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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 JUNE 30, 2011.

¨
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  ¨

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   x    No  ¨

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 ¨
 
Accelerated filer  ¨
     
Non-accelerated filer ¨
 
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   ¨     No  x
 
The number of shares of the issuer’s common stock, $0.0001 par value, outstanding as of July 20, 2011 was 22,951,897.

 
 

 

ATS CORPORATION

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
   
         
Item 1.
 
Financial Statements
 
3
         
   
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010 (audited)
 
3
         
   
Consolidated Statements of Income (unaudited) for the three-month and six-month periods ended June 30, 2011 and June 30, 2010
 
4
         
   
Consolidated Statements of Cash Flows (unaudited) for the six-month periods ended June 30, 2011 and June 30, 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
 
23
         
Item 4.
 
Controls and Procedures
 
23
         
PART II — OTHER INFORMATION
   
         
 Item 1.
 
Legal Proceedings
 
24
         
 Item 1A.
 
Risk Factors
 
24
         
 Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
24
         
 Item 3.
 
Defaults upon Senior Securities
 
25
         
Item 4.
 
[Reserved]
 
25
         
 Item 5.
 
Other Information
 
25
         
 Item 6.
 
Exhibits
 
26
         
SIGNATURES
 
27

 
2

 

ATS CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

     
 
June 30, 2011
(unaudited)
   
December 31,
2010 (audited)
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
587,139
   
$
65,993
 
Restricted cash
   
1,327,549
     
1,327,245
 
Accounts receivable, net
   
16,039,201
     
21,219,602
 
Prepaid expenses and other current assets
   
556,165
     
696,174
 
Income taxes receivable and prepaid, net
   
543,759
     
61,477
 
Other current assets
   
26,947
     
25,491
 
Deferred income taxes, current
   
835,928
     
698,521
 
                 
Total current assets
   
19,916,688
     
24,094,503
 
                 
Property and equipment, net
   
2,441,866
     
2,714,164
 
Goodwill
   
55,370,011
     
55,370,011
 
Intangible assets, net
   
3,114,307
     
4,110,470
 
Other assets
   
133,314
     
133,314
 
Deferred income taxes
   
1,425,334
     
1,407,545
 
                 
Total assets
 
$
82,401,520
   
$
87,830,007
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
                 
Capital leases – current portion
 
$
80,476
   
$
79,572
 
Accounts payable
   
3,849,598
     
4,457,781
 
Other accrued expenses and current liabilities
   
1,568,635
     
2,381,941
 
Accrued salaries and related taxes
   
2,731,055
     
2,917,294
 
Accrued vacation
   
2,100,367
     
1,968,226
 
Deferred revenue
   
529,258
     
513,653
 
Deferred rent – current portion
   
320,498
     
320,498
 
                 
Total current liabilities
   
11,179,887
     
12,638,965
 
                 
Long-term debt net of current portion
   
7,914,257
     
14,400,000
 
Capital leases – net of current portion
   
103,184
     
143,648
 
Deferred rentnet of current portion
   
2,357,893
     
2,465,962
 
Other long-term liabilities
   
68,479
     
 
                 
Total liabilities
   
21,623,700
     
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, 31,849,790 and 31,561,486 shares issued, and 22,951,897 and 22,663,593 shares outstanding
   
3,185
     
3,156
 
Additional paid-in capital
   
133,663,350
     
132,803,839
 
Treasury stock, at cost, 8,897,893 shares held
   
(31,663,758
)
   
(31,663,758
)
Accumulated deficit
   
(41,224,957
)
   
(42,961,805
)
                 
Total stockholders’ equity
   
60,777,820
     
58,181,432
 
                 
Total liabilities and stockholders’ equity
 
$
82,401,520
   
$
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 June 30,
   
Six Months
Ended June 30,
 
   
2011
(unaudited)
   
2010
 (unaudited)
   
2011
(unaudited)
   
2010
 (unaudited)
 
                         
Revenue
 
$
23,104,756
   
$
29,246,328
   
$
47,933,582
   
$
59,758,311
 
                                 
Operating costs and expenses
                               
Direct costs
   
16,050,520
     
20,503,390
     
33,953,487
     
41,919,002
 
Selling, general and administrative expenses
   
3,870,097
     
5,908,910
     
9,795,865
     
12,312,131
 
Depreciation and amortization
   
629,994
     
636,332
     
1,268,462
     
1,277,169
 
Total operating costs and expenses
   
20,550,611
     
27,048,632
     
45,017,814
     
55,508,302
 
                                 
Operating income
   
2,554,145
     
2,197,696
     
2,915,768
     
4,250,009
 
                                 
Other (expense) income
                               
Interest, net
   
(53,381
)
   
(356,887
)
   
(118,045
)
   
