**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

 

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**(Mark one)**

| **x******  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                    |
| ** ** | **FOR THE  QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007.**                                       |
| ** ** | ** **                                                                                    |
| **OR**     | ** **                                                                                    |
| **o******  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSION FILE NUMBER: 0-51552**

 

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**ATS CORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

**7915 Jones Branch Drive**

**McLean, Virginia 22102**

(Addressof principal executive offices)

 

**(703) 506-0088**

(Registrant’stelephone number, including area code)

 

**Not Applicable**

(Formername, former address and former fiscal year, if changed since last report)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months and (2) has been subject to such filing requirements for the past 90days.    Yes  x     No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer  o     AcceleratedFiler  x     Non-acceleratedFiler  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o    No  x

Thenumber of shares of the issuer’s common stock, $0.0001 par value, outstandingas of November 2, 2007 was 18,294,943.

 

 

 

 

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**TABLE OF CONTENTS**
| **PART  I — FINANCIAL INFORMATION** | ** **                                                                                                                                                                                          |
|------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                                                                                |   |
| Item 1.                                  | Consolidated Financial  Statements                                                                                                                                                                  |   |
|                                     |                                                                                                                                                                                                |   |
|                                     | Consolidated  Balance Sheets as of September 30, 2007 (unaudited) and as of December 31,  2006                                                                                                      |   |
|                                     |                                                                                                                                                                                                |   |
|                                     | Consolidated Statements of Operations (unaudited) for  the three and nine months ended September 30, 2007 and 2006 (successor) and  for the three and nine months ended July 31, 2006 (predecessor) |   |
|                                     |                                                                                                                                                                                                |   |
|                                     | Consolidated Statements of Cash Flows (unaudited) for  the nine months ended September 30, 2007 and 2006 (successor) and for the  nine months ended July 31, 2006 (predecessor)                     |   |
|                                     |                                                                                                                                                                                                |   |
|                                     | Notes  to Condensed Unaudited Consolidated Financial Statements                                                                                                                                     |   |
|                                     |                                                                                                                                                                                                |   |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                         |   |
|                                     |                                                                                                                                                                                                |   |
| Item 3.                             | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                                         |   |
|                                     |                                                                                                                                                                                                |   |
| Item 4.                             | Controls and  Procedures                                                                                                                                                                            |   |
|                                     |                                                                                                                                                                                                |   |
| **PART  II — OTHER INFORMATION**    | ** **                                                                                                                                                                                          |
|                                     |                                                                                                                                                                                                |   |
| Item 1.                             | Legal Proceedings                                                                                                                                                                                   |   |
|                                     |                                                                                                                                                                                                |   |
| Item  1A.                                | Risk  Factors                                                                                                                                                                                       |   |
|                                     |                                                                                                                                                                                                |   |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                        |   |
|                                     |                                                                                                                                                                                                |   |
| Item 3.                             | Defaults Upon  Senior Securities                                                                                                                                                                    |   |
|                                     |                                                                                                                                                                                                |   |
| Item 4.                                  | Submission of  Matters to a Vote of Security Holders                                                                                                                                                |   |
|                                     |                                                                                                                                                                                                |   |
| Item 5.                             | Other Information                                                                                                                                                                                   |   |
|                                     |                                                                                                                                                                                                |   |
| Item 6.                             | Exhibits                                                                                                                                                                                            |   |
|                                     |                                                                                                                                                                                                |   |
| **SIGNATURES**                           |                                                                                                                                                                                                |

 

 

 

ii

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**PART I:FINANCIAL INFORMATION**

** **

**ITEM 1:FINANCIAL STATEMENTS**

** **

**ATS Corporation**

Consolidated BalanceSheets

 

| ** **                                       | ** **   | **September 30,** | ** **      | **December 31,** | ** **   |
|--------------------------------------------------|--------------|-------------------|-----------------|------------------|--------------|
| ** **                                       | ** **   | **2007**          | ** **      | **2006**         | ** **   |
|                                             | ** **   | **(unaudited)**   | ** **      | ** **       | ** **   |
| ***Assets***                                     | *** *** | *** ***      | *** ***    | *** ***     | *** *** |
|                                             |         |              |            |             |         |
| **Current Assets**                               | ** **   | ** **        | ** **      | ** **       | ** **   |
| Cash                                             |         | $                 | 239,908         |             | $            | 213,395 |   |
| Accounts receivable                              |         | 29,567,802        |            | —           |         |
| Prepaid expenses and other current assets        |         | 1,019,782         |            | 136,006          |         |
| Income tax receivable                            |         | 2,721,771         |            | —           |         |
| Deferred income taxes, current                   |         | 1,115,021         |            | —           |         |
|                                             |         |              |            |             |         |
| **Total Current Assets**                         |         | 34,664,284        |            | 349,401          |         |
|                                             |         |              |            |             |         |
| **Short-term investments held in Trust account** |         | —            |            | 121,024,475      |         |
|                                             |         |              |            |             |         |
| **Restricted Cash**                              |         | 1,262,530         |            | —           |         |
|                                             |         |              |            |             |         |
| **Cash and cash equivalents held in trust fund** |         | —            |            | 1,332            |         |
|                                             |         |              |            |             |         |
| **Property and equipment, net**                  |         | 1,503,049         |            | —           |         |
|                                             |         |              |            |             |         |
| **Goodwill**                                     |         | 77,222,617        |            | —           |         |
| ** **                                       | ** **   | ** **        | ** **      | ** **       | ** **   |
| **Intangible assets, net**                       |         | 17,161,816        |            | —           |         |
| ** **                                       | ** **   | ** **        | ** **      | ** **       | ** **   |
| **Deferred acquisition costs**                   |         | —            |            | 1,361,215        |         |
| ** **                                       | ** **   | ** **        | ** **      | ** **       | ** **   |
| **Other assets**                                 |         | 431,730           |            | —           |         |
| ** **                                       | ** **   | ** **        | ** **      | ** **       | ** **   |
| **Deferred income tax benefit**                  |         | —            |            | 502,744          |         |
|                                             |         |              |            |             |         |
| **Total Assets**                                 | ** **   | **$**             | **132,246,026** | ** **       | **$**        | **123,239,167** | ** ** |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**ATS Corporation**

Consolidated Balance Sheets—continued

 

| ** **                                                                                                                                                                                                                                       | ** **   | **September 30,  2007** | ** **      | **December 31,  2006** | ** **   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------|-----------------|------------------------|--------------|
| ** **                                                                                                                                                                                                                                       | ** **   | **(unaudited)**         | ** **      | ** **             | ** **   |
| ***Liabilities and Stockholders’ Equity***                                                                                                                                                                                                  | *** *** | *** ***            | *** ***    | ** **             | *** *** |
| Line of credit                                                                                                                                                                                                                                   |         | $                       | —          |                   | $            | — |   |
| Notes payable and capital leases—current portion                                                                                                                                                                                            |         | 918,298                 |            | —                 |         |
| Accounts payable and accrued expenses                                                                                                                                                                                                            |         | 8,575,221               |            | 942,146                |         |
| Accrued salaries and related taxes                                                                                                                                                                                                               |         | 4,892,712               |            | —                 |         |
| Accrued leave benefits                                                                                                                                                                                                                           |         | 2,680,450               |            | —                 |         |
| Income taxes payable                                                                                                                                                                                                                             |         | 230,865                 |            | 310,606                |         |
| Warrant liabilities                                                                                                                                                                                                                              |         | —                  |            | 13,860,000             |         |
| Other current liabilities                                                                                                                                                                                                                        |         | 509,873                 |            | —                 |         |
| Deferred income taxes—current portion                                                                                                                                                                                                       |         | —                  |            | 40,489                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Total Current Liabilities**                                                                                                                                                                                                                    |         | 17,807,419              |            | 15,153,241             |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Notes Payable**                                                                                                                                                                                                                                |         | 14,996,253              |            | —                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Capital leases**—**net of current portion**                                                                                                                                                                                               |         | 107,689                 |            | —                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Other long term liabilities**                                                                                                                                                                                                                  |         | 328,573                 |            | —                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Deferred income taxes**—**net of current portion**                                                                                                                                                                                        |         | 5,605,770               |            | —                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Total Liabilities**                                                                                                                                                                                                                            |         | 38,845,704              |            | 15,153,241             |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| Common stock, subject to possible redemption 4,197,900 shares                                                                                                                                                                                    |         | —                  |            | 23,424,282             |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| Interest income attributable to common stock subject to possible redemptions  (net of taxes of $0 and $561,204, respectively)                                                                                                                    |         | —                  |            | 702,752                |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| Total common stock subject to possible redemption                                                                                                                                                                                                |         | —                  |            | 24,127,034             |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Commitments and Contingencies**                                                                                                                                                                                                                |         | —                  |            | —                 |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Stockholders’ Equity**                                                                                                                                                                                                                    | ** **   | ** **              | ** **      | ** **             | ** **   |
| Common stock—$.0001 par  value; 100,000,000 shares authorized; 26,626,079 and 26,250,000 issued;  18,283,324 and 26,250,000 outstanding, respectively (which includes 0 and  4,197,900 shares subject to possible redemption, respectively) |         | 2,662                   |            | 2,625                  |         |
| Additional paid in capital                                                                                                                                                                                                                       |         | 126,772,677             |            | 81,467,698             |         |
| Treasury stock, at cost 8,342,755 shares                                                                                                                                                                                                         |         | (30,272,007             | )               | —                 |         |
| Retained earnings (deficit)                                                                                                                                                                                                                      |         | (3,103,010              | )               | 2,488,569              |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Total Stockholders’ Equity**                                                                                                                                                                                                              |         | 93,400,322              |            | 83,958,892             |         |
|                                                                                                                                                                                                                                             |         |                    |            |                   |         |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                              | ** **   | **$**                   | **132,246,026** | ** **             | **$**        | **123,239,167** | ** ** |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

