payable and receivable, net
   
401,304
     
1,031,400
 
Other current liabilities
   
97,684
 
   
(579,001
)
Other long-term liabilities
   
171,541
     
 
                 
Net cash provided by operating activities
   
2,901,123
     
2,044,624
 
                 
Cash flows from investing activities
               
Purchase of property and equipment
   
     
(9,074
)
Proceeds from disposals of equipment
   
     
5,000
 
                 
Net cash provided by investing activities
   
     
(4,074
                 
Cash flows from financing activities
               
Borrowings on line of credit
   
14,338,707
     
18,916,849
 
Payments on line of credit
   
(17,301,109
)
   
(19,539,208
)
Payments on notes payable
   
     
(1,078,390
)
Payments on capital leases
   
(19,724
   
 
Proceeds from stock issued pursuant to Employee Stock Purchase Plan
   
70,708
     
71,527
 
Payments to repurchase treasury stock
   
     
(454,640
                 
Net cash used in financing activities
   
(2,911,418
)
   
(2,083,862
)
                 
Net decrease in cash
   
(10,295
   
(43,312
)
                 
Cash, beginning of period
   
65,993
     
178,225
 
                 
Cash, end of period
 
$
55,698
   
$
134,913
 
                 
Supplemental disclosures:
               
Cash paid or received during the period for:
               
Income taxes paid
 
$
99,000
   
$
 
Income tax refunds
   
2,019
     
1,128
 
Interest paid
   
82,401
     
518,127
 
Interest received
   
8,622
     
8,080
 

The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 ¾ BASIS OF PRESENTATION

Principles of Consolidation – The consolidated financial statements include the accounts of ATS Corporation (“ATSC”) and its subsidiary Advanced Technology Systems, Inc. (“ATSI”) (collectively, the “Company”). All material intercompany accounts, transactions, and profits are eliminated in consolidation.

The accompanying consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). These statements include all adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows. Certain information and note disclosures normally included in the annual financial statements have been condensed or omitted pursuant to those instructions, although the Company believes that the disclosures made are adequate to make the information presented not misleading. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the Company’s 2010 Annual Report on Form 10-K. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

Accounting Estimates – The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from those estimates.

Financial Statement Reclassifications – Certain amounts on the prior period financial statements and related notes have been reclassified to conform to the current presentation.  Specifically, accrued interest, which had been identified separately in 2010 on the Consolidated Statement of Cash Flows, has been combined with “Other accrued expenses and accrued liabilities”.

NOTE 2 ¾ RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

ASU 2009-13 & ASU 2009-14: In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, and ASU 2009-14, Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force, to amend the existing revenue recognition guidance. ASU 2009-13 amends Accounting Standards Codification (“ASC”) 605, Revenue Recognition, 25, “Multiple-Element Arrangements” (formerly EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables”), as follows: modifies criteria used to separate elements in a multiple-element arrangement, introduces the concept of “best estimate of selling price” for determining the selling price of a deliverable, establishes a hierarchy of evidence for determining the selling price of a deliverable, requires use of the relative selling price method and prohibits use of the residual method to allocate arrangement consideration among units of accounting, and expands the disclosure requirements for all multiple-element arrangements within the scope of ASC 605-25. This ASU was effective for the Company beginning January 1, 2011, and applies to arrangements made as of that date. The adoption of this ASU did not have a material impact on the Company’s financial position or results of operations.

ASU 2009-14 amends the scope of ASC 985, Software, 605, “Revenue Recognition” (formerly AICPA Statement of Position 97-2, Software Revenue Recognition), to exclude certain tangible products and related deliverables that contain embedded software from the scope of this guidance. Instead, the excluded products and related deliverables must be evaluated for separation, measurement, and allocation under the guidance of ASC 605-25, as amended by ASU 2009-13. The amended guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. An entity may elect retrospective application to all revenue arrangements for all periods presented using the guidance in ASC 250, Accounting Changes and Error Corrections. Entities must adopt the amendments resulting from both of these ASUs in the same period using the same transition method, where applicable. This ASU was effective for the Company beginning January 1, 2011, and applies to arrangements beginning such date. The adoption of this ASU did not have a material impact on the Company’s financial position or results of operations.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic 605). ASU 2010-17 provides guidance on applying the milestone method of revenue recognition in arrangements with research and development activities. This ASU was effective for the Company beginning January 1, 2011, and applies to arrangements beginning such date. The adoption of this ASU did not have a material impact on the Company’s financial position or results of operations.

 
6

 
NOTE 3 ¾ RESTRICTED CASH

The Company is required to maintain $1.2 million on deposit with a financial institution to support a bonding requirement for one of the ATSI state contracts. This amount, and accumulated interest of $127,472 and $127,245 earned thereon as of March 31, 2011 and December 31, 2010, respectively, is reflected in restricted cash in the accompanying consolidated balance sheets. We expect the performance under this contract to be completed in late 2011 or early 2012, whereby the bond will be released and the deposit refunded.

