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,
2010.





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  £  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 o
              
              Accelerated
      filer  oNon-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 August 3, 2010 was 22,532,746.








ATS
CORPORATION





TABLE
OF CONTENTS





PART I
      — FINANCIAL INFORMATIONItem
      1.
                
                Financial
      Statements
                3Consolidated
      Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
      (audited)
                3Consolidated
      Statements of Income (unaudited) for the three- and six-month periods
      ended June 30, 2010 and June 30, 2009
                4Consolidated
      Statements of Cash Flows (unaudited) for the three- and six-month periods
      ended June 30, 2010 and June 30, 2009
                5Notes
      to Consolidated Financial Statements
                6Item 2.
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                14Item 3.
                
                Quantitative
      and Qualitative Disclosures about Market Risk
                22Item 4.
                
                Controls
      and Procedures
                22PART II
      — OTHER INFORMATIONItem 1.
                
                Legal
      Proceedings
                23Item
      1A.
                
                Risk
      Factors
                23Item
      2.
                
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                23Item 3.
                
                Defaults
      upon Senior Securities
                23Item
      4.
                
                Reserved
                23Item 5.
                
                Other
      Information
                23Item 6.
                
                Exhibits
                24SIGNATURES
                25




2





ATS
CORPORATION





PART I — FINANCIAL
INFORMATION





ITEM 1. — FINANCIAL
STATEMENTS





CONSOLIDATED BALANCE
SHEETS





June 30,
                                                    
                                                    
                                                    December 31,2010
                                                    
                                                    
                                                    2009(unaudited)
                                                    
                                                    
                                                    (audited)ASSETSCurrent
      assetsCash
                                                    
                                                    $
                                                    81,108
                                                    
                                                    
                                                    $
                                                    178,225Restricted
      cash
                                                    
                                                    
                                                    1,325,006
                                                    
                                                    
                                                    
                                                    1,324,510Accounts
      receivable, net
                                                    
                                                    
                                                    20,735,334
                                                    
                                                    
                                                    
                                                    22,497,444Prepaid
      expenses and other current assets
                                                    
                                                    
                                                    827,002
                                                    
                                                    
                                                    
                                                    625,231Income
      taxes receivable
                                                    
                                                    
                                                    146,657
                                                    
                                                    
                                                    
                                                    205,339Other
      current assets
                                                    
                                                    
                                                    27,035
                                                    
                                                    
                                                    
                                                    46,057Deferred
      income taxes, current
                                                    
                                                    
                                                    1,682,145
                                                    
                                                    
                                                    
                                                    2,361,611Total
      current assets
                                                    
                                                    
                                                    24,824,287
                                                    
                                                    
                                                    
                                                    27,238,417Property
      and equipment, net
                                                    
                                                    
                                                    2,738,205
                                                    
                                                    
                                                    
                                                    3,011,621Goodwill
                                                    
                                                    
                                                    55,370,011
                                                    
                                                    
                                                    
                                                    55,370,011Intangible
      assets, net
                                                    
                                                    
                                                    5,106,634
                                                    
                                                    
                                                    
                                                    6,102,798Other
      assets
                                                    
                                                    
                                                    146,567
                                                    
                                                    
                                                    
                                                    146,567Deferred
      income taxes
                                                    
                                                    
                                                    1,499,746
                                                    
                                                    
                                                    
                                                    1,400,260Total
      assets
                                                    
                                                    $
                                                    89,685,450
                                                    
                                                    
                                                    $
                                                    93,269,674LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                                                    
                                                    $
                                                    458,353
                                                    
                                                    
                                                    $
                                                    21,191,135Accounts
      payable
                                                    
                                                    
                                                    5,556,163
                                                    
                                                    
                                                    
                                                    4,753,800Other
      accrued expenses and current liabilities
                                                    
                                                    
                                                    3,842,175
                                                    
                                                    
                                                    
                                                    6,356,896Accrued
      salaries and related taxes
                                                    
                                                    
                                                    3,545,009
                                                    
                                                    
                                                    
                                                    4,541,509Accrued
      vacation
                                                    
                                                    
                                                    2,557,954
                                                    
                                                    
                                                    
                                                    2,259,538Deferred
      revenue
                                                    
                                                    
                                                    561,792
                                                    
                                                    
                                                    
                                                    1,392,457Deferred
      rent – current portion
                                                    
                                                    
                                                    320,498
                                                    
                                                    
                                                    
                                                    320,498Total
      current liabilities
                                                    
                                                    
                                                    16,841,944
                                                    
                                                    
                                                    
                                                    40,815,833Long-term debt
       – net of current
      portion
                                                    
                                                    
                                                    17,515,138
                                                    
                                                    
                                                    
                                                    —Deferred rent – net of current
      portion
                                                    
                                                    
                                                    2,570,534
                                                    
                                                    
                                                    
                                                    2,658,055Other
      long-term liabilities
                                                    
                                                    
                                                    5,795
                                                    
                                                    
                                                    
                                                    5,795Total
      liabilities
                                                    
                                                    
                                                    36,933,411
                                                    
                                                    
                                                    
                                                    43,479,683Commitments
      and contingenciesStockholders’
      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, 31,430,639 and 31,235,696 shares
      issued,and 22,532,746 and 22,489,803
      shares outstanding
                                                    
                                                    
                                                    3,143
                                                    
                                                    
                                                    
                                                    3,124Additional
      paid-in capital
                                                    
                                                    
                                                    132,393,214
                                                    
                                                    
                                                    
                                                    131,702,488Treasury
      stock, at cost, 8,897,893 and 8,745,893 shares held
                                                    
                                                    
                                                    (31,663,758
                                                    )
                                                    
                                                    
                                                    (31,209,118
                                                    )Accumulated
      deficit
                                                    
                                                    
                                                    (47,819,385
                                                    )
                                                    
                                                    
                                                    (50,062,979
                                                    )Accumulated
      other comprehensive loss (net of tax benefit of $100,643 and
      $400,571)
                                                    
                                                    
                                                    (161,175
                                                    )
                                                    
                                                    
                                                    (643,524
                                                    )Total
      stockholders’ equity
                                                    
                                                    
                                                    52,752,039
                                                    
                                                    
                                                    
                                                    49,789,991Total
      liabilities and stockholders’ equity
                                                    
                                                    $
                                                    89,685,450
                                                    
                                                    
                                                    $
                                                    93,269,674




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 30,2010
                                          (unaudited)
                                        
                                        
                                        2009
                                          (unaudited)
                                        
                                        
                                        2010
                                          (unaudited)
                                        
                                        
                                        2009
                                          (unaudited)Revenue
                                        
                                        $
                                        29,246,328
                                        
                                        
                                        $
                                        30,266,809
                                        
                                        
                                        $
                                        59,758,311
                                        
                                        
                                        $
                                        57,423,323Operating
      costs and expensesDirect
      costs
                                        
                                        
                                        20,503,390
                                        
                                        
                                        
                                        20,451,932
                                        
                                        
                                        
                                        41,919,002
                                        
                                        
                                        
                                        38,647,669Selling,
      general and administrative expenses
                                        
                                        
                                        5,908,910
                                        
                                        
                                        
                                        6,326,616
                                        
                                        
                                        
                                        12,312,131
                                        
                                        
                                        
                                        12,819,131Depreciation
      and amortization
                                        
                                        
                                        636,332
                                        
                                        
                                        
                                        767,616
                                        
                                        
                                        
                                        1,277,169
                                        
                                        
                                        
                                        1,551,743Total
      operating costs and expenses
                                        
                                        
                                        27,048,632
                                        
                                        
                                        
                                        27,546,164
                                        
                                        
                                        
                                        55,508,302
                                        
                                        
                                        
                                        53,018,543Operating
      income
                                        
                                        
                                        2,197,696
                                        
                                        
                                        
                                        2,720,645
                                        
                                        
                                        
                                        4,250,009
                                        
                                        
                                        
                                        4,404,780Other
      (expense) incomeInterest,
      net
                                        
                                        
                                        (356,887
                                        )
                                        
                                        
                                        (792,604
                                        )
                                        
                                        
                                        (1,178,042
                                        )
                                        
                                        
                                        (1,566,684
                                        )Other
      income
                                        
                                        
                                        3,892
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        503,892
                                        
                                        
                                        