2

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**ATS Corporation**

Consolidated Statementsof Operations(unaudited)

 
| ** **                                                                                         | ** ** | **Successor**                             | ** **  | **Successor**                             | ** **     | ** **                                | **Predecessor** | ** **                                |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|-------------------------------------------|----------------|-------------------------------------------|-----------------|-------------------------------------------|
| ** **                                                                                         | ** ** | **ATS Corp  3 months  ending  9/30/2007** | ** **  | **ATS Corp  3 months  ending  9/30/2006** | ** **     | **ATS Corp  9 months  ending  9/30/2007** | ** **      | **ATS Corp  9 months  ending  9/30/2006** | ** ** | ** ** | **ATS I  3 months  ending  7/31/2006** | ** ** | **ATS I  9 months  ending  7/31/2006** | ** ** |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Revenue**                                                                                        |       | $                                         | 25,646,747  |                                      | —         |                                      | $               | 75,372,148                                |   | — |   |   | $ | 30,048,881 |   | $ | 86,231,975 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Operating  Costs and Expenses**                                                                  | ** ** | ** **                                | ** **  | ** **                                | ** **     | ** **                                | ** **      | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of Services                                                                                   |       | 17,753,224                                |        | —                                    |           | 52,922,818                                |            | —                                    |   |   | 18,907,450 |   | 54,138,280 |   |
| Selling, general  and administrative                                                               |       | 5,850,756                                 |        | 102,400                                   |           | 18,006,631                                |            | 996,021                                   |   |   | 9,430,722 |   | 27,807,147 |   |
| Depreciation and  Amortization                                                                     |       | 186,052                                   |        | —                                    |           | 465,608                                   |            | —                                    |   |   | 202,314 |   | 622,314 |   |
| Amortization of  Intangible Assets                                                                 |       | 1,146,205                                 |        | —                                    |           | 2,870,689                                 |            | —                                    |   |   | 5,035 |   | 34,202 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Total  operating costs and expenses**                                                            |       | 24,936,237                                |        | 102,400                                   |           | 74,265,746                                |            | 996,021                                   |   |   | 28,545,521 |   | 82,601,943 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Operating  Income**                                                                              |       | 710,510                                   |        | (102,400                                  | )              | 1,106,402                                 |            | (996,021                                  | ) |   | 1,503,360 |   | 3,630,032 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Other  Income (Expense)**                                                                        | ** ** | ** **                                | ** **  | ** **                                | ** **     | ** **                                | ** **      | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income  (expense), net                                                                    |       | (124,571                                  | )           | 1,448,763                                 |           | 26,417                                    |            | 4,032,676                                 |   |   | (92,504 | ) | (277,396 | ) |
| Gain (Loss) on  warrant liabilities                                                                |       | —                                    |        | 4,200,000                                 |           | (6,930,000                                | )               | 5,040,000                                 |   |   | — |   |   |   |
| Other income                                                                                       |       | 93                                        |        | —                                    |           | 9,847                                     |            | —                                    |   |   | 31,223 |   | 47,118 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Income  (Loss) Before Income Taxes**                                                             |       | 586,032                                   |        | 5,546,363                                 |           | (5,787,334                                | )               | 8,076,655                                 |   |   | 1,442,079 |   | 3,399,754 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Income  Tax (Benefit) Expense**                                                                  | ** ** | 232,827                                   | ** **  | 607,947                                   | ** **     | 506,999                                   | ** **      | 1,372,688                                 | ** ** | ** ** | 750,691 | ** ** | 1,564,180 | ** ** |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Income  (Loss) from Continuing Operations**                                                      |       | 353,205                                   |        | 4,938,416                                 |           | (6,294,333                                | )               | 6,703,967                                 |   |   | 691,388 |   | 1,835,574 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Loss  from Discontinued Operations**                                                             |       | —                                    |        | —                                    |           | —                                    |            | —                                    |   |   | (623,773 | ) | (1,194,681 | ) |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| **Net  Income (Loss)**                                                                             | ** ** | **$**                                     | **353,205** | ** **                                | **$**          | **4,938,416**                             | ** **      | **$**                                     | **(6,294,333** | **)** | **$** | **6,703,967** | ** ** | ** ** | **$** | **67,615** | ** ** | **$** | **640,893** | ** ** |
| ** **                                                                                         | ** ** | ** **                                | ** **  | ** **                                | ** **     | ** **                                | ** **      | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Calculation  of Net Income for Diluted Earnings**                                                | ** ** | ** **                                | ** **  | ** **                                | ** **     | ** **                                | ** **      | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income less  gain on derivative liabilities                                                    |       | **—**                                | ** **  | **$**                                     | **(4,200,000** | **)**                                     | **—**      | ** **                                | **$** | **(5,040,000** | **)** | ** ** | **—** | ** ** | **—** | ** ** |
| Adjusted Net  income for diluted earnings                                                          |       | **$**                                     | **353,205** | ** **                                | **$**          | **738,416**                               | ** **      | **$**                                     | **(6,294,333** | **)** | **$** | **1,663,967** | ** ** | ** ** | **$** | **67,615** | ** ** | **$** | **640,893** | ** ** |
| Weighted average  number of shares outstanding                                                     |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| -basic                                                                                             |       | 18,194,081                                |        | 26,250,000                                |           | 18,870,815                                |            | 26,250,000                                |   |   | 19,022,500 |   | 19,022,500 |   |
| -diluted                                                                                           |       | 18,499,615                                |        | 26,250,000                                |           | 18,870,815                                |            | 26,250,000                                |   |   | 19,469,600 |   | 19,469,600 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| Weighted average  number of shares outstanding exclusive of shares subject to possible  redemption |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| -basic                                                                                             |       | 18,194,081                                |        | 26,250,000                                |           | 18,870,815                                |            | 26,250,000                                |   |   | 19,022,500 |   | 19,022,500 |   |
| -diluted                                                                                           |       | 18,499,615                                |        | 26,250,000                                |           | 18,870,815                                |            | 26,250,000                                |   |   | 19,469,600 |   | 19,469,600 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| Basic net income  (loss) per share                                                                 |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| -Continuing  operations                                                                            |       | $                                         | 0.02        |                                      | $              | 0.19                                      |            | $                                         | (0.33 | ) | $ | 0.26 |   |   | $ | 0.04 |   | $ | 0.10 |   |
| -Discontinued  operations                                                                          |       | —                                    |        | —                                    |           | —                                    |            | —                                    |   |   | (0.03 | ) | (0.06 | ) |
| Net income (loss)                                                                                  |       | $                                         | 0.02        |                                      | $              | 0.19                                      |            | $                                         | (0.33 | ) | $ | 0.26 |   |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| Net income (loss)  not subject to possible redemption                                              |       | $                                         | 0.02        |                                      | $              | —                                    |            | $                                         | — |   | $ | — |   |   | $ | — |   | $ | — |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| Diluted net  income (loss) per share                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| -Continuing  operations                                                                            |       | $                                         | 0.02        |                                      | $              | 0.03                                      |            | $                                         | (0.33 | ) | $ | 0.06 |   |   | $ | 0.04 |   | $ | 0.10 |   |
| -Discontinued  operations                                                                          |       | —                                    |        | —                                    |           | —                                    |            | —                                    |   |   | (0.03 | ) | (0.06 | ) |
| Net income (loss)                                                                                  |       | $                                         | 0.02        |                                      | $              | 0.03                                      |            | $                                         | (0.33 | ) | $ | 0.06 |   |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                                               |       |                                      |        |                                      |           |                                      |            |                                      |   |   |   |   |   |   |
| Net income (loss)  not subject to possible redemption                                              |       | $                                         | 0.02        |                                      | $              | 0.19                                      |            | $                                         | (0.33 | ) | $ | 0.26 |   |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                                                    |            |                                           |             |                                           |                |                                           |                 |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

The accompanying notesare an integral part of these consolidated financial statements.

 

 

3

----

 

**ATS Corporation**

Consolidated Statementsof Cash Flows

(unaudited)

 
| ** **                                                                                          | ** ** | **(Successor)**                                    | ** ** | ** **                                         | **(Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|-------------------|------------|
| ** **                                                                                          | ** ** | **For the Nine Months Ended  September 30,  2007** | ** ** | **For the Nine Months Ended  September 30,  2006** | ** **        | ** ** | **For the Nine  Months Ended  July 31,  2006** | ** ** |
| ** **                                                                                          | ** ** | ** **                                         | ** ** | ** **                                         | ** **        | ** ** | ** ** | ** ** |
| **Cash Flows from Operating Activities**                                                            | ** ** | ** **                                         | ** ** | ** **                                         | ** **        | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                   |       | $                                                  | (6,294,333 | )                                                  | $                 | 6,703,967  |   |   | $ | 640,893 |   |
| Adjustments to reconcile net income (loss) to net cash (used in) provided  by operating activities: |       |                                               |       |                                               |              |       |   |   |
| Depreciation and amortization                                                                       |       | 465,608                                            |       | —                                             |              |       | 656,516 |   |
| Amortization of intangibles                                                                         |       | 2,870,689                                          |       | —                                             |              |       | — |   |
| Deferred income taxes                                                                               |       | (1,942,376                                         | )          | (348,483                                           | )                 |       | (1,786,808 | ) |
| Deferred rent                                                                                       |       | —                                             |       | —                                             |              |       | (231,492 | ) |
| Loss on disposal of equipment                                                                       |       | —                                             |       | —                                             |              |       | 58,283 |   |
| Stock-based compensation                                                                            |       | 778,443                                            |       | —                                             |              |       | — |   |
| Board of Directors' stock compensation                                                              |       | 42,638                                             |       | —                                             |              |       | — |   |
| Interest on notes payable                                                                           |       | 14,141                                             |       | —                                             |              |       | — |   |
| (Gain) Loss on derivative liabilities attributable to warrants                                      |       | 6,930,000                                          |       | (5,040,000                                         | )                 |       | — |   |
| Changes in assets and liabilities, net of effects of acquisitions:                                  |       |                                               |       |                                               |              |       |   |   |
| Accounts receivable                                                                                 |       | (5,813,760                                         | )          | —                                             |              |       | (360,727 | ) |
| Interest receivable                                                                                 |       | —                                             |       | (128,876                                           | )                 |       | — |   |
| Prepaid expenses                                                                                    |       | (632,007                                           | )          | 67,930                                             |              |       | 49,645 |   |
| Prepaid supplies                                                                                    |       | —                                             |       | —                                             |              |       | 381,361 |   |
| Income taxes receivable                                                                             |       | (277,399                                           | )          | (195,214                                           | )                 |       | (363,610 | ) |
| Other assets                                                                                        |       | (61,965                                            | )          | —                                             |              |       | (213,229 | ) |
| Accounts payable and accrued expenses                                                               |       | 46,826                                             |       | 1,234,167                                          |              |       | (844,118 | ) |
| Accrued salaries and related taxes                                                                  |       | (4,027,516                                         | )          | —                                             |              |       | (770,593 | ) |
| Accrued vacation                                                                                    |       | 391,839                                            |       | —                                             |              |       | 95,167 |   |
| Other current liabilities                                                                           |       | (385,324                                           | )          | —                                             |              |       | — |   |
| Other long-term liabilities                                                                         |       | (362,767                                           | )          | —                                             |              |       | — |   |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Net Cash (Used in) Provided by Operating  Activities**                                            |       | (8,257,263                                         | )          | 2,293,491                                          |              |       | (2,688,712 | ) |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Cash Flows from Investing Activities**                                                            | ** ** | ** **                                         | ** ** | ** **                                         | ** **        | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                  |       | (359,976                                           | )          | —                                             |              |       | (298,988 | ) |
| Sale of U.S. government securities held in Trust fund                                               |       | 121,024,475                                        |       | —                                             |              |       | — |   |
| Purchase of U.S. government securities held in Trust fund                                           |       | —                                             |       | (595,573,920                                       | )                 |       | — |   |
| Maturities of U.S. government securities held in Trust fund                                         |       | —                                             |       | 593,344,327                                        |              |       | — |   |
| Purchase of Advanced Technology Systems Incorporated, net of cash  received                         |       | (79,396,068                                        | )          | —                                             |              |       | — |   |
| Purchase of Potomac Management Group, Inc., net of cash received                                    |       | (13,684,302                                        | )          | —                                             |              |       |   |   |
| Purchase of Reliable Integration Services, Inc., net of cash received                               |       | (997,849                                           | )          | —                                             |              |       | — |   |
| Deferred acquisition costs                                                                          |       | —                                             |       | (1,154,976                                         | )                 |       | — |   |
| Release of cash held in Trust Fund                                                                  |       | 1,332                                              |       | 269,161                                            |              |       | — |   |
| Restricted cash                                                                                     |       | (44,748                                            | )          | —                                             |              |       | — |   |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Net Cash Provided by (Used in) Investing  Activities**                                            |       | 26,542,864                                         |       | (3,115,408                                         | )                 |       | (298,988 | ) |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Cash Flows from Financing Activities**                                                            | ** ** | ** **                                         | ** ** | ** **                                         | ** **        | ** ** | ** ** | ** ** |
| Net borrowings on line-of-credit                                                                    |       | 13,496,253                                         |       | —                                             |              |       | 1,687,035 |   |
| Payments on notes payable                                                                           |       | —                                             |       | —                                             |              |       | (41,469 | ) |
| Payments on capital leases                                                                          |       | (52,989                                            | )          | —                                             |              |       | (19,959 | ) |
| Payments to repurchase stock purchase warrants                                                      |       | (1,430,345                                         | )          | —                                             |              |       | — |   |
| Payments to repurchase treasury stock                                                               |       | (30,272,007                                        | )          | —                                             |              |       | (4,662 | ) |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Net Cash (Used in) Provided by Financing  Activities**                                            |       | (18,259,088                                        | )          | —                                             |              |       | 1,620,945 |   |
| ** **                                                                                          | ** ** | ** **                                         | ** ** | ** **                                         | ** **        | ** ** | ** ** | ** ** |
| **Net Increase (Decrease) in Cash**                                                                 |       | 26,513                                             |       | (821,917                                           | )                 |       | (1,366,755 | ) |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Cash,****beginning of period**                                                                    |       | 213,395                                            |       | 1,855,394                                          |              |       | 1,366,755 |   |
|                                                                                                |       |                                               |       |                                               |              |       |   |   |
| **Cash,****end of period**                                                                          |       | $                                                  | 239,908    |                                               | $                 | 1,033,477  |   |   | $ | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