(1,178,042
)
Other income
   
     
3,892
     
     
503,892
 
                                 
Income before income taxes
   
2,500,764
     
1,844,701
     
2,797,723
     
3,575,859
 
                                 
Income tax expense
   
946,012
     
707,675
     
1,060,875
     
1,332,265
 
                                 
Net income
 
$
1,554,752
   
$
1,137,026
   
$
1,736,848
   
$
2,243,594
 
                                 
Weighted average number of shares outstanding
                               
—basic
   
22,894,660
     
22,472,993
     
22,829,843
     
22,504,568
 
—diluted
   
23,129,005
     
22,590,473
     
23,041,956
     
22,617,016
 
                                 
Net income per share
                               
—basic
 
$
0.07
   
$
0.05
   
$
0.08
   
$
0.10
 
—diluted
 
$
0.07
   
$
0.05
   
$
0.08
   
$
0.10
 

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

 
4

 

ATS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Six Months Ended
 June 30,
 
   
   
2011
(unaudited)
   
   
2010
(unaudited)
   
Cash flows from operating activities
           
Net income
 
$
1,736,848
   
$
2,243,594
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
1,268,462
     
1,277,169
 
Non-cash interest expense SWAP agreement
   
     
223,504
 
Stock-based compensation
   
527,083
     
411,762
 
Directors’ fees paid in equity
   
     
103,094
 
Deferred income taxes
   
(162,219
   
193,077
 
Deferred rent
   
(108,068
)
   
(87,520
)
Gain on disposal of equipment
   
     
(8,722
)
Provision for bad debt
   
(85,827
   
932,365
 
                 
Changes in assets and liabilities:
               
Accounts receivable
   
5,266,227
     
829,745
 
Prepaid expenses
   
140,009
     
(201,771
Restricted cash
   
(304
)
   
(496
)
Other assets
   
(1,456
   
19,229
 
Accounts payable
   
(608,184
   
830,729
 
Other accrued expenses and accrued liabilities
   
(813,306
   
(1,897,452
Accrued salaries and related taxes
   
(186,239
)
   
(996,500
)
Accrued vacation
   
132,141
     
298,417
 
Income taxes receivable
   
(409,584
   
78,408
 
Other current liabilities
   
15,605
     
(830,666
)
Other long-term liabilities
   
68,479
     
 
                 
Net cash provided by operating activities
   
6,779,668
     
3,417,966
 
                 
Cash flows from investing activities
               
Purchase of property and equipment
   
     
(9,074
)
Proceeds from disposals of equipment
   
     
10,000
 
                 
Net cash provided by investing activities
   
     
926
 
                 
Cash flows from financing activities
               
Borrowings on line of credit
   
26,695,365
     
34,537,373
 
Payments on line of credit
   
(33,181,108
)
   
(36,205,470
)
Payments on notes payable
   
     
(1,549,547
)
Payments on capital leases
   
(39,560
   
 
Proceeds from exercise of stock options
   
128,750
     
4,837
 
Proceeds from stock issued pursuant to Employee Stock Purchase Plan
   
138,031
     
151,438
 
Payments to repurchase treasury stock
   
     
(454,640
                 
Net cash used in financing activities
   
(6,258,522
)
   
(3,516,009
)
                 
Net increase (decrease) in cash
   
521,146
     
(97,117
)
                 
Cash, beginning of period
   
65,993
     
178,225
 
                 
Cash, end of period
 
$
587,139
   
$
81,108
 
                 
Supplemental disclosures:
               
Cash paid or received during the period for:
               
Income taxes paid
 
$
1,662,000
   
$
1,061,200
 
Income tax refunds
   
11,214
     
500
 
Interest paid
   
142,765
     
1,216,983
 
Interest received
   
9,158
     
10,078
 

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 for a fair presentation 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”, 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”, 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 for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This ASU was effective for the Company beginning January 1, 2011, and applies to arrangements beginning on or after 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 on or after 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 one of the ATSI state contracts. This amount, and accumulated interest of $127,549 and $127,245 earned thereon as of June 30, 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 deposit will be refunded.

NOTE 4 ¾ ACCOUNTS RECEIVABLE
 
Total accounts receivable consisted of the following:
 
   
June 30,
2011
   
December 31,
2010
 
Billed receivables
 
$
12,408,074
   
$
17,926,139
 
Unbilled receivables:
               
Revenues recorded in excess of milestone billings on fixed-price contracts
   
3,593,997
     
3,387,087
 
Retainage & Rates Variance
   
69,477
     
42,640
 
Other receivables
   
19,750
     
18,129
 
Total accounts receivable
 
$
16,091,298
   
$
21,373,995
 
Allowance for doubtful accounts
   
(52,097
)
   
(154,393
)
Total accounts receivable, net
 
$
16,039,201
   
$
21,219,602
 
 
NOTE 5 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 and six-month periods ended June 30, 2011 and 2010 were as follows:

Stock-based compensation included in selling &
general administrative expenses
 
Three Months 
Ended
June 30, 2011
   
Three Months
Ended
June 30, 2010
   
Six Months
Ended
June 30, 2011
   
Six Months
 Ended
June 30, 2010
 
Non-qualified stock option expense
 
$
35,000
   
$
97,000
   
$
141,000
   
$
143,000
 
Restricted stock expense
   
131,000
     
158,000
     
390,000
     
288,000
 
Stock grants to Directors in lieu of cash
   
     
103,000
     
     
103,000
 
Forfeitures in excess of estimate
   
 
   
(5,000
)
   
(4,000
)
   