                                        —Income
      before income taxes
                                        
                                        
                                        1,844,701
                                        
                                        
                                        
                                        1,928,041
                                        
                                        
                                        
                                        3,575,859
                                        
                                        
                                        
                                        2,838,096Income
      tax expense
                                        
                                        
                                        707,675
                                        
                                        
                                        
                                        756,253
                                        
                                        
                                        
                                        1,332,265
                                        
                                        
                                        
                                        1,240,719Net
      income
                                        
                                        $
                                        1,137,026
                                        
                                        
                                        $
                                        1,171,788
                                        
                                        
                                        $
                                        2,243,594
                                        
                                        
                                        $
                                        1,597,377Weighted
      average number of shares outstanding—basic
                                        
                                        
                                        22,472,993
                                        
                                        
                                        
                                        22,660,767
                                        
                                        
                                        
                                        22,504,568
                                        
                                        
                                        
                                        22,601,811—diluted
                                        
                                        
                                        22,590,473
                                        
                                        
                                        
                                        22,660,767
                                        
                                        
                                        
                                        22,617,016
                                        
                                        
                                        
                                        22,601,811Net
      income per share—basic
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.07—diluted
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.07





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


4


ATS
CORPORATION


CONSOLIDATED STATEMENTS OF CASH
FLOWS


Six Months Ended
                                                June
      30,2010
                                              
                                              
                                              2009(unaudited)
                                              
                                              
                                              (unaudited)Cash
      flows from operating activitiesNet
      income
                                              
                                              $
                                              2,243,594
                                              
                                              
                                              $
                                              1,597,377Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
      and amortization
                                              
                                              
                                              1,277,169
                                              
                                              
                                              
                                              1,551,743Non-cash
      interest expense SWAP agreement
                                              
                                              
                                              223,504
                                              
                                              
                                              
                                              183,404Stock-based
      compensation
                                              
                                              
                                              411,762
                                              
                                              
                                              
                                              292,330Directors’
      fees paid in equity
                                              
                                              
                                              103,094
                                              
                                              
                                              
                                              88,988Deferred
      income taxes
                                              
                                              
                                              193,077
                                              
                                              
                                              
                                              208,221Deferred
      rent
                                              
                                              
                                              (87,520
                                              )
                                              
                                              
                                              (94,036
                                              )Gain
      on disposal of equipment
                                              
                                              
                                              (8,722
                                              )
                                              
                                              
                                              —Provision
      for bad debt
                                              
                                              
                                              932,365
                                              
                                              
                                              
                                              276,262Changes
      in assets and liabilities, net of adjustments related to other
      comprehensive loss:Accounts
      receivable
                                              
                                              
                                              829,745
                                              
                                              
                                              
                                              4,491,003Prepaid
      expenses and other current assets
                                              
                                              
                                              (201,771
                                              )
                                              
                                              
                                              (69,644
                                              )Restricted
      cash
                                              
                                              
                                              (496
                                              )
                                              
                                              
                                              (6,067
                                              )Other
      assets
                                              
                                              
                                              19,229
                                              
                                              
                                              
                                              66,803Accounts
      payable
                                              
                                              
                                              830,729
                                              
                                              
                                              
                                              1,484,818Other
      accrued expenses and accrued liabilities
                                              
                                              
                                              (1,869,085
                                              )
                                              
                                              
                                              (1,911,097
                                              )Accrued
      salaries and related taxes
                                              
                                              
                                              (996,500
                                              )
                                              
                                              
                                              672,066Accrued
      vacation
                                              
                                              
                                              298,417
                                              
                                              
                                              
                                              419,908Accrued
      interest
                                              
                                              
                                              (28,367
                                              )
                                              
                                              
                                              9,961Income
      taxes payable and receivable, net
                                              
                                              
                                              78,408
                                              
                                              
                                              
                                              (1,321,947
                                              )Other
      current liabilities
                                              
                                              
                                              (830,666
                                              )
                                              
                                              
                                              628,051Net
      cash provided by operating activities
                                              
                                              
                                              3,417,966
                                              
                                              
                                              
                                              8,568,144Cash
      flows from investing activitiesPurchase
      of property and equipment
                                              
                                              
                                              (9,074
                                              )
                                              
                                              
                                              (86,654
                                              )Proceeds
      from disposals of equipment
                                              
                                              
                                              10,000
                                              
                                              
                                              
                                              —Net
      cash provided by (used in) investing activities
                                              
                                              
                                              926
                                              
                                              
                                              
                                              (86,654
                                              )Cash
      flows from financing activitiesBorrowings
      on line of credit
                                              
                                              
                                              34,537,373
                                              
                                              
                                              
                                              29,405,026Payments
      on line of credit
                                              
                                              
                                              (36,205,470
                                              )
                                              
                                              
                                              (37,200,267
                                              )Payments
      on notes payable
                                              
                                              
                                              (1,549,547
                                              )
                                              
                                              
                                              (1,127,286
                                              )Payments
      on capital leases
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (42,374
                                              )Proceeds
      from exercise of stock options
                                              
                                              
                                              4,837
                                              
                                              
                                              
                                              —Proceeds
      from stock issued pursuant to Employee Stock Purchase Plan
                                              
                                              
                                              151,438
                                              
                                              
                                              
                                              126,428Payments
      to repurchase treasury stock
                                              
                                              
                                              (454,640
                                              )
                                              
                                              
                                              —Net
      cash used in financing activities
                                              
                                              
                                              (3,516,009
                                              )
                                              
                                              
                                              (8,838,473
                                              )Net
      decrease in cash
                                              
                                              
                                              (97,117
                                              )
                                              
                                              
                                              (356,983
                                              )Cash,
      beginning of period
                                              
                                              
                                              178,225
                                              
                                              
                                              
                                              364,822Cash,
      end of period
                                              
                                              $
                                              81,108
                                              
                                              
                                              $
                                              7,839Supplemental
      disclosures:Cash
      paid or received during the period for:Income
      taxes paid
                                              
                                              $
                                              1,061,200
                                              
                                              
                                              $
                                              2,352,483Income
      tax refunds
                                              
                                              
                                              500
                                              
                                              
                                              
                                              4,924Interest
      paid
                                              
                                              
                                              1,216,983
                                              
                                              
                                              
                                              1,373,319Interest
      received
                                              
                                              
                                              10,078
                                              
                                              
                                              
                                              46,406





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


5




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 3⁄4
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 2009 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 Statements
Reclassifications – Certain amounts on the prior period financial
statements and related notes have been reclassified to conform to the current
presentation.





NOTE 2 3⁄4
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. The Company does not expect this ASU to have a material impact on
its revenue recognition when adopted for our fiscal year beginning January 1,
2011.





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. The Company does not expect this ASU to
have a material impact on its revenue recognition when adopted for our fiscal
year beginning January 1, 2011.





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. The
Company does not expect this ASU to have a material impact on its revenue
recognition when adopted for our fiscal year beginning January 1,
2011.


6


Standards
Issued But Not Yet Effective





Other new
pronouncements issued but not yet effective until after June 30, 2010 are not
expected to have a significant effect on the Company’s consolidated financial
position or results of operations.





NOTE 3 3⁄4
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 $125,006 and $124,510 earned
thereon as of June 30, 2010 and December 31, 2009, respectively, is reflected in
restricted cash in the accompanying consolidated balance sheets. We expect the
performance under this contract to be completed in 2010, whereby the bond will
be released and the deposit refunded.