 

4

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**NOTE A****3⁄4****BASIS OF PRESENTATION**

The ConsolidatedFinancial Statements are for the three-and nine-month periods ended September30, 2007 and 2006 for ATS Corporation (the “Successor Company” or the “Company”)and are for the three-and nine-month periods ended July 31, 2006 for AdvancedTechnology Systems, Inc. (the “Predecessor Company” or “ATSI”).  The Company has included the results ofoperations for the acquisition of ATSI from the acquisition date of January 15,2007 through September 30, 2007.

Except for theconsolidated balance sheet of the Company as of December 31, 2006, whichwas derived from audited financial statements, the accompanying consolidatedfinancial statements are unaudited. In the opinion of management, alladjustments necessary for a fair statement of such financial position andresults of operations have been included. All such adjustments are of a normalrecurring nature. Interim results are not necessarily indicative of results fora full year.

The consolidatedfinancial statements and notes are presented as required by Form 10-Q and donot contain certain information included in the Company’s annual financialstatements and notes. These financial statements should be read in conjunctionwith the Company’s audited financial statements and the notes thereto filedwith the Securities and Exchange Commission (the “SEC”) in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006. The interimfinancial statements of ATSI have also been presented in accordance with the requirementsof Form 10-Q. Such information should be read in conjunction with the ATSIconsolidated financial statements for the year ended October 31, 2006 includedin the ATS Corporation Form 10-K for the year ended December 31, 2006.

Certain amounts inprior years have been reclassified to conform to the current periodpresentation.

**NOTE B****3⁄4****RECENT ACCOUNTING PRONOUNCEMENTS**

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *FairValue Measurements*(“SFASNo. 157”)*.*SFAS No. 157* *defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements*.*Specifically, this Statement sets forth a definition offair value, and establishes a hierarchy prioritizing the inputs to valuationtechniques, giving the highest priority to quoted prices in active markets foridentical assets and liabilities and the lowest priority to unobservable inputs.The provisions of SFAS No. 157 are generally required to be applied on aprospective basis, except to certain financial instruments accounted for underSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, for which the provisions of SFASNo. 157 should be applied retrospectively. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  The Company is evaluating the effect, if any,on its financial position or results of operations.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115*(“SFAS No. 159”). SFAS No. 159 permitsan entity, at specified election dates, to choose to measure certain financialinstruments and other items at fair value. The objective of SFAS No. 159 is toprovide entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently,without having to apply complex hedge accounting provisions.SFAS No. 159 is effective for accounting periods beginning afterNovember 15, 2007.  The Company iscurrently assessing the impact of adopting SFAS No. 159 on the consolidatedfinancial statements.

**NOTE C****3⁄4RESTRICTEDCASH**

The Company is requiredto maintain $1,200,000 on deposit with a financial institution to support abonding requirement for one of ATSI’s state contracts.  Such amount is reflected in restricted cashin the accompanying consolidated balance sheet.

**NOTE D****3⁄4****INVESTMENTS HELD IN TRUST**

The Company held certaininvestments in a trust account consisting principally of short-term treasurybills.  All such investments held in theTrust fund were disposed as of March 31, 2007.

 

 

5

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**NOTE E****3⁄4****INCOME (LOSS) PER SHARE**

Basic and diluted netloss per share information is presented in accordance with SFAS No. 128, *Earnings Per Share*. Basic loss per share is calculated by dividing the net loss attributableto common stockholders by the weighted-average common shares outstanding duringthe period.  Diluted loss per share iscalculated by dividing net loss attributable to common stockholders by the weightedaverage common shares outstanding, which includes common stockequivalents.  The Company’s common stockequivalents include stock options, restricted stock units, and warrants.  For the three months ended September 30, 2007and 2006, a total of 38,429,245 and 42,000,000 common stock equivalents,respectively, were excluded from the calculation of diluted loss per share astheir impact would have been anti-dilutive. For the nine months ended September 30, 2007 and 2006, a total of38,823,779 and 42,000,000 common stock equivalents, respectively, were excludedfrom the calculation of diluted loss per share as their impact would have beenanti-dilutive.  

Weighted average commonshares are calculated as follows: 
| ** **                                                                                  | ** ** | **(Successor)**                            | ** ** | ** **                                      | **(Predecessor)** | ** **                                |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|-------------------|-------------------------------------------|
| ** **                                                                                  | ** ** | **For the Three  Months Ended  9/30/2007** | ** ** | **For the Three  Months Ended  9/30/2006** | ** **        | **For the Nine  Months Ended  9/30/2007** | ** ** | **For the Nine  Months Ended  9/30/2006** | ** ** | ** ** | **For the Three  Months Ended  7/31/2006** | ** ** | **For the Nine  Months Ended  7/31/2006** | ** ** |
| **Income  (Loss) from Continuing Operations**                                               |       | $                                          | 353,205    |                                            | $                 | 4,938,416                                 |   | $ | (6,294,333 | ) | $ | 6,703,967 |   |   | $ | 691,388 |   | $ | 1,835,574 |   |
| ** **                                                                                  | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Loss  from Discontinued Operations**                                                      |       | —                                     |       | —                                          |              | —                                    |   | — |   |   | (623,773 | ) | (1,194,681 | ) |
| ** **                                                                                  | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Income (Loss)**                                                                      |       | $                                          | 353,205    |                                            | $                 | 4,938,416                                 |   | $ | (6,294,333 | ) | $ | 6,703,967 |   |   | $ | 67,615 |   | $ | 640,893 |   |
|                                                                                        |       |                                       |       |                                            |              |                                      |   |   |   |   |   |   |   |   |
| **Interest  income attributable to common stock subject to possible redemption**            | ** ** | —                                     | ** ** | —                                          | ** **        | —                                    | ** ** | — | ** ** | ** ** | — | ** ** | — | ** ** |
| **Gain on  derivative liabilities attributed to warrants**                                  |       | —                                     |       | (4,200,000                                      | )                 | —                                    |   | (5,040,000 | ) |   | — |   | — |   |
| ** **                                                                                  |       |                                       |       |                                            |              |                                      |   |   |   |   |   |   |   |   |
| **Net  income (loss) allocable to common stockholders not subject to possible  redemption** |       | $                                          | 353,205    |                                            | $                 | 738,416                                   |   | $ | (6,294,333 | ) | $ | 1,663,967 |   |   | $ | 67,615 |   | $ | 640,893 |   |
|                                                                                        |       |                                       |       |                                            |              |                                      |   |   |   |   |   |   |   |   |
| **Weighted  average number of shares outstanding**                                          | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **-basic**                                                                                  |       | 18,194,081                                 |       | 26,250,000                                      |              | 18,870,815                                |   | 26,250,000 |   |   | 19,022,500 |   | 19,022,500 |   |
| ** **                                                                                  | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Shares  from assumed conversion of options, warrants and restricted stock**               |       | 305,534                                    |       | —                                          |              | —                                    |   | — |   |   | 447,100 |   | 447,100 |   |
| ** **                                                                                  | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **-diluted**                                                                                |       | 18,499,615                                 |       | 26,250,000                                      |              | 18,870,815                                |   | 26,250,000 |   |   | 19,469,600 |   | 19,469,600 |   |
| ** **                                                                                  | ** ** | ** **                                 | ** ** | ** **                                      | ** **        | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  net income (loss) per share - basic**                                              |       | $                                          | 0.02       |                                            | $                 | 0.03                                      |   | $ | (0.33 | ) | $ | 0.06 |   |   | $ | 0.00 |   | $ | 0.03 |   |
| **Basic  net income (loss) per share - diluted**                                            |       | $                                          | 0.02       |                                            | $                 | 0.03                                      |   | $ | (0.33 | ) | $ | 0.26 |   |   | $ | 0.00 |   | $ | 0.10 |   |

 

 

6

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**NOTE F****3⁄4****EMPLOYEE STOCK-BASED COMPENSATION**

In December 2004, theFASB issued SFAS No. 123(R), *Share Based Payment,*which requires that compensation costs related to share-based paymenttransactions be recognized in financial statements. Under the fair valuerecognition provisions of SFAS No. 123(R), the Company recognizesstock-based compensation based upon the fair value of the stock-based awardstaking into account the effects of the employees’ expected exercise andpost-vesting employment termination behavior. A summary of the components of stock-based compensation expenserecognized during the three and nine months ended September 30, 2007 and 2006is as follows: 
| **Stock-Based Compensation included in indirect  costs  and selling expenses** | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |       |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|------------|
|                                                                           | **2007**   | ** **                            | **2006**   | ** **                           | **2007**   | ** ** | **2006** |   |   |
|                                                                           |       |                                  |       |                                 |       |       |   |   |   |   |
| Non-qualified stock option expense                                             |       | $                                     | 2,256      |                                 | $          | —     |   | $ | 633,609 |   | $ | — |   |
|                                                                           |       |                                  |       |                                 |       |       |   |   |   |   |
| Restricted Stock                                                               |       | $                                     | 66,668     |                                 | $          | —     |   | $ | 144,834 |   | $ | — |   |
|                                                                           |       |                                  |       |                                 |       |       |   |   |   |   |
| Total Stock-Based Compensation Expense                                         |       | $                                     | 68,924     |                                 | $          | —     |   | $ | 778,443 |   | $ | — |   |
|                                                                                |            |                                       |            |                                      |            |            |  |  |  |  |  |  |  |  |  |

 

 

 

7

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The fair value of optionsgranted during the period ended September 30, 2007 has been estimated as of thedate of grant using the Black-Scholes option pricing model with the followingassumptions:

| ** **               | ** ** | **Nine Months   Ended  September 30, 2007** | ** ** |
|--------------------------|------------|-------------------------------------------------------|------------|
| Expected dividend yield  |       | 0                                                     | %          |
| Expected volatility      |       | 37                                                    | %          |
| Risk free interest rate  |       | 4.7                                                   | %          |
| Expected life of options |       | 5.6  years                                            |       |
| Forfeiture rate          |       | 4                                                     | %          |

 

Effective November 1,2006, ATSI was required to adopt the provisions of SFAS No.123(R).  However, no options were granted from theadoption date through January 15, 2007. In connection with the sale of ATSI to ATS Corporation, ATSI wasrequired to redeem 447,100 outstanding stock options for approximately $1.6million.