NOTE 4 ¾ ACCOUNTS RECEIVABLE
 
Total accounts receivable consisted of the following:
 
   
March 31,
2011
   
December 31,
2010
 
Billed receivables
 
$
15,348,016
   
$
17,926,139
 
Unbilled receivables:
               
Revenues recorded in excess of milestone billings on fixed-price contracts
   
3,313,465
     
3,429,728
 
Retainage
   
57,313
     
18,129
 
Total accounts receivable
 
$
18,718,794
   
$
21,373,996
 
Allowance for doubtful accounts
   
(104,531
)
   
(154,393
)
Total accounts receivable, net
 
$
18,614,263
   
$
21,219,602
 
 
NOTE 6 ¾ STOCK PLANS AND STOCK-BASED COMPENSATION
 
Under the fair value recognition provisions of ASC 718 Compensation – Stock Compensation, the Company recognizes stock-based compensation based upon the fair value of the stock-based awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior. A summary of the components of the stock-based compensation expense and related income tax benefits recognized during the three-month periods ended March 31, 2011 and 2010 were as follows:

Stock-based compensation included in selling & general administrative expenses
 
Three Months
Ended
March 31, 
2011
   
Three Months
Ended
March 31, 
2010
 
Non-qualified stock option expense
 
$
106,000
   
$
46,000
 
Restricted stock expense
   
271,000
     
130,000
 
Forfeitures in excess of estimate
   
(4,000
)
   
(14,000
)
Total stock-based compensation expense
 
$
373,000
   
$
162,000
 
Related recognized tax (benefit) cost
   
(41,000
   
4,000
 
Total after-tax stock-based compensation expense
 
$
332,000
   
$
166,000
 

Stock Options - A total of 60,000 stock options were granted during the three-month period ended March 31, 2011. A total of 15,000 stock options were granted during the three-month period ended March 31, 2010.  The fair values of options granted during the three-month periods ended March 31, 2011 and March 31, 2010 have been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

   
Options Granted
January 3, 2011
   
Options Granted
January 4, 2010
 
Expected dividend yield
    %     %
Expected volatility
    66.8 %     80.4 %
Risk free interest rate
    1.6 %     2.5 %
Expected life of options
 
6.3 years
   
6.3 years
 
Forfeiture rate
    4.25 %     4.25 %
Options granted
    60,000       15,000  
 
 
7

 
 
The average fair value per option granted during the three months ended March 31, 2011 was $1.38. As of March 31, 2011, there was $484,981 of unrecognized compensation expense related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 2.5 years. The table below provides stock option information for the three months ended March 31, 2011:
  
   
Number of
Shares
   
Weighted Average
Exercise Price
 Per
Share
   
Weighted-Average
Remaining Contractual
Life in Years
   
Aggregate Intrinsic
Value of
In-the-Money
Options
 
Options outstanding at January 1, 2011
   
579,250
   
$
2.57
     
8.1
   
$
298,388
(1)
Options granted
   
60,000
     
2.80
     
9.8
     
102,600
(2)
Options forfeited
   
(16,125
)
   
2.61
     
     
 
Options outstanding at March 31, 2011
   
623,125
     
2.59
     
8.0
     
1,215,881
(2)
Options exercisable at March 31, 2011
   
249,875
     
3.05
     
7.3
     
386,568
(2)
 
(1)      Intrinsic value represents the excess of the closing stock price on the last trading day of the preceding period, which was $2.75 as of December 31, 2010, over the exercise price, multiplied by the number of options.
(2)      Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $4.51 as of March 31, 2011, over the exercise price, multiplied by the number of options.
 
The following table summarizes information about the stock options outstanding at March 31, 2011:
 
     
Options Outstanding
   
Options Exercisable
 
    Exercise Price
         
         
    Number Outstanding
         
         
Weighted- average Remaining Life in Years
         
         
Weighted- average Exercise Price
         
         
    Number Exercisable
         
         
Weighted- average Exercise Price
         
$
1.40
     
10,000
     
7.8
   
$
1.40
     
5,000
   
$
1.40
 
 
1.50
     
166,625
     
8.1
     
1.50
     
42,500
     
1.50
 
 
2.15
     
104,000
     
7.2
     
2.15
     
52,750
     
2.15
 
 
2.23
     
5,000
     
8.5
     
2.23
     
1,250
     
2.23
 
 
2.50
     
15,000
     
8.7
     
2.50
     
3,750
     
2.50
 
 
2.80
     
110,000
     
9.6
     
2.80
     
     
 
 
2.90
     
93,000
     
9.1
     
2.90
     
40,000
     
2.90
 
 
3.40
     
20,000
     
6.7
     
3.40
     
15,000
     
3.40
 
 
3.50
     
20,000
     
6.6
     
3.50
     
15,000
     
3.50
 
 
3.67
     
15,000
     
6.5
     
3.67
     
11,250
     
3.67
 
 
3.75
     
4,500
     
6.3
     
3.75
     
3,375
     
3.75
 
 
4.88
     
60,000
     
5.9
     
4.88
     
60,000
     
4.88
 
         
623,125
     
8.0
     
2.59
     
249,875
     
3.05
 

 
8

 
  
Restricted Shares – Pursuant to the 2006 Omnibus Incentive Compensation Plan, during the three-month period ended March 31, 2011, the Company granted 40,000 restricted shares valued at an aggregate of $112,000. The 40,000 restricted shares vest ratably over three years. The table below provides additional restricted share information for the three months ended March 31, 2011:
 
   
No. of
Shares
   
Weighted 
Average Grant
Date Fair
Value
 
Unvested at January 1, 2011
   
403,397
   
$
2.54
 
Granted
   
40,000
     
2.80
 
Vested
   
(110,575
)
   
2.61
 
Unvested at March 31, 2011
   
332,822
     
2.54
 

NOTE 7 ¾ EMPLOYEE STOCK PURCHASE PLAN

On July 24, 2007, the Company adopted an employee stock purchase plan with a commencement date of October 1, 2007. The program is officially called the 2007 Employee Stock Purchase Plan (the “ESPP”). The Company initially reserved an aggregate of 150,000 shares of common stock exclusively for issuance under the ESPP. Under the ESPP eligible employees may acquire shares of the Company’s common stock at periodic intervals, namely four month offering periods (the “Offering Periods”) during which payroll deductions are made and shares are subsequently purchased at a 5 percent discount. The ESPP was approved by our shareholders at our May 7, 2008 annual meeting.