NOTE 4 3⁄4
ACCOUNTS
RECEIVABLE




Total
accounts receivable, net of allowance for doubtful accounts of $1.5 million at
June 30, 2010 and $0.7 million at December 31, 2009 consisted of the
following:




June 30,
                                      2010
                                    
                                    
                                    December 31,
                                      2009Billed
      receivables
                                    
                                    $
                                    15,549,177
                                    
                                    
                                    $
                                    19,559,013Unbilled
      receivables:Amounts
      billable
                                    
                                    
                                    13,203
                                    
                                    
                                    
                                    31,999Revenues
      recorded in excess of billings
                                    
                                    
                                    842,275
                                    
                                    
                                    
                                    80,301Revenues
      recorded in excess of milestone billings on fixed-price
      contracts
                                    
                                    
                                    5,733,744
                                    
                                    
                                    
                                    3,474,459Retainage
                                    
                                    
                                    62,258
                                    
                                    
                                    
                                    95,522Total
      accounts receivable
                                    
                                    $
                                    22,200,657
                                    
                                    
                                    $
                                    23,241,294Allowance
      for doubtful accounts
                                    
                                    
                                    (1,465,323
                                    )
                                    
                                    
                                    (743,850
                                    )Total
      accounts receivable, net
                                    
                                    $
                                    20,735,334
                                    
                                    
                                    $
                                    22,497,444





NOTE 5 3⁄4
FAIR VALUE OF FINANCIAL
INSTRUMENTS





In order
to manage interest rate fluctuation exposure on bank debt, the Company entered
into an interest rate swap agreement with Bank of America, NA (“Bank of
America”) on November 9, 2007 providing the Company an ability to eliminate
the variability of interest expense based on $35 million of floating rate debt.
The purpose of the derivative instrument is to hedge cash flows and not for
trading purposes. The Company records cash payments and receipts related to its
interest rate swap as adjustments to interest expense and as a component of
operating cash flow.





Historically
the Company accounted for its interest rate swap agreement as a cash flow hedge.
The fair value of an interest rate swap is based on the net present value of its
net projected cash flows, which are a level 3 input under ASC 820-25 (formerly
SFAS No. 157, Fair Value
Measurement). Accordingly, the fair value of the interest rate swap
agreement of $720,968 and $1,398,115 is included in other accrued expenses and
current liabilities, as of June 30, 2010 and December 31, 2009, respectively,
related to this interest rate swap. In March 2010, management concluded that the
hedge was no longer highly effective.  As a result, the Company has
booked the decrease in the swap liability of $379,386 to interest income during
the three-month period ending June 30, 2010. In addition, the remaining other
comprehensive income balance at March 31, 2010 of $257,880 is being amortized on
a straight-line basis over its remaining life at a rate of $32,235 per
month.


7





Fair value of
                                interest rate
                                swap
                                agreement
                              
                              
                              Deferred
                                Income Tax
                                Asset
                              
                              
                              Other Compre-
                                hensive Loss
                              
                              
                              Ineffectiveness
                                Interest Income
                                (Expense), Net of
                                Tax EffectBalance
      December 31, 2009
                              
                              $
                              (1,398,115
                              )
                              
                              $
                              537,435
                              
                              
                              $
                              643,524
                              
                              
                              $
                              —Decrease
      in liability in the three months ended March 31, 2010
                              
                              
                              297,762
                              
                              
                              
                              (114,460
                              )
                              
                              
                              (183,302
                              )
                              
                              
                              (202,342
                              )Balance
      March 31, 2010
                              
                              $
                              (1,100,353
                              )
                              
                              $
                              422,975
                              
                              
                              $
                              460,222
                              
                              
                              $
                              (202,342
                              )Decrease
      in liability in the three months ended June 30, 2010
                              
                              
                              379,386
                              
                              
                              
                              (198,484
                              )
                              
                              
                              (180,902
                              )
                              
                              
                              84,197Balance
      June 30, 2010
                              
                              $
                              (720,967
                              )
                              
                              $
                              224,491
                              
                              
                              $
                              279,320
                              
                              
                              $
                              (118,145
                              )





NOTE 6 3⁄4
STOCK PLANS AND STOCK-BASED
COMPENSATION





Under the
fair value recognition provisions of ASC 718, Stock Compensation (formerly SFAS
No. 123(R), Share Based
Payment (“FAS 123(R)”)), the Company recognizes stock-based compensation
expense 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 recognized during the three- and six-month periods ended
June 30, 2010 and 2009 is as follows:





Compensation Related to
                                    Options and Restricted
      Stock
                                  
                                  Three Months
                                    Ended
                                    June 30, 2010
                                  
                                  
                                  Three Months
                                    Ended
                                    June 30, 2009
                                  
                                  
                                  Six Months
                                    Ended
                                    June 30, 2010
                                  
                                  
                                  Six Months
                                    Ended
                                    June 30, 2009Incentive
      stock options
                                  
                                  $
                                  97,000
                                  
                                  
                                  $
                                  45,000
                                  
                                  
                                  $
                                  143,000
                                  
                                  
                                  $
                                  82,000Restricted
      stock
                                  
                                  
                                  158,000
                                  
                                  
                                  
                                  124,000
                                  
                                  
                                  
                                  288,000
                                  
                                  
                                  
                                  198,000Stock
      grants to Directors in lieu of cash
                                  
                                  
                                  103,000
                                  
                                  
                                  
                                  114,000
                                  
                                  
                                  
                                  103,000
                                  
                                  
                                  
                                  114,000Forfeitures
      in excess of estimate
                                  
                                  
                                  (5,000
                                  )
                                  
                                  
                                  (7,000
                                  )
                                  
                                  
                                  (19,000
                                  )
                                  
                                  
                                  (13,000
                                  )Total
      stock-based compensation expense
                                  
                                  $
                                  353,000
                                  
                                  
                                  $
                                  276,000
                                  
                                  
                                  $
                                  515,000
                                  
                                  
                                  $
                                  381,000Income
      tax benefit recognized forstock-based
      compensation expense
                                  
                                  $
                                  120,000
                                  
                                  
                                  $
                                  94,000
                                  
                                  
                                  $
                                  187,000
                                  
                                  
                                  $
                                  103,000





Stock
Options –The Company estimates the fair value of options as of the date
of grant using the Black-Scholes option pricing model. A total of 93,000 and
108,000 options were granted during the three- and six-month periods ended June
30, 2010, respectively. A total of 202,000 and 312,000 options were granted
during the three and six-month periods ended June 30, 2009,
respectively.  The fair value of options granted during the six-month
period ended June 30, 2010 has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:





Options Granted
                      January 4, 2010
                    
                    
                    Options Granted
                      April 1, 2010
                    
                    
                    Options Granted
                      May 18, 2010Expected
      dividend yield
                    
                    
                    —
                    %
                    
                    
                    —
                    %
                    
                    
                    —
                    %Expected
      volatility
                    
                    
                    70.6
                    %
                    
                    
                    70.0
                    %
                    
                    
                    67.6
                    %Risk
      free interest rate
                    
                    
                    2.5
                    %
                    
                    
                    2.5
                    %
                    
                    
                    2.5
                    %Expected
      life of options
                    
                    6.3
      years
                    
                    
                    6.3
      years
                    
                    
                    6.3
      yearsForfeiture
      rate
                    
                    
                    4.25
                    %
                    
                    
                    4.25
                    %
                    
                    
                    4.25
                    %




8





The
average fair value per option granted during the six months ended June 30, 2010
was $1.86. As of June 30, 2010, there was $516,813 of unrecognized compensation
expense related to unvested options. This cost is expected to be recognized over
a weighted-average period of 2.7 years. The table below provides stock option
information for the six months ended June 30, 2010:





Number of
                                                Shares
                                              
                                              Weighted
                                                Average
                                                Exercise
                                                Price Per
                                                Share
                                              
                                              Weighted-
                                                Average
                                                Remaining
                                                Contractual
                                                Life in
                                                Years
                                              
                                              Aggregate
                                                Intrinsic
                                                Value of
                                                In-the-
                                                Money
                                                OptionsOptions
      outstanding at  January 1, 2010
                                              
                                              638,000
                                              
                                              $
                                              2.40
                                              
                                              9.5
                                              
                                              $
                                              310,655
                                              (1)Options
      granted
                                              
                                              108,000
                                              
                                              
                                              2.89
                                              
                                              9.8
                                              
                                              
                                              3,000
                                              (2)Options
      expired
                                              
                                              —
                                              
                                              
                                              —
                                              
                                              —
                                              
                                              
                                              —Options
      exercised
                                              
                                              (2,250
                                              )
                                              
                                              2.15
                                              
                                              —
                                              
                                              
                                              —Options
      forfeited
                                              
                                              (106,875
                                              )
                                              
                                              2.39
                                              
                                              —
                                              
                                              
                                              —Options
      outstanding at June 30, 2010
                                              
                                              636,875
                                              
                                              $
                                              2.50
                                              
                                              8.3
                                              
                                              $
                                              349,025
                                              (2)Options
      exercisable atJune
      30, 2010
                                              
                                              238,000
                                              
                                              $
                                              2.86
                                              
                                              7.7
                                              
                                              $
                                              110,981
                                              (2)





(1)
Intrinsic value represents the excess of the closing stock price on the last
trading day of the preceding period, which was $2.48 as of December 31, 2009,
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 $2.65 as of June 30, 2010, over the
exercise price, multiplied by the number of options.