(19,000
)
Total stock-based compensation expense
 
$
166,000
   
$
353,000
   
$
527,000
   
$
515,000
 
Related recognized tax benefit
   
66,000
     
120,000
     
106,000
     
187,000
 
Total after-tax stock-based compensation expense
 
$
100,000
   
$
233,000
   
$
421,000
   
$
328,000
 

Stock Options - A total of zero and 60,000 stock options were granted during the three-month and six-month periods ended June 30, 2011, respectively. A total of 15,000 and 108,000 stock options were granted during the three-month and six-month period ended June 30, 2010, respectively.  The fair values of options granted during the three-month and six-month periods ended June 30, 2011 and June 30, 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
September 1, 2010
   
Options Granted
May 18, 2010
   
Options Granted
April 4, 2010
   
Options Granted
January 4, 2010
 
Expected dividend yield
    %     %     %     %     %
Expected volatility
    47.8 %     66.8 %     67.6 %     70.0 %     70.6 %
Risk free interest rate
    2.4 %     1.6 %     2.5 %     2.5 %     2.5 %
Expected life of options
 
6.3 years
   
6.3 years
   
6.3 years
   
6.3 years
   
6.3 years
 
Forfeiture rate
    4.25 %     4.25 %     4.25 %     4.25 %     4.25 %
Options granted
    60,000       50,000       53,000       40,000       15,000  

 
7

 

The average fair value per option granted during the six months ended June 30, 2011 was $1.38. As of June 30, 2011, there was $285,553 of unrecognized compensation expense related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 1.4 years. The table below provides stock option information for the six months ended June 30, 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
     
9.5
     
94,800
(2)
Options exercised
   
(46,000
)
   
2.80
     
     
 
Options forfeited
   
(59,000
)
   
2.60
     
     
 
Options outstanding at June 30, 2011
   
534,250
     
2.58
     
8.6
     
993,165
(2)
Options exercisable at June 30, 2011
   
277,750
     
2.79
     
6.9
     
471,670
(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 $4.38 as of June 30, 2011, over the exercise price, multiplied by the number of options.
 
The following table summarizes information about the stock options outstanding at June 30, 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
     
7.5
   
$
1.40
     
5,000
   
$
1.40
 
  1.50    
160,750
     
7.8
     
1.50
     
80,000
     
1.50
 
  2.15    
101,000
     
6.9
     
2.15
     
76,125
     
2.15
 
  2.23    
5,000
     
8.2
     
2.23
     
1,250
     
2.23
 
  2.80    
95,000
     
9.3
     
2.80
     
     
 
  2.90    
43,000
     
8.9
     
2.90
     
10,750
     
2.90
 
  3.40    
20,000
     
6.5
     
3.40
     
15,000
     
3.40
 
  3.50    
20,000
     
6.4
     
3.50
     
15,000
     
3.50
 
  3.67    
15,000
     
6.3
     
3.67
     
11,250
     
3.67
 
  3.75    
4,500
     
6.0
     
3.75
     
3,375
     
3.75
 
  4.88    
60,000
     
5.7
     
4.88
     
60,000
     
4.88
 
       
534,250
     
7.6
     
2.58
     
277,750
     
2.79
 

 
8

 

Restricted Shares – Pursuant to the 2006 Omnibus Incentive Compensation Plan, during the six-month period ended June 30, 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 six months ended June 30, 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
   
(196,811
)
   
2.66
 
Unvested at June 30, 2011
   
246,586
     
2.48
 

NOTE 6 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 each of the plan years 2009, 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 June 30, 2011, participants had purchased 392,597 shares since the inception of the ESPP at a weighted average price per share of $2.06. During the six months ended June 30, 2011, 45,493 shares were purchased at an average price per share of $3.03, for total proceed of $137,844.

 
9

 

NOTE 7 ¾ EARNINGS 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 shares. The diluted weighted average shares outstanding for the three months ended June 30, 2011 excluded unvested restricted shares and stock options to purchase approximately 60,000 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 weighted average shares outstanding for the three months ended June 30, 2010 excludes stock options to purchase approximately 268,750 shares because such common stock equivalents have 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 six months ended June 30, 2011 excluded unvested restricted shares and stock options to purchase approximately 103,000 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 weighted average shares outstanding for the six months ended June 30, 2010 excludes stock options to purchase approximately 268,750 shares because such common stock equivalents have 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 June 30,
   
Six months
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income
 
$
1,554,752
   
$
1,137,026
   
$
1,736,848
   
$
2,243,594
 
                                 
Weighted average number of basic shares outstanding during the period
   
22,894,660
     
22,472,993
     
22,829,843
     
22,504,568
 
Dilutive effect of stock options and restricted shares after application of the treasury stock method
   
234,345
     
117,480
     
212,114
     
112,448
 
Weighted average number of diluted shares outstanding during the period
   
23,129,005
     
22,590,473
     
23,041,956
     
22,617,016
 
                                 
Basic earnings per share
 
$
0.07
   
$
0.05
   
$
0.08
   
$
0.10
 
Diluted earnings per share
 
$
0.07
   
$
0.05
   
$
0.08
   
$
0.10
 
 
Shares outstanding during the six months ended June 30, 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 six months ended June 30, 2011.