On January 12, 2007, thestockholders of the Company approved the ATS Corporation 2006 Omnibus IncentiveCompensation Plan (the “Plan”). Under the Plan, the Company reserved 1.5million shares of the Company’s common stock for issuance to employees anddirectors through incentive stock options, or non-qualified stock options orthrough restricted stock units. During the three and nine months endedSeptember 30, 2007, the Board of Directors authorized the issuance of 4,500 and549,000 stock options and restricted stock, respectively.  The stock options have vesting periods up tofour years.

The following tablesummarizes information about stock options outstanding at September 30, 2007:
| **Options  Outstanding**               | ** ** | **Options  Exercisable**    | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| **Range  of**

**Exercise**

**Price** | ** ** | **Number**

**Outstanding** | ** ** | **Weighted-**

**average**

**Remaining**

**Life  in**

**Years** | ** ** | **Weighted-**

**average**

**Exercise**

**Price** | ** ** | **Number**

**Exercisable** | ** ** | **Weighted-**

**average**

**Exercise**

**Price** | ** ** |
|                                   |       |                        |       |   |   |   |   |   |   |   |   |
| $3.75                                  |       | 4,500                       |       | 9.80 |   | $3.75 |   | — |   | — |   |
| $3.85                                  |       | 4,500                       |       | 9.59 |   | 3.85 |   | — |   | — |   |
| $4.32                                  |       | 15,000                      |       | 9.42 |   | 4.32 |   | — |   | — |   |
| $4.88                                  |       | 120,000                     |       | 9.41 |   | 4.88 |   | — |   | — |   |
|                                   |       | 144,000                     |       | 9.43 |   | $4.75 |   | — |   | — |   |

 

The weighted averagegrant date fair value of options granted during the three and nine months endedSeptember 30, 2007 was $1.72 and $2.07, respectively.  As of September 30, 2007, there was $272,263of unrecognized compensation expense related to unvested options.  This cost is expected to be recognized over aweighted-average period of 3.9 years. The fair value of options vested during the three- and nine-monthperiods was approximately $0 and $591,000, respectively.

Pursuant to the Plan,during the three months ended September 30, 2007 the Company granted 80,000restricted shares valued at $294,400 to certain employees.  Such shares vest ratably over a four-yearperiod.  For the nine months endedSeptember 30, 2007, the Company granted 395,534 restricted shares valued at$1,560,406.  Such shares vest ratablyover a four- to six-year period.

**NOTE G****3⁄4****ACCOUNTING FOR WARRANTS ANDDERIVATIVE INSTRUMENTS**

On October 25, 2005,the Company consummated its initial public offering of 21,000,000 units. Eachunit consisted of one share of common stock and two redeemable common stockpurchase warrants. Each warrant entitles the holder to purchase from theCompany one share of its common stock at an exercise price of $5.00. Thewarrant agreement provided for the Company to register the shares underlyingthe warrants and was silent as to the penalty to be incurred in the absence ofthe Company’s ability to deliver registered shares to the warrant holders uponwarrant exercise. The warrants expire on October 19, 2009.

 

 

8

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Emerging Issues Task Force Issue 00-19, or EITF 00-19,“*Accounting for Derivative FinancialInstruments Indexed to and Potentially Settled in, a Company’s Own Stock*,”provides criteria for determining whether freestanding contracts that aresettled in a company’s own stock, including common stock warrants, should bedesignated as either an equity instrument, an asset or as a liability underSFAS No. 133. Under the provisions of EITF 00-19, a contract designated asan asset or a liability must be carried at fair value on a company’s balancesheet, with any changes in fair value recorded in a company’s results ofoperations.  A contract classified as anequity instrument is included within equity, and no fair value adjustments arerequired from period to period.

Fair values for tradedsecurities and derivatives are based on quoted market prices. Where marketprices are not readily available, as was the case with the Company’s warrantson the date of issuance, fair value is determined using methods requiringjudgment and estimates. Utilizing such methods, the fair value of the warrantliability at October 20, 2005 (the date of issuance) was determined to be$0.34 per warrant. At the date of issuance, the Company allocated the unitprice between the share of common stock and the warrants issued based uponrelative fair value determined, among other things, by reference to theunderlying cash held in the Trust fund. The warrants included in the units soldin the Company’s initial public offering began to be publicly traded on theOver-the-Counter Bulletin Board on December 5, 2005, and consequently thefair value of the warrants was reflected as the market price of a warrant ateach reporting period.  The warrants wereaccounted for as a liability under EITF 00-19. As such, to the extent that the market price of the Company’s warrantsincreased or decreased, a gain or loss was recorded to reflect such change infair value.

On March 14, 2007, theCompany entered into a warrant clarification agreement to expressly state that,in the event a warrant would expire unexercised and without value andunredeemed on the expiration date, under no circumstances would the Company berequired to net cash settle the warrants.  This agreement modified theclassification of the warrants from a liability to equity.  The Companyrecognized a loss of $6,930,000 representing the change in fair value of thewarrant liability from December 31, 2006 through March 14, 2007.  The fairvalue of the warrants at March 14, 2007 of $20,790,000 was reclassified toadditional paid in capital.

**NOTEH—COMMON STOCK REDEMPTION**

Following theconsummation of the acquisition of ATSI, the Company announced and implementeda common stock and warrant repurchase program. In connection with this program, the Company paid approximately $13.5million in cash to redeem 2,811,400 shares of common stock at an average priceof $4.80 per share and approximately $1,430,000 in cash to repurchase 3,705,755warrants.  During the three months endedSeptember 30, 2007, the Company repurchased 2,835,222 warrants forapproximately $1,080,000.

On January 16, 2007,the Company announced that it would repurchase 2,625,000 shares of the Company’scommon stock from the founders at $0.011 per share. This program was completedin January 2007.

On January 16, 2007,the Company announced that it would repurchase shares of those shareholdersthat voted against the acquisition of ATSI and requested that their shares(2,906,355) be redeemed at the then per share trust value of $5.77 per share.This program was completed in January 2007.

**NOTE I****3⁄4****INCOME TAXES**

The Company and ATSI’seffective tax rates are based upon the effective tax to be applicable to thefull fiscal year.  As of September 30,2007, the Company had a net deferred tax liability of approximately $4.5million.

Effective January 1,2007, the Company was required to adopt FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).  FIN 48 prescribes a more-likely-than-notthreshold of financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of incometax assets and liabilities, classification of current and deferred tax assetsand liabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods and income taxdisclosures.  Since inception and throughJanuary 1, 2007, the adoption date of this standard, the Company was in essencea “blank check” company with no substantive operations.  The Company recognizes accrued interest andpenalties related to uncertain tax positions in income tax expense. The Companyfiles its tax returns as prescribed by the tax laws of the jurisdictions inwhich it operates.  Management hasconcluded that the adoption of FIN 48 had no material effect on its financialposition or results of operations.

 

 

9

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Management is in the process of evaluating the varioustax positions associated with the acquisitions of ATSI, Reliable IntegrationServices, Inc. (“RISI”), and Potomac Management Group, Inc. (“PMG”) and is ofthe opinion that any deferred tax liabilities that would ultimately result fromuncertain tax positions related to these entities would be covered byindemnification provisions provided in the acquisition agreements or wouldresult in an adjustment to goodwill.

**NOTE J—SEGMENT ACCOUNTING**

The Company reviewed itsservices by unit to determine if any unit of the business is subject to risksand returns that are different than those of other units in the Company.  Based on this review, the Company has determinedthat all units of the Company are providing comparable services to its clients,and the Company has only one reportable segment.

**NOTE K****3⁄4****ACQUISITIONS**

***Advanced Technology Systems, Inc.(“ATSI”)***

Effective the close ofbusiness of January 15, 2007, the Company acquired all of the outstanding capitalstock of ATSI, a provider of systems integration services and applicationdevelopment to the U.S. government, for $81.9 million in cash, and 173,913shares valued at approximately $1,000,000 as of the closing date. The Companywas organized to effect a business combination with an operating business inthe federal services and defense industries. ATSI is active primarily in the growing U.S. government informationtechnology services market. ATSI designs, develops and integratesenterprise-wide information technology solutions, including custom softwareapplications that address the U.S. government’s need to improve systemefficiency, track human and financial capital, and reduce system downtime.Management believes that ATSI provides a strong federal services platform fromwhich the Company can grow, has strong core competencies that the Company canbuild upon, and provides opportunities to create increased stockholder value.The stock purchase agreement provides for a working capital adjustment to the extentthe net working capital on the closing date varies from the target amount asdefined in the agreement.  Based on adetermination of net working capital at the acquisition date, the Company hasrecorded a receivable for approximately $3.5 million, included in other accountsreceivable on the September 30, 2007 consolidated balance sheet that it expectsto receive from funds that were placed in escrow to cover any purchase priceadjustments and indemnification claims.

Aspart of the ATSI transaction on January 15, 2007, the Company agreed that theformer shareholders of ATSI could benefit from earn out opportunities ifcertain adjusted earnings thresholds are achieved during subsequent periods.These earn out opportunities had two components, each dependent on ATSIachieving certain levels of trailing 12-month EBITDA, as defined in the stockpurchase agreement. One component of the earn out, up to an aggregate of$15.0 million, was dependent on ATSI achieving certain levels of adjustedEBITDA during the 12-month trailing periods ended October 31, 2006 andApril 30, 2007. The second component of the earn out, up to an aggregateof $24.0 million, was dependent on the award of a large U.S. Air Forcecontract that ATSI bid on, which ATSI was notified on March 26, 2007, thatit did not receive. Based on the financial results to date, the Company doesnot anticipate any payout under the earn out provisions of the January 15, 2007transaction with ATSI.  The Company fundedthe cash portion of the ATSI purchase price with the proceeds of its initialpublic offering.

Inconnection with the acquisition of ATSI, holders of 2,906,355 shares of commonstock voted against the acquisition and perfected their right to convert theirshares of common stock into $5.77 of cash per share. An aggregate of$16,769,668 was paid to such dissenting stockholders.

Underthe purchase method of accounting, the preliminary purchase price has beenallocated to the net tangible and intangible assets acquired and liabilitiesassumed, based upon preliminary estimates, which assume that historical costapproximates fair value of the assets and liabilities of ATSI. As such,management estimates that a substantial portion of the excess purchase pricewill be allocated to non-amortizable intangible assets. These estimates aresubject to change upon the finalization of the valuation of certain assets andliabilities and may be adjusted in accordance with the provisions of SFASNo. 141, *Business Combinations*.  Management has preliminarily estimated thatthe transaction will result in $63.5 million of goodwill that is not expectedto be deductible for income tax purposes. Additionally, management estimatedthat approximately $17.0 million of the purchase price is allocable tocustomer-related intangible assets, which include customer contracts, backlog,and non-contractual customer relationships (including trade namerecognition).  Such intangible assetswill be amortized over periods ranging from three to six years based uponfactors such as customer relationships and contract periods.