The
following table summarizes information about the stock options outstanding at
June 30, 2010:





Options Outstanding
                                              
                                              
                                              Options ExercisableWeighted-average
                                              
                                              
                                              Weighted-
                                              
                                              
                                              
                                              
                                              
                                              Weighted-Remaining
                                              
                                              
                                              average
                                              
                                              
                                              
                                              
                                              
                                              averageExercise
                                              
                                              Number
                                              
                                              
                                              Life in
                                              
                                              
                                              Exercise
                                              
                                              
                                              Number
                                              
                                              
                                              ExercisePrices
                                              
                                              Outstanding
                                              
                                              
                                              Years
                                              
                                              
                                              Price
                                              
                                              
                                              Exercisable
                                              
                                              
                                              Price$
                                              1.40
                                              
                                              
                                              57,500
                                              
                                              
                                              
                                              8.5
                                              
                                              
                                              $
                                              1.40
                                              
                                              
                                              
                                              20,000
                                              
                                              
                                              $
                                              1.401.50
                                              
                                              
                                              180,750
                                              
                                              
                                              
                                              8.8
                                              
                                              
                                              
                                              1.50
                                              
                                              
                                              
                                              46,125
                                              
                                              
                                              
                                              1.502.15
                                              
                                              
                                              129,875
                                              
                                              
                                              
                                              7.9
                                              
                                              
                                              
                                              2.15
                                              
                                              
                                              
                                              65,875
                                              
                                              
                                              
                                              2.152.23
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              9.2
                                              
                                              
                                              
                                              2.23
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —2.50
                                              
                                              
                                              15,000
                                              
                                              
                                              
                                              9.5
                                              
                                              
                                              
                                              2.50
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —2.90
                                              
                                              
                                              53,000
                                              
                                              
                                              
                                              9.9
                                              
                                              
                                              
                                              2.90
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —3.04
                                              
                                              
                                              40,000
                                              
                                              
                                              
                                              9.8
                                              
                                              
                                              
                                              3.04
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —3.40
                                              
                                              
                                              35,000
                                              
                                              
                                              
                                              7.5
                                              
                                              
                                              
                                              3.40
                                              
                                              
                                              
                                              25,000
                                              
                                              
                                              
                                              3.403.50
                                              
                                              
                                              30,000
                                              
                                              
                                              
                                              7.4
                                              
                                              
                                              
                                              3.50
                                              
                                              
                                              
                                              15,000
                                              
                                              
                                              
                                              3.503.67
                                              
                                              
                                              15,000
                                              
                                              
                                              
                                              7.3
                                              
                                              
                                              
                                              3.67
                                              
                                              
                                              
                                              7,500
                                              
                                              
                                              
                                              3.673.75
                                              
                                              
                                              4,500
                                              
                                              
                                              
                                              7.0
                                              
                                              
                                              
                                              3.75
                                              
                                              
                                              
                                              2,250
                                              
                                              
                                              
                                              3.754.32
                                              
                                              
                                              11,250
                                              
                                              
                                              
                                              6.7
                                              
                                              
                                              
                                              4.32
                                              
                                              
                                              
                                              11,250
                                              
                                              
                                              
                                              4.324.88
                                              
                                              
                                              60,000
                                              
                                              
                                              
                                              6.7
                                              
                                              
                                              
                                              4.88
                                              
                                              
                                              
                                              45,000
                                              
                                              
                                              
                                              4.88636,875
                                              
                                              
                                              
                                              8.3
                                              
                                              
                                              $
                                              2.50
                                              
                                              
                                              
                                              238,000
                                              
                                              
                                              $
                                              2.86




9





Restricted
Shares – Pursuant to the 2006 Omnibus Incentive Compensation Plan, during
the six-month period ended June 30, 2010, the Company granted 226,200 restricted
shares valued at an aggregate of $619,380. Such shares vest over a one- to
five-year period. The table below provides additional restricted share
information for the six months ended June 30, 2010:


No. of
                          Shares
                        
                        
                        Weighted
                          Average Grant
                          Date Fair
                          ValueUnvested at
      January 1, 2010
                        
                        
                        462,986
                        
                        
                        $
                        2.42Granted
                        
                        
                        226,200
                        
                        
                        
                        2.74Vested
                        
                        
                        (90,227
                        )
                        
                        
                        2.20Forfeited
                        
                        
                        (53,075
                        )
                        
                        
                        1.90Unvested
      at June 30, 2010
                        
                        
                        545,884
                        
                        
                        
                        2.64





NOTE 7 3⁄4
EMPLOYEE STOCK PURCHASE
PLAN





The
Company adopted the 2007 Employee Stock Purchase Plan (the “Plan”) in July 2007.
The Plan was subsequently approved by the stockholders in May 2008. The Plan
provides employees and management with an opportunity to acquire or increase
ownership interest in the Company through the purchase of shares of the
Company’s common stock at periodic intervals, namely four month offering periods
during which payroll deductions are made and shares are subsequently purchased
at a discount. The Company initially reserved an aggregate of 150,000 shares of
common stock exclusively for issuance under the Plan. Additionally, the Company
may automatically increase the shares registered under this Plan on an annual
basis pursuant to the Plan’s “evergreen” provision. This provision allows the
Company to annually increase its registered Plan shares by the lesser of the
following: (i) 100,000 shares, (ii) 1% of the Company’s outstanding shares on
January 1 of such year, or (iii) a lesser amount as determined by the Board.
Accordingly, the Board increased the number of shares authorized under the Plan
by 100,000 for fiscal years 2009 and 2010.





The Plan
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 (formerly SFAS No. 123R, Share Based Payment ).
Accordingly, there is no stock-based compensation expense associated with shares
acquired under the Plan for the six-month period ended June 30, 2010. As of June
30, 2010, participants had purchased 316,893 shares since the inception of the
Plan at a weighted average price per share of $1.86. During the six months ended
June 30, 2010, 66,920 shares were purchased at a price per share of
$2.26.





NOTE 8 3⁄4
EARNINGS (LOSS) PER
SHARE





Basic and
diluted earnings per share information is presented in accordance with ASC 260,
Earnings Per Share (formerly SFAS No. 128, Earnings Per Share). Basic
earnings per share is calculated by dividing the net income/(loss) attributable
to common stockholders by the weighted-average common shares outstanding during
the period. Diluted earnings per share is calculated by dividing net income
attributable to common stockholders by the weighted average common shares
outstanding which includes common stock equivalents. The Company’s common stock
equivalents include stock options, restricted stock and warrants. The weighted
average shares outstanding excludes unvested restricted shares.  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. Weighted average shares outstanding for the three months ended
June 30, 2009 excludes warrants and stock options to purchase approximately
4,236,698 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 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. Weighted average shares
outstanding for the six months ended June 30, 2009 excludes warrants and stock
options to purchase approximately 4,222,689 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 warrants expired in October
2009.


10





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





Three
      months
                                  Ended June
      30,
                                
                                
                                Six
      months
                                  Ended June
      30,2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Net
      income
                                
                                $
                                1,137,026
                                
                                
                                $
                                1,171,788
                                
                                
                                $
                                2,243,594
                                
                                
                                $
                                1,597,377Weighted
      average number of basic shares outstanding during the
    period
                                
                                
                                22,472,993
                                
                                
                                
                                22,660,767
                                
                                
                                
                                22,504,568
                                
                                
                                
                                22,601,811Dilutive
      effect of stock options and restricted shares after application of the
      treasury stock method
                                
                                
                                117,480
                                
                                
                                
                                —
                                
                                
                                
                                112,448
                                
                                
                                
                                —Weighted
      average number of diluted shares outstanding during the
    period
                                
                                
                                22,590,473
                                
                                
                                
                                22,660,767
                                
                                
                                
                                22,617,016
                                
                                
                                
                                22,601,811Basic
      earnings per share
                                
                                $
                                0.05
                                
                                
                                $
                                0.05
                                
                                
                                $
                                0.10
                                
                                
                                $
                                0.07Diluted
      earnings per share
                                
                                $
                                0.05
                                
                                
                                $
                                0.05
                                
                                
                                $
                                0.10
                                
                                
                                $
                                0.07




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 a
share repurchase program approved by the Company’s Board of Directors on
February 17, 2009. No stock was repurchased during the three months ended June
30, 2010.