NOTE 8 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 9 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 six months ended June 30, 2011. The Company will continue to monitor the recoverability of the carrying value of its goodwill and other long-lived assets.

 NOTE 10 ¾ INTANGIBLE ASSETS
 
Intangible assets represent the customer contracts and backlog resulting from the previous acquisitions as follows:
 
  
 
June 30,
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
   
(6,232,979
)
   
(5,236,816
)
Total intangible assets, net
 
$
3,114,307
   
$
4,110,470
 

Intangible assets subject to amortization were evaluated as follows:
  
Assets
 
Weighted-
Average
Amortization
Period
 
Carrying
Amount as of
June 30,
2011
   
Amortization
2011
   
Carrying
Amount as of
December 31,
2010
 
Customer-related intangible assets
 
53 mos.
 
$
2,952,173
   
$
(932,263
)
 
$
3,884,436
 
Marketing-related intangible assets
 
38 mos.
   
57,867
     
(24,800
)
   
82,667
 
Technology-related intangible assets
 
60 mos.
   
104,267
     
(39,100
)
   
143,367
 
Totals
 
52 mos.
 
$
3,114,307
   
$
(996,163
)
 
$
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
 
19 mos.
Marketing and technology
   
1,112,286
 
15 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
 
$
996,168
 
December 31, 2012
   
1,962,762
 
December 31, 2013
   
155,377
 
Total
 
$
3,114,307
 
 
NOTE 11 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 12 ¾ DEBT
   
Bank Financing

The Company has a credit facility with Bank of America, N.A., as Administrative Agent, and other various lender parties.  The credit facility 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 facility agreement, and subject to a borrowing base. This effectively increases the maximum availability under the credit facility from $50 million to $55 million. The credit facility has 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 applicable margins charged on the outstanding borrowings have 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 covenant for the minimum fixed charge coverage ratio is 1.5:1. The facility 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 June 30, 2011, the facility’s outstanding debt balance was $7.9 million. The effective rate on the variable rate debt was 2.25% for the six months ended June 30, 2011. The maximum availability under the facility at June 30, 2011 was $16.1 million.

The Company was in compliance with its loan covenants as of June 30, 2011.

At June 30, 2011, the aggregate maturities of our debt were as follows:

Years Ending December 31,
   
2011
 
$
 
2012
   
 
2013
   
7,914,257
 
Total long-term debt
 
$
7,914,257
 

 
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; r

 
·
risks to the Company’s cash position related to the on-going negotiations regarding the U.S. Federal Government debt ceiling:

 
·
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.

 
·
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.

 
13

 
 
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.

For the six-month periods ended June 30, 2011 and 2010, we generated revenue from the following mix of customers:
 
   
Six Months
Ended
June 30, 2011
   
Six Months
Ended
June 30, 2010
 
   
(in thousands)
           
(in thousands)
         
Federal civilian agencies
 
$
25,146
     
52.5
%
 
$
28,902
     
48.4
%
Defense and homeland security
   
12,966
     
27.0
%
   
17,649
     
29.5
%
Commercial
   
5,572
     
11.6
%
   
5,840
     
9.8
%
Government-sponsored enterprise
   
4,250
     
8.9
%
   
7,367
     
12.3
%
Totals
 
$
47,934
     
100.0
%
 
$
59,758
     
100.0
%

While the mix of customers has remained relatively consistent, overall revenue has decreased by $11.8 million.  This reduction is attributable, in part, to delayed funding of development work on newly awarded contracts with federal and civilian agencies, the loss of a Defense Logistics Agency contract for defense and homeland security, and decreased staffing placements at Fannie Mae.  A more detailed explanation is provided in the later section - “Results of Operations – revenue in this Quarterly Report.
 
Revenue from our largest clients during the six months ended June 30, 2011 and 2010 was the following:

   
Six Months
Ended
June 30, 2011
   
Six Months
Ended
June 30, 2010
 
   
(in thousands)
         
(in thousands)
       
U.S. Department of Housing & Urban Development (“HUD”)
 
$
9,567
     
19.9
%
 
$
12,310
     
20.6
%
Pension Benefit Guaranty Corporation (“PBGC”)
   
4,779
     
10.0
%
   
6,101
     
10.2
%
Defense Technology Security Administration (“DTSA”)
   
4,622
     
9.6
%
   
3,861
     
6.5
%
Fannie Mae
   
4,250
     
8.9
%
   
7,367
     
12.3
%
Architect of the Capitol (“AOC”)
   
2,300
     
4.8
%
   
2,705
     
4.5
%
Defense Logistics Agency (“DLA”)
   
1,880
     
3.9
%
   
4,512
     
7.6
%
Nuclear Regulatory Commission (“NRC”)
   