The number of shares of common stock authorized under the ESPP is subject to an automatic annual increase on the first day of the Company’s fiscal year by an amount equal to the lesser of (i) 100,000 shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors. Accordingly, the Board increased the number of shares authorized under the ESPP by 100,000 shares for fiscal years 2010 and 2011.

The ESPP is a qualified plan under Section 423 of the Internal Revenue Code and, for financial reporting purposes, is considered non-compensatory under ASC 718, Stock Compensation. Accordingly, there is no stock-based compensation expense associated with shares acquired under the ESPP. As of March 31, 2011, participants had purchased 373,686 shares since the inception of the ESPP at a weighted average price per share of $1.98. During the three months ended March 31, 2011, 26,582 shares were purchased at an average price per share of $2.66.
 
 
9

 
 
NOTE 8 ¾ EARNINGS (LOSS) PER SHARE
 
Basic and diluted net income per share information is presented in accordance with ASC 260, “Earnings Per Share” (ASC 260). Basic income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted net income per share is calculated by dividing net income attributable to common stockholders by the weighted average common shares outstanding, which includes common stock equivalents. Common stock equivalents are excluded from a calculation of diluted income per share if the impact would be anti-dilutive. The Company’s common stock equivalents include stock options and restricted stock units. The diluted weighted average shares outstanding for the three months ended March 31, 2010 excluded unvested restricted shares and stock options to purchase approximately 487,499 shares of the Company’s common stock because such common stock equivalents had an exercise price in excess of the average market price of the Company’s common stock during the period, or would be anti-dilutive. The diluted weighted average shares outstanding for the three months ended March 31, 2011 excluded unvested restricted shares and stock options to purchase approximately 487,499 shares because such common stock equivalents had an exercise price in excess of the average market price of the Company’s common stock during the period, or would be anti-dilutive.

The chart below shows the calculation of basic and diluted earnings per share:

   
Three Months
Ended March 31,
 
   
2011
   
2010
 
Net income
 
$
182,096
   
$
1,106,568
 
                 
Weighted average number of basic shares outstanding during the period
   
22,764,305
     
22,536,486
 
Dilutive effect of stock options and restricted shares after application of the treasury stock method
   
231,481
     
206,394
 
Weighted average number of diluted shares outstanding during the period
   
22,995,786
     
22,742,880
 
                 
Basic earnings per share
 
$
0.01
   
$
0.05
 
Diluted earnings per share
 
$
0.01
   
$
0.05
 
 
Shares outstanding during the three months ended March 31, 2010 reflect the repurchase of 152,000 shares of ATSC common stock for approximately $455,000 pursuant to the share repurchase program approved by the Company’s Board of Directors on February 17, 2009. No stock was repurchased during the three months ended March 31, 2011.

NOTE 9 ¾ SEGMENT ACCOUNTING

Although ATSI views itself as having several markets, it operates in a single homogenous reporting segment. Financial information is reviewed and evaluated by the co-chief executive officers on a consolidated basis relating to the single reporting segment.

 
10

 
 
NOTE 10 ¾ GOODWILL VALUATION
 
Goodwill represents the excess of purchase price over fair value of net assets of businesses acquired. Other purchased intangible assets include the fair value of items such as customer contracts, backlog and customer relationships. ASC Topic 350, Intangibles, Goodwill and Other (ASC 350), establishes financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but rather tested for impairment on an annual basis or at an interim date in the event of a triggering event. Purchased intangible assets with a definite useful life are amortized on a straight-line basis over their estimated useful lives.

The Company evaluates goodwill for impairment annually in the third fiscal quarter or more frequently depending on specific events or when evidence of potential impairment exists.  For purposes of this testing, management concluded that there is only one reporting unit. The Company’s testing approach utilizes a fair value approach to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value exceeds the estimated fair value of the business, an impairment would be required to be reported. The annual impairment test is based on several factors requiring judgment. Principally, a significant decrease in general market conditions impacting the price of our common stock may indicate potential impairment of recorded goodwill.

Management’s testing performed in 2010 concluded that goodwill was not impaired.  Also, Management has concluded that there were no triggering events that would indicate an impairment during the quarter ended March 31, 2011. The Company will continue to monitor the recoverability of the carrying value of its goodwill and other long-lived assets.

NOTE 11 ¾ INTANGIBLE ASSETS
 
Intangible assets represent the customer contracts and backlog resulting from the acquisitions as follows:
 
  
 
March 31,
2011
   
December 31,
2010
 
Customer contracts and relationships
 
$
8,235,000
   
$
8,235,000
 
Marketing and technology
   
1,112,286
     
1,112,286
 
Intangible assets
   
9,347,286
     
9,347,286
 
Less accumulated amortization
   
(5,734,897
)
   
(5,236,816
)
Total intangible assets, net
 
$
3,612,389
   
$
4,110,470
 

Intangible assets subject to amortization were evaluated as follows:
  
Assets
 
Weighted-
Average
Amortization
Period
 
Carrying
Amount as of
March 31,
2011
   
Amortization
2011
   
Carrying
Amount as of
December 31,
2010
 
Customer-related intangible assets
 
53 mos.
 