 

 

10

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Thetotal purchase price paid, including transaction costs of approximately $4.2million, has been preliminarily allocated as follows:

| **(in thousands):**                                                                        | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|
| Cash                                                                                            |       | $          | 76,635     |   |
| Common stock (173,913 shares valued on the date of the purchase  agreement—April 19, 2006) |       | 1,000      |       |
| Transaction costs                                                                               |       | 4,274      |       |
| Total purchase price                                                                            |       | $          | 81,909     |   |
| Purchase price allocation:                                                                      |       |       |       |
| Current assets                                                                                  |       | $          | 25,650     |   |
| Property and equipment                                                                          |       | 1,466      |       |
| Intangible assets                                                                               |       | 17,000     |       |
| Goodwill                                                                                        |       | 61,645     |       |
| Other assets                                                                                    |       | 2,020      |       |
| Total assets acquired                                                                           |       | 107,781    |       |
| Current liabilities                                                                             |       | 18,504     |       |
| Long-term liabilities                                                                           |       | 1,128      |       |
| Deferred tax liability from acquisition intangibles                                             |       | 6,240      |       |
| Total liabilities assumed                                                                       |       | 25,872     |       |
| Net assets acquired                                                                             |       | $          | 81,909     |   |

 

Thepreliminary estimated value and the weighted-average amortization period ofeach of the components of the customer-related intangible assets are asfollows:

| ** **                                                                 | ** ** | **Estimated Value   (in millions)** | ** ** | **Weighted-Average   Amortization Period** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------|------------|
| Customer contracts                                                         |       | $                                                  | 10.0       |                                                 | 6  years   |   |
| Backlog                                                                    |       | 6.0                                                |       | 3.5  years                                           |       |
| Non-contractual customer relationships (including trade name  recognition) |       | 1.0                                                |       | 3  years                                             |       |
| Total / Average                                                            |       | $                                                  | 17.0       |                                                 | 5  years   |   |

 

Theresults of operations for ATSI have been included in the ConsolidatedStatements of Income from the acquisition date through September 30, 2007.

***Reliable Integration Services,Inc. (“RISI”)***

OnMarch 1, 2007, the Company acquired Reliable Integration Services, Inc. (“RISI”),a 37-employee network systems integrator serving U.S. government defense andcivilian agencies, for approximately $1.3 million as set forth below.Management believes that RISI’s client base and work product complements ATSI’sclient base and work product and provides opportunities for both companies tocross sell their services.

Underthe purchase method of accounting, the preliminary purchase price has beenallocated to the net tangible and intangible assets acquired and liabilitiesassumed, based upon preliminary estimates, which assume that historical costapproximates fair value of the assets and liabilities of RISI. As such,management estimates that a substantial portion of the excess purchase pricewill be allocated to non-amortizable intangible assets. These estimates aresubject to change upon the finalization of the valuation of certain assets andliabilities and may be adjusted in accordance with the provisions of SFASNo. 141, *Business Combinations*.

Theresults of operations for RISI are included in the consolidated statements ofoperations from the acquisition date through September 30, 2007.

 

 

11

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Thetotal purchase price paid, including transaction costs of $70,000, has beenpreliminarily allocated as follows:

| **(in thousands):**                            | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|
| Cash                                                |       | $          | 933        |   |
| Common stock (46,296 shares issued)                 |       | 200        |       |
| Promissory note                                     |       | 86         |       |
| Transaction costs                                   |       | 69         |       |
| Total purchase price                                |       | $          | 1,288      |   |
| Purchase price allocation:                          |       |       |       |
| Current assets                                      |       | $          | 671        |   |
| Property and equipment                              |       | 16         |       |
| Intangible assets                                   |       | 300        |       |
| Goodwill                                            |       | 1,026      |       |
| Other assets                                        |       | 39         |       |
| Total assets acquired                               |       | $          | 2,052      |   |
| Current liabilities                                 |       | 648        |       |
| Deferred tax liability from acquisition intangibles |       | 116        |       |
| Total liabilities assumed                           |       | 764        |       |
| Net assets acquired                                 |       | $          | 1,288      |   |

 

Managementhas preliminarily estimated that the transaction will result in $1.0 million ofgoodwill.  Management is currentlyanalyzing the deductibility of goodwill on future income taxes. Approximately$300,000 of the purchase price is expected to be allocated to acquiredcustomer-related intangible assets, that include customer contracts, backlog,and non-contractual customer relationships (including trade name recognition),and will be amortized over periods ranging from three to six years based uponfactors such as expected customer relationships and contract periods.

Thepreliminary estimated value and the weighted-average amortization period of eachof the components of the customer-related intangible assets are as follows:

| ** **                                                                 | ** ** | **Estimated Value   (in thousands)** | ** ** | **Weighted-Average   Amortization Period** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| Customer contracts                                                         |       | $                                                   | 173        |                                                 | 6  years   |   |
| Backlog                                                                    |       | 102                                                 |       | 3.5  years                                           |       |
| Non-contractual customer relationships (including trade name  recognition) |       | 25                                                  |       | 3  years                                             |       |
| Total / Average                                                            |       | $                                                   | 300        |                                                 | 4.9  years |   |

 

***Potomac Management Group, Inc. (“PMG”)***

OnSeptember 1, 2007, the Company acquired Potomac Management Group, Inc. (“PMG”),a 149-employee information technology services provider serving mostly U.S.government agencies, for approximately $16.6 million as set forth below. Inaddition to this amount, there is the potential for $1.5 million of payments tothe former owners should PMG meet certain performance objectives.  Management believes that PMG’s client baseand work product complements ATSI’s client base and work product and providesopportunities for both companies to cross sell their services.

Underthe purchase method of accounting, the preliminary purchase price has beenallocated to the net tangible and intangible assets acquired and liabilitiesassumed, based upon preliminary estimates, which assume that historical costapproximates fair value of the assets and liabilities of PMG. As such,management estimates that a substantial portion of the excess purchase pricewill be allocated to non-amortizable intangible assets. These estimates aresubject to change upon the finalization of the valuation of certain assets andliabilities and may be adjusted in accordance with the provisions of SFASNo. 141, *Business Combinations*.

Theresults of operations for PMG are included in the consolidated statements ofoperations from the acquisition date through September 30, 2007.

 

 

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Thetotal purchase price paid, including transaction costs of $130,000 has beenpreliminarily allocated as follows:

| **(in thousands):**             | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Cash                                 |       | $          | 13,750     |   |
| Common stock (134,408 shares issued) |       | 500        |       |
| Promissory note                      |       | 2,250      |       |
| Transaction costs                    |       | 130        |       |
| Total purchase price                 |       | $          | 16,630     |   |
| Purchase price allocation:           |       |       |       |
| Current assets                       |       | $          | 2,484      |   |
| Property and equipment               |       | 208        |       |
| Intangible assets                    |       | 2,722      |       |
| Goodwill                             |       | 12,194     |       |
| Other assets                         |       | 32         |       |
| Total assets acquired                |       | $          | 17,640     |   |
| Current liabilities                  |       | 823        |       |
| Deferred rent liability              |       | 187        |       |
| Total liabilities assumed            |       | 1,010      |       |
| Net assets acquired                  |       | $          | 16,630     |   |

 

Managementhas preliminarily estimated that the transaction will result in $12.2 millionof goodwill.  Management is currentlyanalyzing the deductibility of goodwill on future income taxes. Approximately$2.7 million of the purchase price is expected to be allocated to acquiredcustomer-related intangible assets, that include customer contracts, backlog,and non-contractual customer relationships (including trade name recognition),and will be amortized over five years based upon factors such as expectedcustomer relationships and contract periods.

Inaddition to the purchase price of $16.6 million for PMG, there is the potentialfor $1.5 million of payments to the former owners should PMG meet certaindefined performance objectives. Any payments due would occur in October 2008and October 2009.

Thepreliminary estimated value and the weighted-average amortization period ofeach of the components of the customer-related intangible assets are asfollows:

| ** **                                                                 | ** ** | **Estimated Value   (in thousands)** | ** ** | **Weighted-Average   Amortization Period** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| Customer contracts                                                         |       | $                                                   | 2,474      |                                                 | 5  years   |   |
| Non-contractual customer relationships (including trade name  recognition) |       | 248                                                 |       | 5  years                                             |       |
| Total / Average                                                            |       | $                                                   | 2,722      |                                                 | 5.0  years |   |

 

**L****3⁄4****DISCONTINUED OPERATIONS**

***Advanced TechnologySystems International, Inc. (“ATSII”)***

In August 2005, ATSIadopted a formal plan for the sale of Advanced Technology SystemsInternational, Inc. (“ATSII”), which had a history of operating losses. On November 30, 2005, pursuant to the terms of a stock purchase agreemententered into by and between ATSI, ATSII, New Technology Management, Inc. (“NTMI”)and NTMI Acquisition Corporation, ATSI sold all of the outstanding common stockof ATSII.

The following representsthe results of operations of ATSII:

| ** **        | ** ** | **Nine Months  Ended July 31,  2006** | ** ** |
|-------------------|------------|-------------------------------------------------|------------|
|              |       |                                            |       |
| Revenue           |       | $                                               | 234,386    |   |
| Loss before taxes |       | (442,509                                        | )          |
| Net loss          |       | (408,291                                        | )          |
|                   |            |                                                 |            |  |

 

 

 

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***Pyramid***

In January 2006, management decided to discontinue theoperations of the Pyramid Products Solutions Group. The following representsthe results of the operations of Pyramid:

| ** **        | ** ** | **Nine Months   Ended July 31,  2006** | ** ** |
|-------------------|------------|-------------------------------------------------------|------------|
| Revenue           |       | $                                                     | 733,264    |   |
| Loss before taxes |       | (1,281,182                                            | )          |
| Net loss          |       | (786,390                                              | )          |
|                   |            |                                                       |            |  |

 

**NOTE M****3⁄4****COMMITMENTS & CONTINGENCIES**

***Changein Control Agreements***

Prior to theacquisition of ATS, ATSI’s Board of Directors approved Retention Agreements tokey employees which authorized the payment of bonuses if the employee continuedemployment through the date of the ATS Corporation acquisition.  Asfurther described in Note K, as of the close of business on January 15, 2007,ATSI was acquired by the Company. As a condition of the Retention Agreements, certainkey employees received approximately $3,705,000 in bonuses upon the closing ofthe transaction.  These bonuses were recorded in overhead expense in ATSI’sconsolidated statements of operations for the period from November 1, 2006through January 15, 2007.

***EmploymentAgreement***

On March 19, 2007,the Company entered into an employment agreement with Dr. Edward H. Bersoff,its Chairman, President and Chief Executive Officer, who had been serving inthat capacity since January 16, 2007. The employment agreement was filed aspart of a current report on Form 8-K on March 21, 2007. The employmentagreement specifies annual salary and incentive compensation for the terms ofthe agreement.  The agreement also provides for between twelve andeighteen months’ salary and 50% of any incentive compensation targets if theemployee is terminated other than for cause.

On October 29,2007, the Company and Dr. Bersoff entered into an amendment to Dr. Bersoff’semployment agreement, extending his employment term as Chief Executive Officerthrough December 31, 2008.  The amendedemployment agreement was filed as part of a current report on Form 8-K onOctober 29, 2007.

On May 4, 2007,the Company entered into a letter agreement with its Senior Vice President ofFinance who became the Chief Financial Officer on May 22, 2007. The terms ofthe letter agreement were filed as part of a current report on Form 8-K on May22, 2007.  No employment agreement hasbeen signed to date.