1,631
     
3.4
%
   
853
     
1.4
%

 HUD, representing 19.9% of our revenue for the first six months of 2011, continues to be the Company’s largest customer with the Company receiving over $53 million in new contract awards from HUD since January 2011. Although the first six months of 2011 experienced a decline from the first six months of 2010, primarily due to funding delays on the newly awarded re-compete contracts and some reduction in scope on one of the re-compete awards, we expect the revenue base to recover in the second half of the year. We expect recovery to be driven by an increase in development task funding under the contracts awarded in the first half of the year as HUD accelerates its transformation initiatives. Likewise, at PBGC where we have received over $20 million in new contract awards since January of this year, there was a revenue reduction from the same six-month period in 2010 due to the completion of a major contract and the subsequent delay in funding of development work on the new award.   Revenues derived from our contracts at PBGC represented 10% of our total revenue for the six months ended June 30, 2011. Revenue has increased at DTSA for the first half of 2011 compared to the same period in 2010 as we continue to gain recognition for our subject matter expertise in software and systems development related to the management of U.S. exports.  With the challenges facing the housing industry we have experienced a slow down in the demand for professional staffing support as Fannie Mae has delayed many new project starts, resulting in a revenue decline in our Fannie Mae relationship from the first half of 2010 compared to the first half of 2011.  However, we are a top tier vendor at Fannie Mae with a long standing relationship and we expect to remain an important partner as the organization stabilizes and leverages staffing support to catch up on postponed projects. The revenue decline at AOC for the first half of 2011 compared to the first half of 2010  is directly attributable to a change from a prime contractor to subcontractor role as a result of the Company’s strategic decision on the recently awarded re-compete to team with a small business. The revenue decline at DLA for the same comparative period is directly attributable to the loss of a contract in the fourth quarter of 2010. Although our revenue derived from the NRC represents only 3.4% of our total revenue for the six months ended June 30, 2011, it has nearly doubled over the same period in 2010.

 
14

 

Overview (continued)

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 rates plus the cost of materials incurred. We recognize revenue on certain fixed-price contracts using the percentage-of-completion method, where appropriate, 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 is 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:

   
Six Months
Ended
June 30, 2011
   
Six Months
Ended
June 30, 2010
 
   
(in thousands)
           
(in thousands)
         
Time-and-materials
 
$
23,937
     
49.9
%
 
$
39,511
     
66.1
%
Fixed-price
   
21,751
     
45.4
%
   
20,247
     
33.9
%
Cost-plus-fee
   
2,246
     
4.7
%
   
     
 
Totals
 
$
47,934
     
100.0
%
 
$
59,758
     
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, two re-competes were awarded as a cost-reimbursable contract and a hybrid fixed price/cost-plus-fixed-fee contract.

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.  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-reimbursable contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-reimbursable 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.

 
15

 
 
Overview (continued)

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:
 
   
Six Months
Ended
June 30, 2011
   
Six Months
Ended
June 30, 2010
 
   
(in thousands)
         
(in thousands)
       
Prime contracts
  $ 39,020       81.4 %   $ 50,242       84.1 %
Subcontracts
    8,914       18.6 %     9,516       15.9 %
Totals
  $ 47,934       100.0 %   $ 59,758       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 June 30, 2011, we had 381 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 9 in Notes to Consolidated Financial Statements.

Contract Backlog

Total backlog at June 30, 2011 was approximately $271 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 includes unexercised contract options but excludes unfunded indefinite delivery indefinite quantity (“IDIQ”) orders.

The following table summarizes our contract backlog at June 30, 2011 and December 31, 2010, respectively:

   
June 30,
2011
   
December 31,
2010
 
Backlog:
           
Funded
 
$
31,132,304
   
$
36,666,667
 
Unfunded
   
239,952,892
     
199,466,494
 
Total backlog
 
$
271,085,196
   
$
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 $82.9 million were awarded during the six-month period ending June 30, 2011, compared to $95.1 million for the same period in 2010.  The most significant awards in 2011 were a $45.7 million award on a HUD IT services contract for the Single Family Computerized Homes Underwriting Systems (“CHUMS”) and Federal Housing Administration (“FHA”) connection; a $20.4 million award from PBGC on the Benefit Management Application (“BMA”) support program; a $4.8 million award on the Army R&R IDIQ contract and additional tasking at Fannie Mae of $4.7 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 June 30, 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 six months ended June 30, 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 six months ended June 30, 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
June 30, 2011
     
     
For the 
Three Months 
Ended
June 30, 2010
   
For the 
Six Months 
Ended
June 30, 2011
   
For the 
Six Months 
Ended
June 30, 2010
     
Net income
 
$
1,554,752
   
$
1,137,026
   
$
1,736,848
   
$
2,243,594
 
Adjustments:
                               
Depreciation
   
131,912
     
138,251
     
272,298
     
281,006
 
Amortization of intangibles
   
498,082
     
498,081
     
996,164
     
996,163
 
Interest, net
   
53,381
     
356,887
     
118,045
     
1,178,042
 
Taxes
   
946,012
     
707,675
     
1,060,875
     
1,332,265
 
EBITDA
 
$
3,184,139
   
$
2,837,920
   
$
4,184,230
   
$
6,031,070
 
Net settlements
   
     
     
     
(495,000
)
Severance
   
     
     
1,072,414
     
 
Strategic expenses
   
14,499
     
     
108,699
     
 
Adjusted EBITDA
 
$
3,198,638
   
$
2,837,920
   
$
5,365,343
   
$
5,536,070
 

Recent Events

On January 7, 2011, the Company announced that its Board of Directors had begun a process to evaluate strategic alternatives for the Company, which is currently ongoing. 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.