$
3,418,305
   
$
(466,131
)
 
$
3,884,436
 
Marketing-related intangible assets
 
38 mos.
   
70,267
     
(12,400
)
   
82,667
 
Technology-related intangible assets
 
60 mos.
   
123,817
     
(19,550
)
   
143,367
 
Totals
 
52 mos.
 
$
3,612,389
   
$
(498,081
)
 
$
4,110,470
 

The combined weighted average remaining amortization period of all intangible assets is scheduled below.
  
Basis for Amortization
 
Asset Value
 
Remaining Life
Customer contracts and relationships
 
$
8,235,000
 
22 mos.
Marketing and technology
   
1,112,286
 
18 mos.
Total
 
9,347,286
   

 
11

 

Expected amortization expense for each of the fiscal years through December 31, 2013 is as follows:
 
Fiscal Year Ended
 
Amount
 
December 31, 2011
 
$
1,494,250
 
December 31, 2012
   
1,962,762
 
December 31, 2013
   
155,377
 
Total
 
$
3,612,389
 
 
NOTE 12 ¾ LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. Management currently believes that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

NOTE 13 ¾ DEBT
  
Bank Financing

On June 1, 2010, the Company, as Borrower, entered into an amended and restated credit agreement related to its credit facility with Bank of America, N.A., as Administrative Agent, and other various lender parties (the “Amended Credit Agreement”).  The Amended Credit Agreement provides for a base credit limit of $30 million with the capability to increase the aggregate commitment amount of the facility an additional $25 million, assuming no event of default exists as defined in the Amended Credit Agreement. This effectively increases the maximum availability under the credit facility from $50 million to $55 million. The term of the credit facility has been extended an additional three years with a maturity in June 2013.  Borrowings under the facility are subject to compliance with covenants including an asset coverage ratio, leverage ratio, and a fixed charge ratio. Borrowings bear interest at rates based on 30-day LIBOR plus applicable margins based on a leverage ratio as determined quarterly.  The Amended Credit Agreement adjusted the applicable margins charged on the outstanding borrowings from a range of 2.0% to 3.5% to a range of 2.0% to 3.0% based on the leverage ratio. The fee for the unused portion of the facility ranges from .25% to .35% based on the leverage ratio compared to the previous rates of .20% to .375%. The covenants for the minimum fixed charge coverage ratio were adjusted slightly from 1.3:1 to 1.5:1 while the other financial covenants remained the same. The Amended Credit Agreement provides a basket for stock repurchase not to exceed $3.0 million in any period of twelve consecutive months, and total consideration for acquisitions in any twelve-month period greater than $20 million will require lender approval. As of March 31, 2011, the facility’s outstanding debt balance was $11.4 million. The effective rate on the variable rate debt was 2.25% for the three months ended March 31, 2011. The maximum availability under the facility at March 31, 2011 was $18.6 million.

The Company was in compliance with its loan covenants as of March 31, 2011.

At March 31, 2011, the aggregate maturities of our debt were as follows:

Years Ending December 31,
   
2011
 
$
 
2012
   
 
2013
   
11,437,598
 
Total long-term debt
 
$
11,437,598
 

 
12

 
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. The factors described in our filings with the SEC, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements, including but not limited to:
 
 
·
risks related to the government contracting industry, including possible changes in government spending priorities, especially during periods when the government faces significant budget challenges;
 
 
·
risks related to our business, including our dependence on contracts with U.S. Federal Government agencies and departments, and continued good relations, and being successful in competitive bidding, with those customers;

 
·
uncertainties as to whether revenues corresponding to our contract backlog will actually be received;

 
·
risks related to the implementation of our strategic plan, including the ability to identify, finance and complete acquisitions and the integration and performance of acquired businesses; and

 
·
other risks and uncertainties disclosed in our filings with the SEC.

Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 under “Item 1A. Risk Factors.” Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update these forward-looking statements, even if our situation changes in the future.

The terms “we” and “our” as used throughout this Quarterly Report on Form 10-Q refer to ATS Corporation and Advanced Technology Systems, Inc., the wholly-owned subsidiary of ATSC, unless otherwise indicated.

Overview

ATSI provides software and systems development, systems integration, information technology infrastructure and outsourcing, information sharing, and consulting services primarily to U.S. government agencies. As part of its complete systems life-cycle approach, ATSI offers its clients an integrated full-service information technology infrastructure outsourcing solution that allows an agency to focus on its core mission while reducing costs and maintaining system uptime.
 
 
13

 
 
For the three-month periods ended March 31, 2011 and 2010, we generated revenue from the following mix of customers:
 
   
Three months
Ended
March 31, 2011
   
Three months
Ended
March 31, 2010
 
    (in thousands)             (in thousands)          
Federal civilian agencies
 
$
12,998
     
52.4
%
 
$
15,238
     
49.9
%
Defense and homeland security
   
6,393
     
25.7
%
   
8,881
     
29.1
%
Commercial
   
3,013
     
12.1
%
   
2,937
     
9.6
%
Government-sponsored entity
   
2,425
     
9.8
%
   
3,456
     
11.3
%
Totals
 
$
24,829
     
100.0
%
 
$
30,512
     
100.0
%

Our largest clients during the three months ended March 31, 2011 were the following:

   
Three months
Ended
March 31, 2011
   
Three months
Ended
March 31, 2010
 
   
(in thousands)
         
(in thousands)
       