NOTE 9 3⁄4
SEGMENT
ACCOUNTING





The
Company reviewed its services by business lines to determine if any of the
business lines are subject to risks and returns that are different from those of
other units in the Company. The Company has determined that it has one line of
business, primarily providing IT services to government and commercial
companies. As such, the Company has only one reportable segment.





NOTE 10 3⁄4
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) (formerly Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS
142”)), 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
discounted cash flow analysis and market based approaches 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
expected cash flows or changes in general market conditions may indicate
potential impairment of recorded goodwill. Management has concluded that there
were no triggering events that would indicate an impairment during the six
months ended June 30, 2010. The Company will continue to monitor the
recoverability of the carrying value of its goodwill and other long-lived
assets.


11





NOTE
11 3⁄4 INTANGIBLE
ASSETS




Intangible
assets consisted of the following:




June 30,
                              2010
                            
                            Weighted-
                              Average
                              Amortization
                              Period
                            
                            December 31,
                              2009
                            
                            Weighted-
                              Average
                              Amortization
                              PeriodCustomer
      contracts and related customer relationships
                            
                            $
                            8,235,000
                            
                            53
      mos.
                            
                            $
                            8,235,000
                            
                            53
      mos.Acquired
      technology and in-process research and development
                            
                            
                            400,487
                            
                            38
      mos.
                            
                            
                            400,487
                            
                            38
      mos.Other
                            
                            
                            711,799
                            
                            60
      mos.
                            
                            
                            711,799
                            
                            60
      mos.Intangible
      assets
                            
                            $
                            9,347,286
                            
                            52
      mos.
                            
                            $
                            9,347,286
                            
                            52
      mos.Less
      accumulated amortization
                            
                            
                            (4,240,652
                            )
                            
                            
                            
                            (3,244,488
                            )Total
      intangible assets, net
                            
                            $
                            5,106,634
                            
                            
                            
                            $
                            6,102,798




Expected
amortization expense for the remainder of the year ending December 31, 2010, and
for each of the fiscal years thereafter, is as follows:




Year
      ending December 31,
                            
                            Amount2010
                            
                            $
                            996,1652011
                            
                            
                            1,992,3282012
                            
                            
                            1,962,7622013
                            
                            
                            155,379Total
      intangible assets, net
                            
                            $
                            5,106,634




NOTE 12 3⁄4
LEGAL
PROCEEDINGS





From time
to time, we are involved in various legal matters and proceedings concerning
matters arising in the ordinary course of business. Other than possibly the
matters discussed below, we currently believe 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.





We were a
defendant in Maximus, Inc. vs. Advanced Technology Systems, Inc., previously
pending in the Connecticut Superior Court, Complex Litigation Docket. The
lawsuit regarded breach of contract and other claims related to a subcontract
between Maximus and ATSI associated with a prime contract between Maximus and
the State of Connecticut. Based on the complaint filed in the suit, Maximus
sought damages in excess of $3.5 million. The case was filed in August
2007.





In
January of 2009, the case was consolidated for discovery purposes with an action
brought by the State of Connecticut against Maximus relating to the prime
contract.  On February 23, 2010, the State of Connecticut advised
Maximus that it was accepting Maximus' settlement offer.





On April
6, 2010, a settlement agreement was signed between Maximus and the Company. In
accordance with the terms of the settlement, ATSC paid Maximus $1.5 million in
return for a full release. The Company had fully reserved the $1.5 million as a
loss contingency as of December 31, 2009.





Further,
based on the claims asserted in the lawsuit, we have made an indemnification
demand against the former principal owners of ATSI under the stock purchase
agreement governing the transaction in which the Company (then Federal Services
Acquisition Corporation) acquired ATSI.


12





Following
the indemnification demand, the former principal owners of ATSI brought an
arbitration against us with the American Arbitration Association claiming that
the former owners do not owe us any indemnification obligations for the Maximus
lawsuit or the Maximus subcontract. At our request, the arbitration was stayed
pending the outcome of the Maximus lawsuit described above. The Company notified
the American Arbitration Association of the settlement with Maximus and the stay
has been lifted. Discovery is ongoing and we are pursuing our indemnification
claim against the former principal owners of ATSI. The arbitration hearing has
been scheduled for November, 2010. The Company will seek a recovery of
approximately $2.4 million for the cost associated with the settlement and
related expenses.





NOTE 13 3⁄4
DEBT




Debt
consisted of the following:





June 30,
                                                        2010
                                                      
                                                      
                                                      December 31,
                                                        2009Bank
      Financing
                                                      
                                                      $
                                                      17,515,138
                                                      
                                                      
                                                      $
                                                      18,688,235Notes
      payable
                                                      
                                                      
                                                      458,353
                                                      
                                                      
                                                      
                                                      2,502,900Total
      debt
                                                      
                                                      $
                                                      17,973,491
                                                      
                                                      
                                                      $
                                                      21,191,135Less
      current portion
                                                      
                                                      
                                                      (458,353
                                                      )
                                                      
                                                      
                                                      (21,191,135
                                                      )Debt,
      net of current portion
                                                      
                                                      $
                                                      17,515,138
                                                      
                                                      
                                                      $
                                                      —





Notes
Payable





The notes
payable balances were reduced by $2.0 million, inclusive of the $0.5 million
favorable settlement claim with the former Number Six Software
owners.




At June
30, 2010, the aggregate maturities of our debt were as follows:





Twelve-months
      Ending June 30,2010
                                    
                                    $
                                    458,3532011
                                    
                                    
                                    —2012
                                    
                                    
                                    —2013
                                    
                                    
                                    17,515,138Total
      long-term debt
                                    
                                    $
                                    17,973,491




Bank
Financing





On June
1, 2010, ATS Corporation (the “Company”), as Borrower, entered into an amended
and restated credit agreement related to its previous 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 an increase in the credit facility from $50 million to $55 million and an
extension to the term for an additional three years or expiration in June
2013.  Borrowings bear interest at rates based on 30-day LIBOR plus
applicable margins based on the 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 facility’s unused fee 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 June 30, 2010, the Facility’s outstanding debt balance
was $17.5 million. For the six months ended June 30, 2010, the effective
interest rate on the outstanding borrowings under the Facility was 6.25%. The
maximum availability under the Facility at June 30, 2010 was $20.8
million.





The
Company was in compliance with its loan covenants agreements as of June 30,
2010.


13





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, 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, 2009 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.





Our
diverse customer base consists primarily of U.S. government agencies. For the
six-month periods ended June 30, 2010 and 2009, we generated revenue from the
following mix of customers:





Six Months
                                          Ended
                                          June 30, 2010
                                        
                                        
                                        Six Months
                                          Ended
                                          June 30, 2009Federal
      civilian agencies
                                        
                                        $
                                        28,915,000
                                        
                                        
                                        48.4
                                        %
                                        
                                        $
                                        27,579,000
                                        
                                        
                                        48.0
                                        %Defense
      and homeland security
                                        
                                        
                                        16,188,000
                                        
                                        
                                        27.1
                                        %
                                        
                                        
                                        19,367,000
                                        
                                        
                                        33.7
                                        %Commercial
                                        
                                        
                                        14,655,000
                                        
                                        
                                        24.5
                                        %
                                        
                                        
                                        10,477,000
                                        
                                        
                                        18.3
                                        %Totals
                                        
                                        $
                                        59,758,000
                                        
                                        
                                        100.0
                                        %
                                        
                                        $
                                        57,423,000
                                        
                                        
                                        100.0
                                        %




14





Our
largest clients in the six months ended June 30, 2010 were the U.S. Department
of Housing and Urban Development (“HUD”), Fannie Mae, the Pension Benefit
Guaranty Corporation, the Defense Logistics Agency and the Defense Technology
Security Administration, representing approximately $12.3 million, $7.4 million,
$6.1 million, $4.5 million, and $3.9 million in revenues, respectively,
accounting for 20.6%, 12.3%, 10.2%, 7.6%, and 6.5%, respectively, of total
revenue.