 
17

 
 
Results of Operations (unaudited)

Results of operations for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 are presented below.

The following table sets forth certain financial data as dollars and as a percentage of revenue:
 
   
For the Three
   
 
   
For the Three
   
 
   
For the Six
   
 
   
For the Six
   
 
 
   
Months Ended
         
Months Ended
         
Months Ended
         
Months Ended
       
   
June 30,
         
June 30,
         
June 30,
         
June 30,
       
   
2011
    %    
2010
    %    
2011
    %    
2010
    %  
Revenue
 
$
23,104,756
         
$
29,246,328
         
$
47,933,582
         
$
59,758,311
       
                                                         
Operating costs and expenses
                                                       
Direct costs
   
16,050,520
     
69.5
%
   
20,503,390
     
70.1
%
   
33,953,487
     
70.8
%
   
41,919,002
     
70.1
%
Selling, general and administrative expenses
   
3,870,097
     
16.8
%
   
5,908,910
     
20.2
%
   
9,795,865
     
20.4
%
   
12,312,131
     
20.6
%
Depreciation and amortization
   
629,994
     
2.7
%
   
636,332
     
2.2
%
   
1,268,462
     
2.6
%
   
1,277,169
     
2.1
%
                                                                 
Total operating costs and expenses
   
20,550,611
     
88.9
%
   
27,048,632
     
92.5
%
   
45,017,814
     
93.9
%
   
55,508,302
     
92.9
%
                                                                 
Operating income
   
2,554,145
     
11.1
%
   
2,197,696
     
7.5
%
   
2,915,768
     
6.1
%
   
4,250,009
     
7.1
%
                                                                 
Other (expense) income
                                                               
Interest, net
   
(53,381
)
   
(0.2
)%
   
(356,887
)
   
(1.2
)%
   
(118,045
)
   
(0.2
)%
   
(1,178,042
)
   
(2.0
)%
Other income
   
     
0.0
%
   
3,892
     
0.0
%
   
     
0.0
%
   
503,892
     
0.8
%
                                                                 
Income before income taxes
   
2,500,764
     
10.8
%
   
1,844,701
     
6.3
%
   
2,797,723
     
5.8
%
   
3,575,859
     
6.0
%
                                                                 
Income tax expense
   
946,012
     
4.1
%
   
707,675
     
2.4
%
   
1,060,875
     
2.2
%
   
1,332,265
     
2.2
%
                                                                 
Net Income
 
$
1,554,752
     
6.7
%
 
$
1,137,026
     
3.9
%
 
$
1,736,848
     
3.6
%
 
$
2,243,594
     
3.8
%
                                                                 
Weighted average number of shares outstanding
                                                               
—basic
   
22,894,660
             
22,472,993
             
22,829,843
             
22,504,568
         
—diluted
   
23,129,005
             
22,590,473
             
23,041,956
             
22,617,016
         
                                                                 
Net income per share
                                                               
—basic
 
$
0.07
           
$
0.05
           
$
0.08
           
$
0.10
         
—diluted
 
$
0.07
           
$
0.05
           
$
0.08
           
$
0.10
         
 
 
18

 
 
Comparison of the three months ended June 30, 2011 to the three months ended June 30, 2010.

Revenue – Revenue decreased by $6.1 million, or 20.9%, to $23.1 million for the three months ended June 30, 2011.
 
 Three Months Ended June 30,
 
2011
   
2010
   
Decrease
 
   
(in thousands)
   
(in thousands)
   
(in thousands)
 
Revenue
                 
Federal Civilian Agencies
  $ 12,148     $ 13,827     $ (1,679 )
Defense and homeland security
    6,573       8,582       (2,009 )
Commercial
    2,533       2,863       (330 )
Government Sponsored enterprise
    1,851       3,974       (2,123 )
Total Revenue
  $ 23,105     $ 29,246     $ (6,141 )

Revenue from federal civilian agencies decreased by $1.7 million from 2010 or 12.1%.   Of the $1.7 million revenue decrease the primary contributors were $.8 million due to delayed funding of development work on newly awarded re-compete contracts, $.3 million due to reduced scope on re-compete awards and $.2 million due to a contract that ended.   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 $1.2 million of revenue in the second quarter of 2010, a reduction of $0.5 million on a U.S. Air Force contract vehicle due to Department of Defense budget prioritizations, and a reduction of $0.3 million related to a USCG contract where the prime did not exercise the option year. The Government Sponsored Enterprise revenue decrease of $2.1 million or 53.4% to $1.9 million in the second quarter of 2011 from $4.0 million in the same period in 2010 was due to a decrease in staffing placements at Fannie Mae as a result of delayed project starts.

Direct costs – Direct costs were $16.1 million or 69.5% of revenue in the second quarter 2011 compared to $20.5 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 June 30, 2011 and June 30, 2010 are presented below.   The reduction in direct cost is directly attributable to the decrease in revenues for the three months ended June 30, 2011.