U.S. Department of Housing & Urban Development
 
$
4,751
     
19.1
%
 
$
6,763
     
22.2
%
Pension Benefit Guaranty Corporation
   
2,777
     
11.2
%
   
3,102
     
10.2
%
Fannie Mae
   
2,399
     
9.7
%
   
3,393
     
11.1
%
Defense Technology Security Administration
   
2,180
     
8.8
%
   
2,249
     
7.4
%
Defense Logistics Agency
   
940
     
3.8
%
   
2,246
     
7.4
%

We derive substantially all of our revenue from providing professional and technical services. We generate this revenue from contracts with various payment arrangements, including time-and-materials contracts, fixed-price contracts and cost-plus-fee contracts. We recognize revenue on time-and-materials contracts based on actual hours delivered at the contracted billable hourly rate plus the cost of materials incurred. We recognize revenue on fixed-price contracts using the percentage-of-completion method based on costs we incurred in relation to total estimated cost. However, if the contract is primarily for services being provided over a specified period of time, for example, maintenance service arrangements, we recognize revenue on a straight-line basis over the term of the contract. Revenue on cost-plus-fee contracts are recognized based on actual direct costs plus the applicable burdens per the Company’s provisional overhead rate submission.  These provisional overhead rates are adjusted to actual at year end. The following table summarizes our historical contract mix, measured as a percentage of total revenue, for the periods indicated:

   
Three months
Ended
March 31, 2011
   
Three months
Ended
March 31, 2010
 
Time-and-materials
 
$
13,292,000
     
53.5
%
 
$
20,485,000
     
67.1
%
Fixed-price
   
10,628,000
     
42.8
%
   
10,027,000
     
32.9
%
Cost-plus-fixed-fee
   
909,000
     
3.7
%
   
     
 
Totals
 
$
24,829,000
     
100.0
%
 
$
30,512,000
     
100.0
%

The increase in fixed-price contracts reflects the general industry trend toward fixed-price contract vehicles. The Company has successfully won several re-competes as fixed-price contracts which had previously been time-and-materials. In addition, one re-compete was awarded as a cost-plus-fixed-fee contract.
 
 
14

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or goods delivered, the contract price is fixed or determinable, and collectability is reasonably assured. The Company’s revenue historically is derived from primarily three previously mentioned contract types. Revenue on time-and-material contracts is recognized based on the actual hours performed at the contracted billable rates for services provided, plus materials’ cost for products delivered to the customer, and costs incurred on behalf of the customer. Revenue on fixed-price contracts is recognized ratably over the period of performance or on the percentage-of-completion method depending on the nature of services to be provided under the contract which are either maintenance and support services based or require some level of customization. For contracts that involve software design, customization, or integration, revenue is recognized on the percentage-of-completion method using costs incurred in relation to total estimated project costs. Provisions for anticipated contract losses are recognized at the time they become known.   Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in performance of the contract. For cost-plus-fee contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.

We derived some of our revenue from contracts for which we were the prime contractor and some of our revenue as subcontractors to other prime contractors as follows:

   
Three months
Ended
March 31, 2011
   
Three months
Ended
March 31, 2010
 
Prime contracts
 
$
20,266,000
     
81.6
%
 
$
25,352,000
     
83.1
%
Subcontracts
   
4,563,000
     
18.4
%
   
5,160,000
     
16.9
%
Totals
 
$
24,829,000
     
100.0
%
 
$
30,512,000
     
100.0
%

Our most significant expense is direct costs, which consists primarily of project personnel salaries and benefits, and direct expenses incurred to complete projects. The number of consulting personnel assigned to a project will vary according to the size, complexity, duration, and demands of the project. As of March 31, 2011, we had 401 employees who worked on our contracts, excluding sub-contractors, which augment Company staff as required.

General and administrative expenses consist primarily of costs associated with our executive management, finance and administrative groups, human resources, sales and marketing personnel, and costs associated with marketing and bidding on future projects, unassigned consulting personnel, personnel training, occupancy costs, travel and all other corporate costs.

Goodwill Valuation

See Note 10.

 
15

 
 
Contract Backlog

Total backlog at March 31, 2011 was approximately $222 million. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not contractually obligated by the customer). Unfunded backlog excludes unexercised contract options and unfunded indefinite delivery indefinite quantity (“IDIQ”) orders.

On April 1, 2011 the Company was awarded a $46 million contract, which is not included in the backlog at March 31, 2011, and is fully described under Recent Events below.

 The following table summarizes our contract backlog at March 31, 2011 and December 31, 2010, respectively:

   
March 31,
2011
   
December 31,
2010
 
Backlog:
           
Funded
 
$
31,582,530
   
$
36,666,667
 
Unfunded
   
190,505,157
     
199,466,494
 
Total backlog
 
$
222,087,687
   
$
236,133,161
 

Our backlog includes orders under contracts that in some cases extend for several years, with the latest expiring in 2017. New orders of $10.8 million were awarded during the three-month period ending March 31, 2011, the most significant awards being a $4.8 million award on the Army R&R IDIQ contract and additional tasking at Fannie Mae of $4.4 million.

We cannot guarantee that we will recognize any revenue from our backlog. The federal government has the prerogative to cancel any contract or delivery order at any time. Most of our contracts and delivery orders have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees in such cases. Backlog varies considerably from time to time as current contracts or delivery orders are executed and new contracts or delivery orders under existing contacts are awarded. Our estimate of the portion of the backlog as of March 31, 2011 from which we expect to recognize revenue during fiscal year 2011 is likely to change because the receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control.
 