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 and fixed-price 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. The following table summarizes our historical contract mix, measured
as a percentage of total revenue, for the periods indicated:





Six Months
                                      Ended
                                      June 30, 2010
                                    
                                    
                                    Six Months
                                      Ended
                                      June 30, 2009Time
      and materials
                                    
                                    $
                                    39,511,000
                                    
                                    
                                    66
                                    %
                                    
                                    $
                                    40,074,000
                                    
                                    
                                    70
                                    %Fixed-price
                                    
                                    
                                    20,247,000
                                    
                                    
                                    34
                                    %
                                    
                                    
                                    17,349,000
                                    
                                    
                                    30
                                    %Totals
                                    
                                    $
                                    59,758,000
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    57,423,000
                                    
                                    
                                    100
                                    %





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 different types of contractual
arrangements: time-and-materials contracts, fixed-price contracts and, to a
lesser extent, cost-plus-fee contracts. 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
percentage-of-completion depending on the nature of services to be provided
under the contract. 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 did not have any cost-plus-fee contracts in 2009 or the first
half of 2010, but we may for the second half of 2010.





The
Company’s fixed-price contracts are either maintenance and support services
based or require some level of customization. Revenue is recognized ratably over
the contract period for maintenance and support contracts. 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.





The fees
under certain government contracts may be increased or decreased in accordance
with cost or performance incentive provisions that measure actual performance
against targets or other criteria. Such incentive fee awards or penalties are
included in revenue at the time the amounts can be reasonably determined.
Provisions for anticipated contract losses are recognized at the time they
become known.





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, 2010
                                
                                
                                Six Months
                                  Ended
                                  June 30, 2009Prime
      contracts
                                
                                $
                                50,242,000
                                
                                
                                84
                                %
                                
                                $
                                45,025,000
                                
                                
                                78
                                %Subcontracts
                                
                                
                                9,516,000
                                
                                
                                16
                                %
                                
                                
                                12,398,000
                                
                                
                                22
                                %Totals
                                
                                $
                                59,758,000
                                
                                
                                100
                                %
                                
                                $
                                57,423,000
                                
                                
                                100
                                %




15





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, 2010, we had 507 personnel who worked on our contracts.





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





Goodwill
represents the excess of costs 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) (formerly Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS
142”)), 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 performs an annual impairment test for goodwill. For purposes of this
testing, management concluded that there is only one reporting unit. The
Company’s testing approach utilizes a discounted cash flow analysis and market
based approaches 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
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.  The annual impairment test is based on several
factors requiring judgment. Principally, a significant decrease in expected cash
flows or changes in general market conditions may indicate potential impairment
of recorded goodwill. We also evaluate these assets for impairment when events
occur that suggest a possible impairment. Such events could include, but are not
limited to, the loss of a significant client or contract, decreases in federal
government appropriations or funding for specific programs or contracts, or
other similar events. Management has concluded that there were no triggering
events that would indicate an impairment during the six months ended June 30,
2010. The Company will continue to monitor the recoverability of the carrying
value of its goodwill and other long-lived assets.





Contract
Backlog





We define
backlog as the future revenue we expect to receive from our existing contracts
and other engagements. We generally include in backlog the estimated revenue
represented by contract options that have been priced, though not exercised. We
do not include any estimate of revenue relating to potential future delivery
orders that may be awarded under our General Services Administration Multiple
Award Schedule contracts, other Indefinite Delivery/Indefinite Quantity (“IDIQ”)
contracts, or other contract vehicles that are also held by a large number of
firms, an order under which potential further delivery orders or task orders may
be issued by any of a large number of different agencies and are likely to be
subject to a competitive bidding process.





The
following table summarizes our contract backlog at June 30, 2010 and December
31, 2009, respectively (in thousands):





June 30,
                      2010
                    
                    
                    December 31,
                      2009Backlog:Funded
                    
                    $
                    54,100
                    
                    
                    $
                    61,000Unfunded
                    
                    
                    148,000
                    
                    
                    
                    105,800Total
      backlog
                    
                    $
                    202,100
                    
                    
                    $
                    166,800





Our
backlog includes orders under contracts that in some cases extend for several
years, with the latest expiring in 2017. The three most significant awards
during the six-month period ended June 30, 2010 were successful re-competitions
with a Department of Defense agency valued at $27.5 million, the Nuclear
Regulatory Commission (“NRC”) valued at $21.4 million and HUD valued at $13.7
million.





16





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 won. Our estimate of the portion of the backlog as
of June 30, 2010 from which we expect to recognize revenue during fiscal year
2010 is likely to change because the receipt and timing of any revenue is
subject to various contingencies, many of which are beyond our
control.




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.





For the Three
                  
                  
                  For the Three
                  
                  
                  For the Six
                  
                  
                  For the SixMonths Ended
                  
                  
                  Months Ended
                  
                  
                  Months Ended
                  
                  
                  Months EndedJune 30, 2010
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2010
                  
                  
                  June 30, 2009Net
      income
                  
                  $
                  1,137,026
                  
                  
                  $
                  1,171,788
                  
                  
                  $
                  2,243,594
                  
                  
                  $
                  1,597,377Adjustments:Depreciation
                  
                  
                  138,251
                  
                  
                  
                  217,314
                  
                  
                  
                  281,006
                  
                  
                  
                  451,138Amortization
      of intangibles
                  
                  
                  498,081
                  
                  
                  
                  550,302
                  
                  
                  
                  996,163
                  
                  
                  
                  1,100,605Interest,
      net
                  
                  
                  356,887
                  
                  
                  
                  792,604
                  
                  
                  
                  1,178,042
                  
                  
                  
                  1,566,684Taxes
                  
                  
                  707,675
                  
                  
                  
                  756,253
                  
                  
                  
                  1,332,265
                  
                  
                  
                  1,240,719EBITDA
                  
                  $
                  2,837,920
                  
                  
                  $
                  3,488,261
                  
                  
                  $
                  6,031,070
                  
                  
                  $
                  5,956,523





During
the six months ended June 30, 2010, we recorded other income of approximately
$0.5 million associated with the adjustment of seller notes from a previous
acquisition. Adjusting EBITDA for this one time benefit would result in an
adjusted EBITDA of $5,536,070.





Recent
Events





None.


17




Results
of Operations (unaudited)





Results
of operations for the three- and six-month periods ended June 30, 2010 compared
with the three- and six-month periods ended June 30, 2009 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 EndedJune
      30,
                
                
                
                
                
                June
      30,
                
                
                
                
                
                June
      30,
                
                
                
                
                
                June
      30,2010
                
                
                
                
                
                2009
                
                
                
                
                
                2010
                
                
                
                
                
                2009Revenue
                
                $
                29,246,328
                
                
                
                
                
                $
                30,266,809
                
                
                
                
                
                $
                59,758,311
                
                
                
                
                
                $
                57,423,323Operating
      costs and expensesDirect
      costs
                
                
                20,503,390
                
                
                
                70.1
                %
                
                
                20,451,932
                
                
                
                67.6
                %
                
                
                41,919,002
                
                
                
                70.1
                %
                
                
                38,647,669
                
                
                
                67.3
                %Selling,
      general and administrative expenses
                
                
                5,908,910
                
                
                
                20.2
                %
                
                
                6,326,616
                
                
                
                20.9
                %
                
                
                12,312,131
                
                
                
                20.6
                %
                
                
                12,819,131
                
                
                
                22.3
                %Depreciation
      and amortization
                
                
                636,332
                
                
                
                2.2
                %
                
                
                767,616
                
                
                
                2.5
                %
                
                
                1,277,169
                
                
                
                2.1
                %
                
                
                1,551,743
                
                
                
                2.7
                %Total
      operating costs and expenses
                
                
                27,048,632
                
                
                
                92.5
                %
                
                
                27,546,164
                
                
                
                91.0
                %
                
                
                55,508,302
                
                
                
                92.9
                %
                
                
                53,018,543
                
                
                