   
Three Months Ended
June 30, 2011
   
Three Months Ended
June 30, 2010
   
Increase
(Decrease)
 
   
(in thousands)
   
%
   
(in thousands)
   
%
   
(in thousands)
   
%
 
Direct labor and fringe benefits
 
$
10,620
     
46.0
%
 
$
13,187
     
45.1
%
 
$
(2,567
   
(19.5
)%
Subcontractors
   
4,090
     
17.7
%
   
6,451
     
22.1
%
   
(2,361
   
(36.6
)%
Other direct costs
   
1,341
     
5.8
%
   
865
     
3.0
%
   
476
     
55.0
%
Total direct costs
 
$
16,051
     
69.5
%
 
$
20,503
     
70.2
%
 
$
(4,452
)
   
(21.7
)%

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 June 30, 2011 and June 30, 2010 were $3.9 million and $5.9 million, or 16.8% and 20.2% of revenue, respectively.  Of the $2.0 million decrease in SG&A approximately $1.0 million was associated with a reduction in salary and fringe costs in 2011due to process improvements resulting in increased efficiencies in the back office and elimination of several management positions as a result of an organizational realignment.   The Company was negatively impacted by two non recurring items in 2010 accounting for an additional $.7 million of the difference namely a $0.5 million bad debt write-off associated with a state and local contract and $0.2 million of legal expenses associated with indemnification claims.

Depreciation and amortization – Depreciation and amortization expense were $0.6 million for each of the quarters ended June 30, 2011 and June 30, 2010.

 
19

 
 
Interest, net – The net interest expense was $0.1 million and $0.4 million for the three-months ended June 30, 2011 and June 30, 2010, respectively. This decrease of $0.3 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 and the lower average outstanding debt balance in 2011.

Our average outstanding debt balance for the quarter ended June 30, 2011 was $8.0 million compared to $18.0 million for the quarter ended June 30, 2010.
 
Income taxes The Company reported an income tax expense of $1.0 million and $0.7million for the three-month periods ended June 30, 2011 and 2010, respectively. The effective tax rates were 37.8% and 38.4% for the three-month periods ended June 30, 2011 and 2010, respectively. The slightly lower effective tax rate for the three-months ended June 30, 2011 compared to the three-month period ended June 30, 2010 was primarily driven by higher tax deductions for vesting restricted stock.

Comparison of the six months ended June 30, 2011 to the six months ended June 30, 2010.

Revenue – Revenue decreased by $11.8 million, or 19.8%, to $47.9 million for the six months ended June 30, 2011.
 
Six Months Ended June 30,
 
2011
   
2010
   
Decrease
 
   
(in thousands)
   
(in thousands)
   
(in thousands)
 
Revenue
                 
Federal Civilian Agencies
  $ 25,146     $ 28,902     $ (3,756 )
Defense and homeland security
    12,966       17,649       (4,683 )
Commercial
    5,572       5,840       (268
Government Sponsored Enterprise
    4,250       7,367       (3,117 )
Total Revenue
  $ 47,934     $ 59,758     $ (11,824 )

Revenue from federal civilian agencies decreased by $3.8 million from 2010 or 13.0%.   Of the $3.8 million revenue decrease the primary contributors were $1.8 million due to delayed funding of development work on newly awarded re-compete contracts, $1.4 million associated with the completion of the PBGC PAMT contract and the delayed funding of development work on the re-competed award, $0.7 million due to reduced scope on re-compete awards and $0.7 million due to a contract that ended. This was partially offset by $0.8 million of increased revenue on the NRC contract as a result of additional tasking by the government.  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 $2.3 million of revenue in the first six months of 2010, and also by a $1.1 million reduction on a U.S. Air Force contract vehicle due to Department of Defense budget prioritizations as well as reductions with the US Coast Guard of $1.0 million.   The Government Sponsored Enterprise revenue decrease of $3.1 million or 42.3% to $4.3 million in the first six months of 2011 from $7.4 million in the same period in 2010 was due to a decrease in staffing placements at Fannie Mae as a result of delayed project starts.

Direct costs – Direct costs were $34.0 million or 70.8% of revenue in the first half of 2011 compared to $41.9 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 six months ended June 30, 2011 and June 30, 2010 are presented below.   The reduction in direct cost is directly attributable to the decrease in revenues for the six months ended June 30, 2011.

   
Six Months Ended
June 30, 2011
   
Six Months Ended
June 30, 2010
   
Increase
(Decrease)
 
   
(in thousands)
   
%
   
(in thousands)
   
%
   
(in thousands)
   
%
 
Direct labor and fringe benefits
 
$
22,486
     
46.9
%
 
$
27,476
     
46.0
%
 
$
(4,990
   
(18.2
)%
Subcontractors
   
8,990
     
18.7
%
   
11,929
     
20.0
%
   
(2,939
   
(24.6
)%
Other direct costs
   
2,477
     
5.2
%
   
2,514
     
4.2
%
   
(37
)
   
(1.5
)%
Total direct costs
 
$
33,953
     
70.8
%
 
$
41,919
     
70.1
%
 
$
(7,966
)
   
(19.0
)%

 
20

 