 
16

 
 
Non-GAAP Financial Measures – EBITDA

In evaluating our operating performance, management uses certain non-GAAP financial measures to supplement the consolidated financial statements prepared under U.S. GAAP. More specifically, we use the following non-U.S. GAAP financial measure: earnings before interest, taxes, depreciation, and amortization (“EBITDA”). EBITDA is a non-U.S. GAAP measure which we define as U.S. GAAP net income plus interest expense, income taxes, and depreciation and amortization.  We have provided EBITDA because we believe it is comparable to similar measures of financial performance in comparable companies and may be of assistance to investors in evaluating companies on a consistent basis, as well as enhancing an understanding of our operating results.  EBITDA is not a recognized term under U.S. GAAP and does not purport to be an alternative to net income as a measure of operating performance or the cash flows from operating activities as a measure of liquidity.

During the three months ended March 31, 2011 we recorded expenses of approximately $1.1 million in severance pay and $0.1 million related to the Company’s strategic evaluation, as described below under Recent Events. During the three months ended March 31, 2010, we recorded other income of approximately $0.5 million associated with the adjustment of seller notes related to the acquisition of Number Six Software (“NSS”).  These items have been reflected below in our presentation of adjusted EBITDA.

     
     
For the 
Three
Months 
Ended

March 31, 2011
     
     
For the 
Three
Months 
Ended

March 31, 2010
     
Net income
 
$
182,096
   
$
1,106,568
 
Adjustments:
               
Depreciation
   
140,386
     
142,756
 
Amortization of intangibles
   
498,082
     
498,081
 
Interest, net
   
64,664
     
821,155
 
Taxes
   
114,863
     
624,590
 
EBITDA
 
$
1,000,091
   
$
3,193,150
 
Net settlements
   
     
(495,000
)
Severance
   
1,072,414
     
 
Strategic expenses
   
94,200
     
 
Adjusted EBITDA
 
$
2,166,705
   
$
2,698,150
 

Recent Events

On January 7, 2011, the Company announced that its Board of Directors has begun a process to evaluate strategic alternatives for the Company. There can be no assurance that the review of strategic alternatives will result in the Company pursuing any particular transaction, or, if it pursues any such transaction, that it will be completed.

On April 1, 2011 the U.S. Department of Housing and Urban Development (“HUD”) awarded ATSC a five year $46 million IT services award for the Single Family Computerized Homes Underwriting System (“CHUMS”) and Federal Housing Administration (“FHA”) connection.  This contract represents a continuation of the Company’s application systems support to HUD on these critical systems as well as allows the Company to participate in the FHA transformation initiative.

 
17

 
 
Results of Operations (unaudited)

Results of operations for the three-month periods ended March 31, 2011 and March 31, 2010 are presented below.

The following table sets forth certain financial data as dollars and as a percentage of revenue:
 
       
       
For the Three Months Ended March 31, 2011
       
       
%    
       
       
For the Three Months Ended March 31, 2010
       
       
%    
       
Revenue
 
$
24,828,826
         
$
30,511,983
       
                             
Operating costs and expenses
                           
Direct costs
   
17,902,967
     
72.1
%
   
21,415,612
     
70.2
%
Selling, general and administrative expenses
   
5,925,768
     
23.9
%
   
6,403,221
     
21.0
%
Depreciation and amortization
   
638,468
     
2.6
%
   
640,837
     
2.1
%
                                 
Total operating costs and expenses
   
24,467,203
     
98.5
%
   
28,459,670
     
93.3
%
                                 
Operating income
   
361,623
     
1.5
%
   
2,052,313
     
6.7
%
                                 
Other income (expense)
                               
Interest, net
   
(64,664
   
(0.3
%)
   
(821,155
)
   
(2.7
%)
Other income
   
     
0.0
 %
   
500,000
     
1.6
%
                                 
Income before income taxes
   
296,959
     
1.2
%
   
1,731,158
     
5.7
%
                                 
Income tax expense
   
114,863
     
0.5
 %
   
624,590
     
2.0
%
                                 
Net Income
 
$
182,096
     
0.7
%
 
$
1,106,568
     
3.6
%
                                 
Weighted average number of shares outstanding
                               
—basic
   
22,764,305
             
22,536,486
         
—diluted
   
22,995,786
             
22,742,880
         
                                 
Net income per share
                               
—basic
 
$
0.01
           
$
0.05
         
—diluted
 
$
0.01
           
$
0.05
         

 
18

 
 
Comparison of the three months ended March 31, 2011 to the three months ended March 31, 2010.

Revenue – Revenue decreased by $5.7 million, or 18.6%, to $24.8 million for the three months ended March 31, 2011.
 
 Three Months Ended March 31,
 
2011
2010
Decrease
   
(in thousands)
   
(in thousands)
   
Revenue
                       
Federal Civilian Agencies
 
$
12,998
   
$
15,238
   
$
(2,240
)
Defense and homeland security
   
6,393
     
8,881
     
(2,488
)
Commercial
   
3,013
     
2,937
     
76
 
Government Sponsored Entity
   
2,425
     
3,456
     
(1,031
)
Total Revenue
 
$
24,829
   
$
30,512
   
$
(5,683
)

The Continuing Resolution and related US government budget uncertainties have had an overall unfavorable impact on the revenue derived from our federal business in the first quarter of 2011.  Revenue from federal civilian agencies decreased by $2.2 million from 2010 levels or 14.7% as a result of delayed funding on awarded development contracts and revenue reductions related to reduced scope on some recompeted contracts, coupled with approximately $1.0 million of revenue recognized in the first quarter of 2010 as a result of an unusually high volume of development tasking by the HUD customer and an increase in revenue recognition for improved efficiencies on the performance of fixed price development tasks.   Revenue from defense and homeland security customers was affected by the loss of a contract with the Defense Logistics Agency in September 2010 which had generated $1.1 million of revenue in the first quarter of 2010, and also by a reduction in the usage of a U.S. Air Force contract vehicle by a U.S. Army customer due to Department of Defense budget prioritizations.  The Government Sponsored Entity decrease of $1.0 million or 29.8% to $2.4 million in the first quarter of 2011 from $3.4 million in the same period in 2010 was due to a temporary decrease in staffing placements at Fannie Mae as a result of late or delayed project starts.