                92.3
                %Operating
      income
                
                
                2,197,696
                
                
                
                7.5
                %
                
                
                2,720,645
                
                
                
                9.0
                %
                
                
                4,250,009
                
                
                
                7.1
                %
                
                
                4,404,780
                
                
                
                7.7
                %Other
      (expense) incomeInterest,
      net
                
                
                (356,887
                )
                
                
                (1.2
                )%
                
                
                (792,604
                )
                
                
                (2.6
                )%
                
                
                (1,178,042
                )
                
                
                (2.0
                )%
                
                
                (1,566,684
                )
                
                
                (2.7
                )%Other
      income
                
                
                3,892
                
                
                
                0.0
                %
                
                
                —
                
                
                
                0.0
                %
                
                
                503,892
                
                
                
                0.8
                %
                
                
                —
                
                
                
                0.0
                %Income
      before income taxes
                
                
                1,844,701
                
                
                
                6.3
                %
                
                
                1,928,041
                
                
                
                6.4
                %
                
                
                3,575,859
                
                
                
                6.0
                %
                
                
                2,838,096
                
                
                
                4.9
                %Income
      tax expense
                
                
                707,675
                
                
                
                2.4
                %
                
                
                756,253
                
                
                
                2.5
                %
                
                
                1,332,265
                
                
                
                2.2
                %
                
                
                1,240,719
                
                
                
                2.2
                %Net
      Income
                
                $
                1,137,026
                
                
                
                3.9
                %
                
                $
                1,171,788
                
                
                
                3.9
                %
                
                $
                2,243,594
                
                
                
                3.8
                %
                
                $
                1,597,377
                
                
                
                2.8
                %Weighted
      average number of shares outstanding—basic
                
                
                22,472,993
                
                
                
                
                
                
                
                22,660,767
                
                
                
                
                
                
                
                22,504,568
                
                
                
                
                
                
                
                22,601,811—diluted
                
                
                22,590,473
                
                
                
                
                
                
                
                22,660,767
                
                
                
                
                
                
                
                22,617,016
                
                
                
                
                
                
                
                22,601,811Net
      income per share—basic
                
                $
                0.05
                
                
                
                
                
                
                $
                0.05
                
                
                
                
                
                
                $
                0.10
                
                
                
                
                
                
                $
                0.07—diluted
                
                $
                0.05
                
                
                
                
                
                
                $
                0.05
                
                
                
                
                
                
                $
                0.10
                
                
                
                
                
                
                $
                0.07




18


Comparison
of the three months ended June 30, 2010 to the three months ended June 30,
2009.





Revenue –
Revenue decreased by $1.0 million, or 3.4%, to $29.2 million for the three
months ended June 30, 2010. This was primarily due to reduced equipment
purchases and the effect of awards on recompeted contracts that transitioned
from time-and-materials to fixed-price contracts.





Direct costs
– Direct costs were 70.1% and 67.6% of revenue for the three-month
periods ended June 30, 2010 and 2009, respectively, an increase of 2.5%. 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 following chart
shows the areas and programs with significant cost variances for the three-month
periods:





Three Months
                                                Ended
                                                June 30, 2010
                                              
                                              
                                              Three Months
                                                Ended
                                                June 30, 2009
                                              
                                              
                                              Increase (Decrease)(in
      thousands)
                                              
                                              
                                              %Direct
      labor and fringe benefits
                                              
                                              $
                                              13,186
                                              
                                              
                                              $
                                              12,577
                                              
                                              
                                              $
                                              609
                                              
                                              
                                              
                                              4.8
                                              %Subcontractors
                                              
                                              
                                              6,450
                                              
                                              
                                              
                                              5,999
                                              
                                              
                                              
                                              451
                                              
                                              
                                              
                                              7.5
                                              %Other
      direct costs
                                              
                                              
                                              867
                                              
                                              
                                              
                                              1,876
                                              
                                              
                                              
                                              (1,009
                                              )
                                              
                                              
                                              (53.8
                                              )%Totals
                                              
                                              $
                                              20,503
                                              
                                              
                                              $
                                              20,452
                                              
                                              
                                              $
                                              51
                                              
                                              
                                              
                                              0.2
                                              %





The
increase in direct labor costs is associated primarily with the increased level
of effort at Fannie Mae and Pension Benefit Guaranty Corporation (“PBGC”) offset
by reductions on time-and-materials contracts that have transitioned to
fixed-price efforts, as well as reductions in other direct costs related to
reduced computer equipment purchase requirements on our government
contracts.





Gross
margins were 29.9% and 32.4% for the three months ended June 30, 2010 and 2009,
respectively.  This decrease was a result of increased subcontract
costs related to Fannie Mae, which carry a lower margin, as well as the impact
of new awards that were competitively bid with lower margins than existing
contracts.





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.  SG&A
expenses decreased $0.4 million to $5.9 million, or 20.2% of revenue, for the
quarter ended June 30, 2010 compared to $6.3 million, or 20.9% of revenue, for
the quarter ended June 30, 2009. The improvement in SG&A expense is
attributable to controlling various indirect costs, partially offset by an
increase in bad debt allowance.





Depreciation and
amortization – Depreciation and amortization expense decreased $0.2
million to $0.6 million from $0.8 million primarily due to a reduction of
amortization as acquired intangible assets reach the end of their amortization
periods.





Interest, net
– The net interest expense was $0.4 million and $0.8 million for the
three-month periods ended June 30, 2010 and June 30, 2009, respectively. This
decrease was attributable to the decline in the interest rate related to the
credit facility, as well as a decrease in our outstanding debt balance and also
decreases in the acquisition-related term notes. Our average outstanding debt
balance for the quarter ended June 30, 2010 was $18.0 million compared to $26.7
million for the quarter ended June 30, 2009.





Income
taxes – The
Company reported an income tax expense of $0.7 million and $0.8 million for the
three-month periods ended June 30, 2010 and 2009, respectively. The effective
tax rates were 38.4% and 39.2% for the three-month periods ended June 30, 2010
and 2009, respectively. The effective rates for the three-month periods ended
June 30, 2010 and June 30, 2009 were affected by variances in book-tax
differences.


19




Comparison
of the six months ended June 30, 2010 to the six months ended June 30,
2009.





Revenue –
Revenue increased by $2.3 million, or 4.1%, to $59.8 million for the six months
ended June 30, 2010. This was the result of increased levels of effort on
commercial and civilian contracts and increases due to estimate-to-complete
adjustments to reflect improved performance on civilian contracts, partially
offset by lower levels of effort on Department of Defense
contracts.





Direct costs
– Direct costs were 70.2% and 67.3% of revenue for the six-month periods
ended June 30, 2010 and 2009 respectively, an increase of 2.9%. Direct costs are
comprised of direct labor, fringe on this labor, subcontract labor costs and
material and other direct costs. Material and other direct costs are incurred in
response to specific client tasks and may vary from period to period. The
following chart shows the areas and programs with significant cost variances for
the six-month periods:





Six Months
                                          Ended
                                          June 30, 2010
                                        
                                        
                                        Six Months
                                          Ended
                                          June 30, 2009
                                        
                                        
                                        Increase(in thousands)
                                        
                                        %Direct
      labor and fringe benefits
                                        
                                        $
                                        27,476
                                        
                                        
                                        $
                                        24,856
                                        
                                        
                                        $
                                        2,620
                                        
                                        
                                        10.5
                                        %Subcontractors
                                        
                                        
                                        11,929
                                        
                                        
                                        
                                        11,401
                                        
                                        
                                        
                                        528
                                        
                                        
                                        4.6
                                        %Other
      direct costs
                                        
                                        
                                        2,514
                                        
                                        
                                        
                                        2,391
                                        
                                        
                                        
                                        123
                                        
                                        
                                        5.1
                                        %Totals
                                        
                                        $
                                        41,919
                                        
                                        
                                        $
                                        38,648
                                        
                                        
                                        $
                                        3,271
                                        
                                        
                                        8.5
                                        %





Direct
labor and fringe benefits increases were primarily due to increased levels of
effort on time-and-materials contracts with Fannie Mae and PBGC.





Gross
margins were 29.8% and 32.7% for the six months ended June 30, 2010 and 2009,
respectively.  This decrease was a result of increased subcontract
costs related to Fannie Mae, which carry a lower margin, as well as the impact
of new awards that were competitively bid with lower margins than existing
contracts.