In addition, theCompany has entered into employment agreements with certain key employees thatprovide for severance payments in the event of termination.

***PhantomStock Option Plan***

In December 2004,ATSI’s subsidiary, Appix, Inc. (“Appix”), adopted the Appix Phantom Stock Plan(the “Phantom Stock Plan”).   Under thePhantom Stock Plan, a committee of the Board of Directors of Appix could awardup to 2,000,000 phantom stock units to eligible participants.  The valueof the units was determined based upon a formula that was defined in theagreement.  The units were also subject to a vesting schedule as definedin the Phantom Stock Plan, and became immediately exercisable in the event of achange in control of Appix or ATSI.  Units issued under the Phantom StockPlan were also subject to certain termination and cancellation provisions.

As furtherdescribed in Note K, as of the close of business on January 15, 2007, ATSI wasacquired by the Company. As a condition of the stock purchase agreement, alloutstanding phantom stock units were repurchased for approximately $276,000. Such compensation expense was recorded in general and administrative expense inATSI’s statements of operations for the period from November 1, 2006through January 15, 2007.

***Earn-outProvision related to PMG***

In addition to thepurchase price of $16.6 million for PMG, there is the potential for $1.5million of payments to the former owners should PMG meet certain definedperformance objectives.  Any payments duewould occur in October 2008 and October 2009.

 

 

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                ***LegalProceedings***

See *“Part II, Other Information—Item 1. Legal Proceedings.”*

*                **Line ofCredit***

The Companyentered into a Credit Agreement with Bank of America on June 4, 2007.  This agreement provides a $25.0 million creditfacility with the option for the Company to increase the amount available underthe credit facility up to $50.0 million. Borrowings on the credit agreement bear interest at the LIBOR rate plusbetween 150 to 225 basis points per annum, depending on the Company’s ratio of fundeddebt to EBITDA.  Pursuant to theagreement, the Company is required to meet certain financial covenants asfurther described.  The covenants are anasset coverage ratio of not less than 1.20 to 1.0, a consolidated leverageratio not to exceed 3.50 to 1.0 and a consolidated fixed charge coverage ratioof at least 1.20 to 1.0.  The covenantsare tested based on the financial position of the Company at the end of eachcalendar quarter. At, and as of, September 30, 2007, the Company was in fullcompliance with such covenants.  As ofSeptember 30, 2007, the Company had a $13,496,000 outstanding balance on the creditfacility.

**NOTE N****3⁄4****SUBSEQUENT EVENTS**

***Acquisition***

On October 15,2007, the Company announced the signing of a definitive agreement to acquireNumber Six Software, Inc. (“Number Six”). It is a provider of application development and information technologyconsulting to both government and commercial customers. This acquisitionsupports the Company’s strategic growth plan to broaden its information technologyservices expertise and add new customers in each of the Company’s targetsectors. Closing of the transaction is subject to customary conditions,including approval by the stockholders of Number Six, and is anticipated inNovember 2007.

This transactionwill accounted for in accordance with the provisions of SFAS-141, *Business Combinations*.

 

 

 

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** **

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

***FORWARD-LOOKING STATEMENTS***

Some of the statements in this Quarterly Report onForm 10-Q constitute forward-looking statements.  These statements involve known and unknownrisks, uncertainties, and other factors that may cause our actual results,levels of activity, performance or achievements to be materially different fromany future results, levels of activity, performance or achievements expressedor implied by such forward-looking statements. In some cases, you can identify these statements by forward-lookingwords such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,”“may,” “plan,” “potential,” “should,” “will,” and “would” or similar words.  You should read statements that contain thesewords carefully because they discuss our future expectations, containprojections 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 anycautionary language in this Quarterly Report on Form 10-Q, provide examples ofrisks, uncertainties and events that may cause our actual results to differmaterially from the expectations we describe in our forward-looking statements,including but not limited to:

·                  risksrelated to the government contracting industry, including possible changes ingovernment spending priorities;

·                  risksrelated to our business, including our dependence on contracts with U.S.Federal Government agencies and departments and continued good relations, andbeing successful in competitive bidding, with those customers;

·                  uncertaintiesas to whether revenues corresponding to our contract backlog will actually bereceived;

·                  risksrelated to the implementation of our strategic plan, including the ability tomake acquisitions and the performance and future integration of acquiredbusinesses; and

·                  otherrisks and uncertainties disclosed in our filings with the Securities and ExchangeCommission.

Additional factors thatmay affect our results are discussed in our Annual Report on Form 10-K for theyear ended December 31, 2006 under “Item 1A. Risk Factors.”  Although we believe the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance, or achievements.  You should not place undue reliance on theseforward-looking statements, which apply only as of the date of this QuarterlyReport on Form 10-Q.  We undertake noobligation to update these forward-looking statements, even if our situationchanges in the future.

The terms the “Company,” “we”and “our” as used throughout this Quarterly Report on Form 10-Q refer to ATSCorporation and its consolidated subsidiaries, unless otherwise indicated.

 

 

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**Overview**

ATS Corporation (“ATS”) was organized as a “blankcheck” company under the laws of the State of Delaware on April 12, 2005and was formed for the purpose of acquiring, through a merger, capital stockexchange, asset acquisition, stock purchase or other similar businesscombination, an operating business in the federal services and defenseindustries. As of the close of business on January 15, 2007, we acquired all ofthe outstanding capital stock of Advanced Technology Systems, Inc. (“ATSI”), aprovider of systems integration and application development to the U.S.government, for (a) $81.9 million in cash, reduced by a working capitaladjustment, the repayment of outstanding indebtedness of ATSI and an aggregateof $8.395 million of escrowed funds, and (b) 173,913 shares of our commonstock.  The terms of the agreementprovided that the former shareholders of ATSI could benefit from certain earnout opportunities if certain adjusted EBITDA thresholds were achieved.  Based on the financial results to date, theCompany does not anticipate any payout under the earn out provisions.  In addition, on March 1, 2007, we acquiredall of the outstanding capital stock of Reliable Integration Services, Inc. (“RISI”),a network systems integrator provider serving U.S. government defense andcivilian agencies, for $1.3 million in the form of cash, promissory notes andthe assumption of debt, plus 46,296 shares of our common stock.  Also, on September 1, 2007, we acquired allof the outstanding capital stock of Potomac Management Group, Inc. (“PMG”), aninformation technology, multi-media services and maritime consulting providerserving primarily the U.S. Government defense and civilian agencies, for $16.6million in the form of cash, promissory notes, and 134,408 shares of our commonstock.

ATS (www.atsva.com) is a professional services firmserving both the Federal Government and state and local government agencies,specializing in systems integration and application development; informationtechnology infrastructure management to support its clients’ program or systemobjectives through the design and implementation of customized solutions;  strategicinformation technology consulting (business process redesign); and networkmanagement.

Our diverse customer baseconsists primarily of U.S. government agencies. The following schedule presentsthe breakdown by customer type for the three- and nine-month periods endedSeptember 30, 2007. ATS’ largest clients in the three months ended September30, 2007 were the U.S. Department of Housing and Urban Development and FannieMae, representing approximately 26% and 16%, respectively, of its totalrevenue.  For the nine months endedSeptember 30, 2007, the percentages were 24% for the U.S. Department of Housingand Urban Development and 16% for Fannie Mae.

| **REVENUE BY CUSTOMER TYPE**              | ** ** | **For the 3 Months  Ended 9/30/07** | ** ** | **For the 9 Months  Ended 9/30/07** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
|                                      |       |                                |       |                                |       |
| **Defense and Intelligence**              |       | 26.1                                | %          | 24.0                                | %          |
| **Civilian Agencies**                     |       | 48.2                                | %          | 46.6                                | %          |
| **State/Local Government and Commercial** |       | 25.7                                | %          | 29.4                                | %          |
| **Total**                                 |       | 100.0                               | %          | 100.0                               | %          |

 

We derive substantiallyall of our revenues from fees for consulting services.  We generate these fees from contracts withvarious payment arrangements, including time and materials contracts,fixed-price contracts and cost-reimbursable contracts.  During the three and nine months endedSeptember 30, 2007, revenues from these contract types were approximately 58%,37% and 5%, respectively, of total revenues. We typically issue invoices monthly to manage outstanding accountsreceivable balances.  We recognizerevenues on time and materials contracts based on actual hours delivered at thecontracted billable hourly rates plus the cost of materials incurred.  We recognize revenues on fixed-pricecontracts using the percentage-of-completion method based on costs we incurredin relation to total estimated costs.  However,if the contract has a service element, we recognize revenues on a straight-linebasis over the term of the contract.  Werecognize cost-type contracts to the extent of costs incurred plus aproportionate amount of fee earned.

On occasion, we enterinto contracts that include the delivery of a combination of two or more of ourservice offerings.  Typically, suchmultiple-element arrangements incorporate the design, development, ormodification of systems and an ongoing obligation to manage, staff, maintain,host, or otherwise run solutions and systems provided to the client.  Such contracts are divided into separate unitsof accounting, and the total arrangement fee is allocated to each unit based onits relative fair value when evidence of such fair value is known.  In accordance with our revenue recognitionpolicy, revenue is recognized separately for each element.

The fees under certaingovernment contracts may be increased or decreased in accordance with cost orperformance incentive provisions that measure actual performance againsttargets or other criteria.  Such incentivefee awards or penalties are included in revenue at the time the amounts can bereasonably determined.  Provisions foranticipated contract losses are recognized at the time they become known.

 

 

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In the three and ninemonths ended September 30, 2007, we derived revenue as a prime contractor andsubcontractor as depicted in the table below.

| **REVENUE BY PRIME/SUB CONTRACTOR** | ** ** | **For the 3 Months  Ended 9/30/07** | ** ** | **For the 9 Months  Ended 9/30/07** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| **PRIME**                           |       | 93                                  | %          | 83                                  | %          |
| **SUB**                             |       | 7                                   | %          | 17                                  | %          |
| **TOTAL**                           |       | 100                                 | %          | 100                                 | %          |

 

Our most significantexpense is direct costs, which consist primarily of project personnel salariesand benefits, and direct expenses incurred to complete projects.  The number of consulting personnel assignedto a project will vary according to the size, complexity, duration, and demandsof the project.  As of September 30,2007, we had 586 personnel who worked on our contracts.

General andadministrative expenses consist primarily of costs associated with ourexecutive management, finance and administrative groups, human resources, salesand marketing personnel, and costs associated with marketing and bidding onfuture projects, unassigned consulting personnel, personnel training, occupancycosts, depreciation and amortization, travel and all other branch and corporatecosts.

Investment and otherincome consist primarily of interest income earned on our cash, cashequivalents and marketable securities.

**ContractBacklog**

We define backlog as thefuture revenue we expect to receive from our contracts and otherengagements.  We generally include inbacklog the estimated revenue represented by contract options that have beenpriced, though not exercised.  We do notinclude any estimate of revenue relating to potential future delivery ordersthat might be awarded under our General Services Administration Multiple AwardSchedule contracts, other Indefinite Delivery/Indefinite Quantity  (“IDIQ”) contracts, or other contractvehicles that are also held by a large number of firms, an order whichpotential further delivery orders or task orders might be issued by any of alarge number of different agencies and are likely to be subject to acompetitive bidding process.  AtSeptember 30, 2007, our backlog was approximately $148.8 million, of which$40.6 million was funded.