Direct costs – Direct costs were $17.9 million or 72.1% of revenue in the first quarter 2011 compared to $21.4 million or 70.2% of revenue for the same period in 2010.  Direct costs are comprised of direct labor, fringe on this labor, subcontract labor costs and other direct costs. Other direct costs are incurred in response to specific client tasks and may vary from period to period. The detail comparison of the direct cost components for the three months ended March 31, 2011 and March 31, 2010 are presented below.   The reduction in direct cost is directly attributable to the decrease in revenues for the three months ended March 31, 2011.

   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
   
Increase
(Decrease)
 
   
(in thousands)
   
%
   
(in thousands)
   
%
   
(in thousands)
   
%
 
Direct labor and fringe benefits
 
$
11,915
     
48.0
%
 
$
14,325
     
46.9
%
 
$
(2,410
   
(16.8
%)
Subcontractors
   
4,899
     
19.7
%
   
5,478
     
18.0
%
   
(579
   
(10.6
%)
Other direct costs
   
1,089
     
4.4
%
   
1,613
     
5.3
%
   
(524
)
   
(32.5
%)
Total direct costs
 
$
17,903
     
72.1
%
 
$
21,416
     
70.2
%
 
$
(3,513
)
   
(16.4
%)

Selling, general and administrative (“SG&A”) expenses – The components of SG&A are marketing, bid and proposal costs, indirect labor and the associated fringe benefits, facilities costs and other discretionary expenses.  Expenses for the three months ended March 31, 2011 and March 31, 2010 were $5.9 million and $6.4 million, respectively.  For the three months ended March 31, 2011 and March 31, 2010 SG&A expenses as a percentage of revenue were 23.9% and 21.0%, respectively.  The SG&A for the three months ended March 31, 2011 included an extraordinary item in the amount of $1.1 million related to severance costs including those of our former CEO, Sidney Fuchs.  When adjusted for the $1.1 million the SG&A was $4.8 million or 19.3 % of revenue for the three months ended March 31, 2011 as compared to 21.0% in 2010.

Depreciation and amortization – Depreciation and amortization expense were $0.6 million for each of the quarters ended March 31, 2011 and March 31, 2010.

 
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Interest, net – The net interest expense was $0.1 million and $0.8 million for the three-months ended March 31, 2011 and March 31, 2010, respectively. This decrease of $0.7 million in net interest expense was attributable to the retirement of the variable rate SWAP agreement in September 2010 that ATSC had entered into in November 2007.

Our average outstanding debt balance for the quarter ended March 31, 2011 was $13.2 million compared to $18.5 million for the quarter ended March 31, 2010.
 
Income taxes The Company reported an income tax expense of $0.1 million and $0.6 million for the three-month periods ended March 31, 2011 and 2010, respectively. The effective tax rates were 38.6% and 36.1% for the three-month periods ended March 31, 2011 and 2010, respectively. The slightly higher effective tax rate for the three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010 was primarily driven by the $0.5 million settlement from the former owners of NSS during the three months ended March 31, 2010, which was a non-taxable permanent difference.

Financial Condition, Liquidity and Capital Resources

Financial Condition.   Total assets decreased $3.0 million to $84.8 million as of March 31, 2011 compared to $87.8 million as of December 31, 2010, primarily due to a decrease in receivables of $2.6 million as a result of lower revenue in 2011 compared to 2010.
 
Our total liabilities decreased $3.6 million to $26.0 million as of March 31, 2011 from $29.6 million as of December 31, 2010. The decrease was due primarily to decreases in our debt of $3.0 million to $11.4 million in 2011 compared to $14.4 million in 2010, which we were able to pay down over the course of 2011 in connection with our strong operating cash flow as discussed in more detail below. Accrued expenses decreased by $1.4 million to $1.0 million at March 31, 2011 compared to $2.4 million at December 31, 2010. This decrease was primarily related to the reduction of vendor cost accruals of $0.5 million from December 31, 2010 related to vendor deliveries which had not been billed to ATSC; and outstanding payments of $0.4 million at March 31, 2011 compared to $1.2 million at December 31, 2010.  These decreases were partially offset by a $0.3 million increased vacation accrual at March 31, 2011 and $0.3 million income tax payable liability at March 31, 2011.
 
Liquidity and Capital Resources.   Our primary liquidity needs are to finance the costs of operations, acquire capital assets and to engage in a strategic alternative evaluation, as well as possibly selective strategic acquisitions. We expect to meet our short-term requirements through funds generated from operations and from our credit facility with Bank of America and Citizens Bank, which was initially signed in June 2007 and renewed in June 2010. As part of the agreement, we are required to meet certain financial covenants which are tested every quarter. As of March 31, 2011, we were in compliance with all covenants. Our cash requirements to fund any strategic alternative or acquisitions will be funded by cash generated from operations in addition to the credit facility. This credit facility expires in June 2013. As of March 31, 2011 we had $11.4 million outstanding on the credit facility, and availability to borrow an additional $7.2 million based upon our borrowing base at such date.