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 six months ended June 30, 2011 and June 30, 2010 were $9.8 million and $12.3 million, or 20.4% and 20.6% of revenue, respectively.   The SG&A for the six months ended June 30, 2011 included an extraordinary item in the amount of $1.1 million related to severance costs.  The Company was negatively impacted by two non recurring items in 2010 accounting for an additional $1.2 million of the difference, namely a $1.0 million bad debt write-off associated with a state and local government contract and $0.2 million of legal expenses associated with indemnification claims against former owners of ATSI.  In addition there was $0.4 million accrual for bonus in 2010. When adjusted for the extraordinary items in the respective periods the SG&A was $8.7 million or 18.1 % of revenue for the six months ended June 30, 2011 and $10.7 million or 17.9% for the six months  ended June 30, 2010.  Of the $2.0 million decrease in SG&A approximately $1.5 million was associated with a reduction in salary and fringe costs in 2011due to process improvements resulting in increased efficiencies in the back office and elimination of several management positions as a result of an organizational realignment.

Depreciation and amortization – Depreciation and amortization expense was $1.3 million for each of the six months ended June 30, 2011 and June 30, 2010.

Interest, net – The net interest expense was $0.1 million and $1.2 million for the six-month periods ended June 30, 2011 and June 30, 2010, respectively. This decrease of $1.1 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 and the lower average outstanding debt balance in 2011.

Our average outstanding debt balance for the six-months ended June 30, 2011 was $11.2 million compared to $18.2 million for the six-months ended June 30, 2010.
 
Income taxes The Company reported an income tax expense of $1.1 million and $1.3 million for the six-month periods ended June 30, 2011 and 2010, respectively. The effective tax rates were 37.9% and 37.3% for the six-month periods ended June 30, 2011 and 2010, respectively. The slightly higher effective tax rate for the six-month period ended June 30, 2011 compared to the six-month period ended June 30, 2010 benefited from higher tax deductions in 2011 for vesting restricted stock and for deductions associated with true-ups for prior year tax returns.  The effective tax rate for the six months ended June 30, 2010 benefited from a non-taxable $0.5 million settlement from the former owners of NSS, which is a non-taxable permanent difference.

 
21

 

Financial Condition, Liquidity and Capital Resources

Financial Condition.   Total assets decreased $5.4 million to $82.4 million as of June 30, 2011 compared to $87.8 million as of December 31, 2010, primarily due to a decrease in receivables of $5.2 million as a result of lower revenue in 2011 compared to 2010.
 
Our total liabilities decreased $8.0 million to $21.6 million as of June 30, 2011 from $29.6 million as of December 31, 2010. The decrease was due primarily to decreases in our debt of $6.5 million to $7.9 million at June 30, 2011 compared to $14.4 million at December 31, 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. Other accrued expenses and current liabilities decreased by $0.8 million to $1.6 million at June 30, 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 which were subsequently paid. Also accounts payable decreased by $0.7 million to $3.8 million as of June 30, 2011 from $4.5 million at December 31, 2010 due to lower vendor costs associated with the reduction in revenue.
 
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. 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 June 30, 2011, we were in compliance with all covenants. Our cash requirements to fund any strategic alternative will be funded by cash generated from operations in addition to the credit facility. This credit facility expires in June 2013. As of June 30, 2011, we had $7.9 million outstanding on the credit facility, and availability to borrow an additional $8.2 million based upon our borrowing base at such date.

Net cash provided by operating activities was $6.8 million for the six months ended June 30, 2011.  Cash provided by operating activities is primarily driven by operating income adjusted for working capital changes, which were principally changes in accounts receivable.

Net cash used in financing activities was $6.3 million for the six months ended June 30, 2011 compared to $3.5 million for the six months ended June 30, 2010. During the six months ended June 30, 2011, we used $6.5 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 July 20, 2011, we had cash on hand of approximately $115,639. Our available balance on our credit facility as of July 20, 2011 was approximately $9.1 million.

Off-Balance Sheet Arrangements

For the six months ended June 30, 2011, we did not have any off-balance sheet arrangements.
 
 
22

 

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 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
  $     $ 7,914     $     $     $ 7,914  
Operating Leases
      1,891         3,688         3,759         3,779         13,117  
Total
  $ 1,891     $ 11,602     $ 3,759     $ 3,779     $ 21,031  

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 June 30, 2011, we had an outstanding balance of $7.9 million under our variable interest rate line of credit.

  Item 4. Controls and Procedures.

As of June 30, 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 six months ended June 30, 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.

 
23

 
 
PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 11 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.

Purchases of Equity Securities by Issuer

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.

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 six months ended June 30, 2011.  The Company repurchased 152,000 shares of common stock for approximately $455,000 during the three months ended June 30, 2010 as part of the repurchase program. The Company currently has approximately 22.9 million shares outstanding.

Recent Sales of Unregistered Securities

None.
 
 
24

 

Item 3.  Defaults upon Senior Securities.

Not applicable.

Item 4.  [Reserved.]

Item 5.  Other Information.

None.
 
 
25

 
 
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

 
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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.
 
 
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: July 25, 2011
   

 
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