**RecentEvents**

On January 16, 2007, weannounced that the board of directors of the Company had approved therepurchase of up to $15 million of either the Company’s common stock or itswarrants.  On September 7, 2007, theCompany announced the completion of the repurchase program, during which theCompany had repurchased a total of 2,811,400 shares of common stock for a totalof approximately $13.5 million and 3,705,755 warrants for approximately$1,430,000.

On September 1, 2007, theCompany acquired Potomac Management Group, Inc. (“PMG”), a 149-employeeinformation technology and multimedia services provider serving mostly U.S.government agencies, for approximately $16.6 million.  In addition to this amount, there is thepotential for $1.5 million of payments to the former owners should PMG meetcertain performance objectives. Management believes that PMG’s client base and work product complementsATSI’s client base and work product and provides opportunities for both companiesto cross sell services.

On October 15, 2007, theCompany announced the signing of a definitive agreement to acquire Number SixSoftware, Inc. (“Number Six”).  NumberSix is a provider of application development and information technologyconsulting to both government and commercial customers.  This acquisition supports the Company’sstrategic growth plan to broaden its information technology services expertiseand add new customers in each of the Company’s target sectors.  The closing of this transaction is subject tocustomary conditions, including approval by the stockholders of Number Six, andis anticipated in November 2007.

**Resultsof Operations**

We acquired ATSI as ofclose of business on January 15, 2007, acquired RISI on March 1, 2007 and acquiredPotomac Management Group, Inc. (“PMG”) on September 1, 2007.  Prior to our acquisition of the ATSIbusiness, we had no operations and generated no revenue.  Accordingly, we are presenting threecomparisons, two for the successor company and one for the predecessorcompany.  The first of the two successorcompany comparisons compares our results for the three

 

 

 

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months ended September30, 2007 to the three months ended September 30, 2006. The results for thethree months ended September 30, 2006 only reflect the results of ATS, whichhad no operations during the quarter.

The second comparison forthe successor company compares the results for the nine months ended September30, 2007 to the nine months ended September 30, 2006.  For the period ended September 30, 2007,these results reflect eight and a half months of revenues and expenses for ATSIand seven months of revenues and expenses for RISI, and one month of revenueand expenses for PMG, which correspond to the dates these companies wereacquired during the first and third quarters. The results for the nine months ended September 30, 2006 only reflectthe results of ATS, which had no operations during the period.

The predecessorcomparison we are providing is that of ATSI for the three-and nine-monthperiods ending July 31, 2006 which correspond to the first three quarters ofthe predecessor company’s prior fiscal year.

 

 

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The following tables setforth certain financial data as dollars and as a percentage of revenues.
| ** **                                    | ** ** | **Successor**                             | ** ** | **Successor**                             | ** ** | **Predecessor**                           | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **ATS Corp  3 months  ending  9/30/2007** | ** ** | **ATS Corp  3 months  ending  9/30/2006** | ** ** | **ATS Corp  9 months  ending  9/30/2007** | ** ** | **ATS Corp  9 months  ending  9/30/2006** | ** ** | **ATS I  3 months  ending  7/31/2006** | ** ** | **ATS I  9 months  ending  7/31/2006** | ** ** |
| **As a  Percentage of Revenue Revenue**       | ** ** | $                                         | **25,647** | ** **                                | —     | ** **                                | $          | **75,372** | ** ** | — | ** ** | $ | **30,049** | ** ** | $ | **86,232** | ** ** |
|                                          |       | —                                    |       | —                                    |       | —                                    |       | — |   | — |   | — |   |
| **Operating  Costs and Expenses**             |       | —                                    |       | —                                    |       | —                                    |       | — |   | — |   | — |   |
| Cost of Services                              |       | 17,753                                    |       | —                                    |       | 52,923                                    |       | — |   | 18,907 |   | 54,138 |   |
| Selling, general  and administrative          |       | 5,851                                     |       | 102                                       |       | 18,007                                    |       | 996 |   | 9,431 |   | 27,807 |   |
| Depreciation and  Amortization                |       | 186                                       |       | —                                    |       | 466                                       |       | — |   | 202 |   | 622 |   |
| Amortization of  Intangible Assets            |       | 1,146                                     |       | —                                    |       | 2,871                                     |       | — |   | 5 |   | 34 |   |
|                                          |       | —                                    |       | —                                    |       | —                                    |       | — |   | — |   | — |   |
| **Total  operating costs and expenses**       |       | 24,936                                    |       | 102                                       |       | 74,266                                    |       | 996 |   | 28,546 |   | 82,602 |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Operating  Income**                         |       | 711                                       |       | (102                                      | )          | 1,106                                     |       | (996 | ) | 1,503 |   | 3,630 |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Other  Income (Expense)**                   | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income  (expense), net               |       | (125                                      | )          | 1,449                                     |       | 26                                        |       | 4,033 |   | (93 | ) | (277 | ) |
| Gain (Loss) on  warrant liabilities           |       | —                                    |       | 4,200                                     |       | (6,930                                    | )          | 5,040 |   | — |   | — |   |
| Other income                                  |       | 0                                         |       | —                                    |       | 10                                        |       | — |   | 31 |   | 47 |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  (Loss) Before Income Taxes**        |       | 586                                       |       | 5,546                                     |       | (5,787                                    | )          | 8,077 |   | 1,442 |   | 3,400 |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  Tax (Benefit) Expense**             | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                       |       | 233                                       |       | 840                                       |       | 507                                       |       | 1,721 |   | 751 |   | 1,564 |   |
| Deferred                                      |       | —                                    |       | (232                                      | )          | —                                    |       | (348 | ) | — |   | — |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  (Loss) from Continuing Operations** |       | 353                                       |       | 4,938                                     |       | (6,294                                    | )          | 6,704 |   | 691 |   | 1,836 |   |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Loss  from Discontinued Operations**        |       | —                                    |       | —                                    |       | —                                    |       | — |   | (624 | ) | (1,195 | ) |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Net  Income (Loss)**                        | ** ** | **$**                                     | **353**    | ** **                                | **$**      | **4,938**                                 | ** ** | **$** | **(6,294** | **)** | **$** | **6,704** | ** ** | **$** | **68** | ** ** | **$** | **641** | ** ** |
| ** **                                    | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                                   |       | 100.0                                     | %          | —                                    |       | 100.0                                     | %          | — |   | 100.0 | % | 100.0 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Operating  Costs and Expenses**             | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of Services                              |       | 69.2                                      | %          | —                                    |       | 70.2                                      | %          | — |   | 62.9 | % | 62.8 | % |
| Selling, general  and administrative          |       | 22.8                                      | %          | —                                    |       | 23.9                                      | %          | — |   | 31.4 | % | 32.2 | % |
| Depreciation and  Amortization                |       | 0.7                                       | %          | —                                    |       | 0.6                                       | %          | — |   | 0.7 | % | 0.7 | % |
| Amortization of  Intangible Assets            |       | 4.5                                       | %          | —                                    |       | 3.8                                       | %          | — |   | 0.0 | % | 0.0 | % |
|                                          |       | 0.0                                       | %          | —                                    |       | 0.0                                       | %          | — |   | 0.0 | % | 0.0 | % |
| **Total  operating costs and expenses**       |       | 97.2                                      | %          | —                                    |       | 98.5                                      | %          | — |   | 95.0 | % | 95.8 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Operating  Income**                         |       | 2.8                                       | %          | —                                    |       | 1.5                                       | %          | — |   | 5.0 | % | 4.2 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Other  Income (Expense)**                   | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income  (expense), net               |       | (0.5                                      | )%         | —                                    |       | 0.0                                       | %          | — |   | (0.3 | )% | (0.3 | )% |
| Gain (Loss) on  warrant liabilities           |       | 0.0                                       | %          | —                                    |       | (9.2                                      | )%         | — |   | 0.0 | % | 0.0 | % |
| Other income                                  |       | 0.0                                       | %          | —                                    |       | 0.0                                       | %          | — |   | 0.1 | % | 0.1 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  (Loss) Before Income Taxes**        |       | 2.29                                      | %          | —                                    |       | (7.68                                     | )%         | — |   | 4.80 | % | 3.94 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  Tax (Benefit) Expense**             | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                       |       | 0.9                                       | %          | —                                    |       | 0.7                                       | %          | — |   | 2.5 | % | 1.8 | % |
| Deferred                                      |       | 0.0                                       | %          | —                                    |       | 0.0                                       | %          | — |   | 0.0 | % | 0.0 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Income  (Loss) from Continuing Operations** |       | 1.4                                       | %          | —                                    |       | (8.4                                      | )%         | — |   | 2.3 | % | 2.1 | % |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Loss  from Discontinued Operations**        |       | 0.0                                       | %          | —                                    |       | 0.0                                       | %          | — |   | (2.1 | )% | (1.4 | )% |
|                                          |       |                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |
| **Net  Income (Loss)**                        | ** ** | **1.4**                                   | %          | —                                    | ** ** | **(8.4**                                  | **)%**     | — | ** ** | **0.2** | **%** | **0.7** | **%** |
|                                               |            |                                           |            |                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

20

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Our revenues andoperating results may be subject to significant variation from quarter toquarter depending on a number of factors, including the progress of contracts,revenue earned on contracts, the number of billable days in a quarter, thetiming of the pass-through of other direct costs, the commencement andcompletion of contracts during any particular quarter, the schedule of thegovernment agencies for awarding contracts, the term of each contract that wehave been awarded, and general economic conditions.  Because a significant portion of ourexpenses, such as certain personnel and facilities costs, are fixed in theshort term, successful contract performance and variation in the volume ofactivity, as well as in the number of contracts commenced or completed duringany quarter, may cause significant variations in operating results from quarterto quarter.

The Federal Government’sfiscal year ends September 30.  If thebudget for the next fiscal year has not been approved by that date, our clientsmay have to suspend engagements that we are working on until a budget has beenapproved.  Such suspensions may cause usto realize lower revenues in the fourth calendar quarter of the year.  Further, a change in presidentialadministrations and in senior government officials may negatively affect therate at which the Federal Government purchases technology.

As a result of thefactors above, period-to-period comparisons of our revenues and operatingresults may not be meaningful.  Youshould not rely on these comparisons as indicators of future performance as noassurances can be given that quarterly results will not fluctuate, causing amaterial adverse effect on our operating results and financial condition.

**Results of Operations for the Successor Company forthe Three Months ended September 30, 2007 compared with the Three Months EndedSeptember 30, 2006.**

*Revenuesand cost of services: *The Company had no operating revenues orcost of services in the three months ended September 30, 2006, compared to$25.6 million of revenues and $17.8 million of cost of services in the threemonths ended September 30, 2007.

*Selling,general and administrative expenses:*  Selling,general and administrative expenses of $102,400 for the three months endedSeptember 30, 2006 were related to the pursuit of potential acquisitioncandidates. For the three months ended September 30, 2007, the $5.9 million ofselling, general and administrative expenses were related to operations.

*Depreciationand amortization:* There was no depreciation expense in the threemonths ended September 30, 2006. For the three months ended September 30, 2007,the $0.2 million of depreciation expense was related to operations.

*Amortizationof intangible assets:* There was no amortization ofintangible assets in the three months ended September 30, 2006. For the threemonths ended September 30, 2007, the $1.1 million of amortization expense wasrelated to the recording of intangible assets after the acquisitions.