Net cash provided by operating activities was $2.9 million for the three months ended March 31, 2011, while net cash provided by operating activities for March 31, 2010 was $2.0 million. Cash provided by operating activities is primarily driven by operating income adjusted for working capital changes, which were principally changes in accounts receivable and accrued expenses.

Net cash used in financing activities was $2.9 million for the three months ended March 31, 2011 compared to $2.1 million for the three months ended March 31, 2010. During the three months ended March 31, 2011, we used $2.9 million to pay down our line of credit.

We expect to retain future earnings, if any, for use in the operation of our business, possible strategic alternative, and/or expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

As of the close of business on May 12, 2011, we had cash on hand of approximately $47,504. Our available balance on our credit facility as of May 12, 2011 was approximately $9.5 million.

Although we believe that funds generated by operations and available under our credit facility will be sufficient to fund our operations and possible strategic alternative, additional capital, in the form of additional senior credit, other debt, or equity, may be necessary to finance a significant acquisition.

Off-Balance Sheet Arrangements

For the three months ended March 31, 2011, we did not have any off-balance sheet arrangements.

 
20

 

Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2011 that require us to make future cash payments.

 
Less than
One Year
 
One to Three
Years
 
Three to Five
Years
 
More than
Five Years
 
Total
 
 
(in thousands)
 
Long-Term Debt Obligations
 
$
   
$
11,438
   
$
   
$
   
$
11,438
 
Operating Leases
   
1,910
     
3,688
     
3,736
     
4,257
     
13,591
 
Total
 
$
1,910
   
$
15,126
   
$
3,736
   
$
4,257
   
$
25,029
 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates for our borrowings under our credit facility. As of March 31, 2011, we had an outstanding balance of $11.4 million under our variable interest rate line of credit.

 Item 4. Controls and Procedures.

As of March 31, 2011, under the supervision and with the participation of our management, including our Co-Chief Executive Officers and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that our disclosure controls and procedures as defined by Rule 13a-15(e) of the Exchange Act were effective as of the end of the period covered by this report. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2011, no changes occurred in the Company’s internal control over financial reporting that materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

 
21

 
 
PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 12 of the notes to the consolidated financial statements.

Item 1A. Risk Factors.

See Part I, Item 1A, “Risk Factors,” of the Company’s 2010 Form 10-K for a detailed discussion of the risk factors affecting the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 10, 2009, the Company announced the approval of a plan under Rule 10b5-1 under the Exchange Act (the “Plan”), to facilitate purchases of the Company’s common shares and assist with compliance with Rule 10b-18 under such Act.  A plan under Rule 10b5-1 allows a company to repurchase its common shares at times when it otherwise might be prevented from doing so under insider trading laws.  A broker selected by the Company has authority under the Plan to repurchase up to $1.5 million of the Company’s common stock over the next two years on the Company’s behalf.  The $1.5 million amount is a portion of the total repurchase program (the “Program”) amount previously approved by the Board on February 11, 2009 of the lesser of $3.0 million or 2.0 million shares.  Purchases of common shares under the Plan will be subject to specified parameters and certain price, volume and timing constraints.  Accordingly, there can be no assurance as to how many common shares will be purchased.  In addition, the Program and related Plan may be suspended or discontinued at any time without prior notice.

Purchases of Equity Securities by Issuer

Period
 
Number
of Shares
Purchased
   
Purchase Price
   
Average Price
Paid per Share
 
Prior to January 1, 2010
   
403,138
   
$
937,111
   
$
2.32
 
January 1-31, 2010
   
2,000
     
4,640
     
2.32
 
March 1-31, 2010
   
150,000
     
450,000
     
3.00
 
Total
   
555,138
   
$
1,391,751
     
2.51
 

Period
 
Number of Shares Limitation
   
Value of Shares Limitation
 
Original authorization
   
2,000,000
   
$
3,000,000
 
Repurchases prior to  January 1, 2010
   
(403,138
)
   
(937,111
)
Repurchases January 1-31, 2010
   
(2,000
)
   
(4,640
)
Repurchases March 1-31, 2010
   
(150,000
)
   
(450,000
)
Remaining authorized repurchase limitations
   
1,444,862
   
$
1,608,249
 

No stock was repurchased during the three months ended March 31, 2011.  The Company repurchased 152,000 shares of common stock for approximately $455,000 during the three months ended March 31, 2010 as part of the repurchase program. The Company currently has approximately 22.9 million shares outstanding.

Recent Sales of Unregistered Securities

None.

 
22

 

Item 3.  Defaults upon Senior Securities.

Not applicable.

Item 4.  Reserved.

Item 5.  Other Information.

None.

 
23

 
 
Item 6.  Exhibits.

Exhibit
Number
 
Description
31.1
 
Certification of Principal Executive Officers pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
     
32.1
 
Certification of Principal Executive Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
24

 

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.
 
 
ATS Corporation
 
       
 
By:
/s/ Pamela A. Little
 
   
Pamela A. Little
 
   
Co-Chief Executive Officer and Chief Financial Officer
   
(Principal Executive Officer)
 
 
By:
/s/ John A. Hassoun
 
   
John A. Hassoun
 
   
Co-Chief Executive Officer
(Principal Executive Officer)
 
Date: May 16, 2011
     
 
 
25