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.  SG&A
expenses decreased $0.5 million to $12.3 million, or 20.6% of revenues, for the
six months ended June 30, 2010 compared to $12.8 million, or 22.3% of revenues,
for the six months ended June 30, 2009.  The improvement in the
SG&A expense is attributable to controlling various indirect costs, as well
as significant savings on legal fees due to the resolution of a portion of the
arbitration with the previous owners of ATSI, partially offset by an increase in
bad debt allowance.





Depreciation and
amortization – Depreciation and amortization expense decreased $0.3
million to $1.3 million from $1.6 million,  primarily due to a
reduction of amortization as acquired intangible assets reach the end of their
amortization periods.





Interest, net
– The net interest expense was $1.2 million and $1.6 million for the
six-month periods ended June 30, 2010 and June 30, 2009, respectively. This
decrease was attributable to the decline in the interest rate related to the
credit facility, as well as a decrease in our average outstanding debt balance
and decreases in the acquisition-related term notes. Our average outstanding
debt balance for the six months ended June 30, 2010 was $18.2 million compared
to $28.8 million for the six months ended June 30, 2009.





Other income
– Other income was $0.5 million for the six-month period ended June 30,
2010, due primarily to the resolution of an acquisition related indemnification
claim.





Income
taxes – The
Company reported an income tax expense of $1.3 million and $1.2 million for the
six-month periods ended June 30, 2010 and 2009, respectively. The effective tax
rates were 37.3% and 43.7% for the six-month periods ended June 30, 2010 and
2009, respectively. The effective rates for the six-month periods ended June 30,
2010 and June 30, 2009 were affected by variances in book-tax
differences.


20




Financial
Condition, Liquidity and Capital Resources





Financial
Condition – Total
assets decreased by $3.6 million to $89.7 million as of June 30, 2010 from $93.3
million as of December 31, 2009. This decrease was primarily driven by a
$1.8 million decrease in our accounts receivable related to improved collection
efforts, which reduced our days-sales-outstanding from 66.3 to 64.5 days, and
$1.0 million related to the amortization of intangible assets.





Our total
liabilities decreased $6.5 million to $36.9 million as of June 30, 2010 from
$43.5 million as of December 31, 2009. Significant changes within total
liabilities included a decrease to long-term debt of $3.2 million to $18.0
million from $21.2 million due to favorable cash collections, a decrease of $2.5
million in accrued expenses to $3.8 million at June 30, 2010 compared to $6.4
million at December 31, 2009 primarily due to the payment of $1.5 million into a
settlement escrow related to the Maximus litigation (See Note 12 - Legal
Proceedings), and a $0.8 million decrease in deferred revenue to $0.6
million.





Liquidity and
Capital Resources – Our
primary liquidity needs are to finance the costs of operations, acquire capital
assets and to make selective strategic acquisitions. We expect to meet our
short-term requirements through funds generated from operations and from our $55
million credit facility with Bank of America. As of June 30, 2010, we had an
outstanding balance of $17.5 million on our credit facility. As noted above,
there has been a significant decrease in this debt due to positive cash flow
from operations. The balance is expected to continue to decrease for the
remainder of 2010. The Facility is considered adequate to meet our operations
liquidity and capital requirements. The maximum availability under the Facility
at June 30, 2010 was $20.8 million.





Net cash
generated by operating activities was $3.4 million for the six months ended June
30, 2010, compared to $8.6 million for the same period in 2009. Cash generated
by operating activities was primarily driven by ongoing operations, specifically
collecting receivables, which were utilized to pay down the balance on our line
of credit facility as discussed above, offset by the payment of the lawsuit
settlement of $1.5 million. Depreciation and amortization were also lower due to
the effect of assets reaching the end of their depreciable and amortizable
lives.





Net cash
provided by investing activities was $0.0 million for the six months ended June
30, 2010, compared to $0.1 million used in the same period in 2009, primarily as
a result of reduced capital expenditures.





Net cash
used in financing activities was $3.5 million for the six months ended June 30,
2010, compared to cash used in financing activities of $8.8 million in the same
period in 2009. The cash was primarily used to pay down the credit facility and
the notes payable from acquisitions in 2007.





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





ATSC has
a credit facility which is a three-year, secured facility that permits
continuously renewable borrowings of up to $55.0 million, subject to the
borrowing base. The expiration date of the Agreement is June 1, 2013. The
interest rate is based on LIBOR plus the applicable rate ranging from 200 to 300
basis points depending on the Company’s consolidated leverage ratio. The Company
pays a fee in the amount of .25% to .35% on the unused portion of the facility,
based on its consolidated leverage ratio, as defined in the Agreement. Any
outstanding balances under the facility are due on the expiration date. The
amended Agreement also allows the company to repurchase its common stock in an
amount not to exceed $3 million in any twelve-month period. Total consideration
for acquisitions in any twelve month period greater than $20 million requires
lender approval. At June 30, 2010, the Company was in compliance with its loan
covenants.





Off-Balance
Sheet Arrangements





For the
six months ended June 30, 2010, we did not have any off-balance sheet
arrangements.


21





Contractual
Obligations





The
following table summarizes our contractual obligations as of June 30, 2010 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
                  
                  $
                  458
                  
                  
                  $
                  17,515
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  17,973Operating
      Leases
                  
                  
                  1,819
                  
                  
                  
                  3,494
                  
                  
                  
                  3,667
                  
                  
                  
                  5,681
                  
                  
                  
                  14,661Total
                  
                  $
                  2,277
                  
                  
                  $
                  21,009
                  
                  
                  $
                  3,667
                  
                  
                  $
                  7,681
                  
                  
                  $
                  32,634





Standards
Issued But Not Yet Effective





New
pronouncements issued but not yet effective until after June 30, 2010 are not
expected to have a significant effect on the Company’s consolidated financial
position or results of operations.







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 a portion of our borrowings under our credit
facility. As of June 30, 2010, we had an outstanding balance of $17.5 million
under our variable interest rate line of credit. In November 2007, we
hedged the interest rate risk on such debt by executing an interest rate swap as
discussed in Note 5 of the notes to consolidated financial
statements.





Item 4. Controls and
Procedures.





As of
June 30, 2010, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, we have 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 Chief Executive Officer and our Chief Financial Officer have concluded that
our disclosure controls and procedures as defined by Rule 13a-15(e) of the
Exchange Act were effective as of June 30, 2010. 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 Chief Executive Officer 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, 2010, 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.


22





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 2009 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 approval of a plan under Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended, 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 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 10b5-1 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
                  
                  Total Number
                    of Shares
                    Purchased
                  
                  
                  Average Price
                    Paid per Share
                  
                  
                  Total Number of Shares
                    Purchased as Part of
                    Publicly Announced
                    Plans or Programs
                  
                  
                  Maximum Dollar
                    Value of Shares that
                    May Yet Be Purchased
                    Under the PlanApril
      1-30, 2010
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  555,138
                  
                  
                  $
                  1,608,249May
      1-31, 2010
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  555,138
                  
                  
                  
                  1,608,249June
      1-30, 2010
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  555,138
                  
                  
                  
                  1,608,249Total
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  555,138
                  
                  
                  $
                  1,608,249





No stock
was repurchased during the three months ended June 30, 2010.  The
Company repurchased approximately 152,000 shares of common stock for
approximately $455,000 during the six months ended June 30, 2010 as part of the
repurchase program. The Company currently has approximately 22.5 million shares
outstanding.





Recent
Sales of Unregistered Securities





None.





Item 3.  Defaults upon Senior
Securities.





Not
applicable.





Item 4. 
Reserved.







Item 5.  Other
Information.





None.


23




Item 6. 
Exhibits.





Exhibit
                Number
              
              Description31.1
              
              Certification
      of Principal Executive Officer pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
      as amended31.2
              
              Certification
      of Principal Financial Officer pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
      as amended32.1
              
              Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              
              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
      CorporationBy:
            /s/ Edward H. BersoffChairman
      of the Board, President andChief
      Executive OfficerBy:
            /s/ Pamela A. LittleExecutive
      Vice President and Chief Financial OfficerDate:
      August 3, 2010




25