*Interestincome (expense): *Interest expense was $0.1 million for thethree months ended September 30, 2007, due primarily to borrowing against theCompany’s line of credit.  Interestincome for the three month ending September 30, 2006 was $1.4 million.  The interest income for the period endedSeptember 30, 2006 was primarily related to earnings on funds that were held intrust until the Company consummated an acquisition, which occurred on January15, 2007.

*Gain(Loss) on warrant liabilities:*  For the threemonths ended September 30, 2006, we recognized a gain of $4.2 million from thechange in the fair value of the warrant liability.  Because the warrant agreement, until March14, 2007, was silent as to whether we were required to net cash settle thewarrants if we were unable to deliver common stock to the warrants holders, wewere required to mark the warrants to market as liabilities and thereforerecognize gains or losses on the increase or decrease in the fair value of thewarrants as reflected in the three months ended September 30, 2006.  Effective March 14, 2007, the warrantagreement was clarified to state that we are not required to net cash settlethe instruments if we are unable to deliver shares of common stock to thewarrant holders.  As a result, we are nolonger required to mark the liability to fair value and the liability wasreclassified in the first quarter of 2007 to additional paid in capital.

*Income(loss) before income tax:*  For the three months endedSeptember 30, 2007, income before tax was $0.6 million as compared to $5.6 millionfor the three months ended September 30, 2006, of which $4.2 million wasattributable to the change in fair value of the warrant liability, and $1.4million was attributable to interest income.

*Provisionfor income taxes:*  Our income tax expense for the quarters endedSeptember 30, 2007 and September 30, 2006 was $233,000 and $608,000,respectively.  The effective tax rate forthe three months ended September 30, 2007 was 39.6% compared with 11.0% for thesame period in 2006 due to the exclusion of the gain from change in fair valueof the warrant liability and amortization expenses.

 

21

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**Results of Operations for the Successor Companyfor the Nine Months Ended September 30, 2007 compared with the Nine MonthsEnded September 30, 2006.**

*Revenuesand cost of services: *The Company had no operating revenues orcost of services in the nine months ended September 30, 2006, compared to $75.4million of revenues and $52.9 million in cost of services in the nine monthsended September 30, 2007.

*Selling,general and administrative expenses:*  Selling,general and administrative expenses of $1.0 million for the nine months endedSeptember 30, 2006 were related to the pursuit of potential acquisitioncandidates. For the nine months ended September 30, 2007, the $18.0 million ofselling, general and administrative expenses were related to operations.

*Depreciationand amortization:*  There was no depreciation expense in the ninemonths ended September 30, 2006. For the nine months ended September 30, 2007,the $0.5 million of depreciation expense was related to operations.

*Amortizationof intangible assets:* There was no amortization ofintangible assets in the nine months ended September 30, 2006. For the ninemonths ended September 30, 2007, the $2.9 million of amortization expensereflects the amortization of intangible assets resulting from the acquisitionsof ATSI, RISI and PMG.

*Interestincome (expense): *Interest income was $26,000 in the ninemonths ended September 30, 2007, and $4.0 million for the nine months endedSeptember 30, 2006. The interest income for the period ended September 30, 2006was primarily related to earnings on funds that were held in trust until theCompany consummated an acquisition, which occurred on January 15, 2007.

*Gain(Loss) on warrant liabilities:*  There was aloss on warrant liabilities in the amount of $6.9 million for the nine monthsended September 30, 2007 and a gain of $5.0 million for the nine-month periodended September 30, 2006.  Because thewarrant agreement, until March 14, 2007, was silent as to whether we wererequired to net cash settle the warrants if we were unable to deliver commonstock to the warrants holders, we were required to mark the warrants to marketas liabilities and therefore recognize gains or losses on the increase ordecrease in the fair value of the warrants as reflected in the nine monthsended September 30, 2006.  EffectiveMarch 14, 2007, the warrant agreement was clarified to state that we are notrequired to net cash settle the instruments if we are unable to deliver sharesof common stock to the warrant holders. As a result, we are no longer required to mark the liability to fairvalue and the liability was reclassified in the first quarter of 2007 toadditional paid in capital.

*Income(loss) before income tax:* The loss beforetax for the nine months ended September 30, 2007 was $5.8 million, primarilydue to change in the fair value of the warrant liability. For the nine monthsended September 30, 2006, income before taxes was $8.1 million, primarilybecause of the interest income and the gain on warrant liabilities.

*Provisionfor income taxes:*  The provision for income tax was $0.5 millionfor the nine months ended September 30, 2007 from $1.4 million for the ninemonths ended September 30, 2006.

**Results of Operations for the Successor Companyfor the Three Months Ended September 30, 2007 Compared with the Three MonthsEnded July 31, 2006 for the Predecessor Company.**

*Revenues: *Revenues decreased by 15% to $25.6 million for thethree-month period ended September 30, 2007, from $30.0 million for the threemonths ended July 31, 2006.  The declinein revenues between these two periods is primarily related to the winding downof one major contract and several smaller ones.

*Cost ofservices:*  Cost of services decreased by 6% to $17.8million for the three-month period ended September 30, 2007, from $18.9 millionfor the three months ended July 31, 2006. Cost of services did not decrease in proportion to the decrease inrevenues primarily due to a shift in business base from labor tosubcontractors.  ATS labor derivedrevenues generate a higher margin.

*Selling,general and administrative expenses:*  Selling,general and administrative expenses decreased 38% to $5.9 million in thethree-month period ended September 30, 2007 from $9.4 million for the threemonths ended July 31, 2006.  The primaryreasons for this decrease were factors related to the acquisition of ATSI by ATS.  During the period ending July 31, 2006, ATSIincurred a large amount of expenses relating to its sale and compensation forthe previous owners which did not recur in the three-month period endedSeptember 30, 2007.

*Depreciationand amortization:*  Depreciation and amortization expense decreased8% to $186,000 for the three- month period ended September 30, 2007, from$202,000 for the three months ended July 31, 2006.  The predecessor company used the doubledeclining balance method of depreciating assets whereas, during the 2007quarter, the successor 

 

22

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company valued the assetsacquired in the acquisition of ATSI and RISI at fair value as of the dates ofacquisition and depreciation was adjusted in the quarter to reflect thestraight line method of depreciation from each acquisition date.

*Amortizationof intangible assets:* Amortization of intangibleassets increased to $1.2 million in the three-month period ended September 30,2007 from $5,000 in the three-month period ended July 31, 2006 because of theamortization of intangible assets associated with the acquisitions of ATSI,RISI and PMG.

*OperatingIncome (loss):* Operating income decreased 53% to $0.7 millionfor the three-month period ended September 30, 2007 from $1.5 million for thethree months ended July 31, 2006, due to the decrease in revenues and increasedamortization of intangible assets.

*Interestincome (expense): *Interest expense increased by 35% to$125,000 in the three months ended September 30, 2007 from an expense of $92,500for the three months ended July 31, 2006.

*Provisionfor income taxes:*   The provision for income tax decreased by69% to $233,000 for the three months ended September 30, 2007 from $751,000 forthe three months ended July 31, 2006 because of the decrease in income. Theeffective tax rates for the periods ended September 30, 2007 and July 31, 2006were 42.0% and 52.0%, respectively.  Thedecrease in the effective tax rate was due to the non deductibility of the lossfrom change in fair value of the warrant liability and amortization expenses.

**Results of Operations for the Successor Companyfor the Nine Months ended September 30, 2007 Compared with the Nine MonthsEnded July 31, 2006 for the Predecessor Company.**

*Revenues: *Revenues decreased by 13% to $75.4 million for thenine-month period ended September 30, 2007, from $86.2 million for the ninemonths ended July 31, 2006.  The declinein revenue between these two periods is primarily related to a winding down ofa contract and the fact that the period ended September 30, 2007 reflects eightand one half months of revenue offset by pick-up in revenue from theacquisitions of RISI and PMG as opposed to a full nine months of revenue for2006.

*Cost ofservices:*  Cost of services decreased by 2% to $52.9million for the nine-month period ended September 30, 2007, from $54.1 millionfor the nine months ended July 31, 2006. Cost of services did not decrease in proportion to the decrease inrevenues, primarily due to the increased compensation costs during this periodand the increased utilization of subcontractor labor versus ATS labor.

*Selling,general and administrative expenses:*  Selling,general and administrative expenses decreased 35% to $18.0 million in thenine-month period ended September 30, 2007 from $27.8 million for the ninemonths ended July 31, 2006.  The primaryreasons were factors related to the acquisitions of ATSI by ATS.  ATSI was required to pay $4.7 million inretention bonuses (including associated payroll taxes), $1.7 million inpayments under an employee stock option plan and phantom stock plan (includingdividends), and $0.3 million in legal and accounting fees associated with thetransaction.

*Depreciationand amortization:*  Depreciation and amortization expensedecreased 25% to $0.5 million for the nine- month period ended September 30,2007, from $0.6 million for the nine months ended July 31, 2006.  The predecessor company used the doubledeclining balance method of depreciating assets whereas during the 2007 period,the successor company valued the assets acquired in the acquisition of ATSI andRISI at the fair market value as of the dates of acquisition and depreciationwas adjusted in the period to reflect the straight line method of depreciationfrom the acquisition dates.

*Amortizationof intangible assets:* Amortization of intangibleassets increased to $2.9 million in the nine-month period ending September 30,2007 from $34,000 in the nine-month period ended July 31, 2006 because of theamortization of the intangible assets associated with the acquisitions of ATSI,RISI and PMG.

*Operatingincome (loss):*  Operating income decreased 70% to $1.1million for the nine-month period ended September 30, 2007 from $3.6 millionfor the nine months ended July 31, 2006, due to lower revenue and increasedamortization costs.

*Interestincome (expense): *Interest income equaled $26,000 in thenine months ended September 30, 2007 compared to an expense of $277,000 for thenine months ended July 31, 2006, because of lower borrowings during the 2007period.

*Loss onderivative liabilities attributable to warrants: *For the nine months ended September 30, 2007, weincurred a charge of $6.9 million on the change in fair value of the warrantliability.

 

23

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*Provisionfor income taxes:*  The provision for income taxes decreased by69% to $0.5 million for the nine months ended September 30, 2007 from $1.6million for the nine months ended July 31, 2006 because of the decrease inincome.

**Financial Condition, Liquidity and Capital Resources**

*Financial Condition*:  Total assets increased $9.0 million to $132.2million as of September 30, 2007 compared to $123.2 million as of December 31,2006, primarily due to goodwill associated with the purchase of primarily ATSIand PMG.  The $121.0 million inshort-term investments as of December 31, 2006 were used to acquire ATSI andRISI in the first quarter of 2007 and PMG in the third quarter.

Ourtotal liabilities increased to $38.8 million as of September 30, 2007 from$15.2 million as of December 31, 2006. The increase was due to our acquisitions and offset by the decrease inthe warrant liability.   As the warrantagreement was clarified effective March 14, 2007 to provide that we are notrequired to net cash settle the instruments if we are unable to deliver sharesof common stock to the warrant holders, we are no longer required to mark thewarrants to market and the warrant liability was reclassified during the firstquarter to additional paid-in capital.

*Liquidity and Capital Resources:*  Our primary liquidity needs are to financethe costs of operations, acquire capital assets and to make selective strategicacquisitions.  We expect to meet ourshort-term requirements through funds generated from operations and from acredit facility with Bank of America, which was initially signed on June 4,2007, as further discussed below.  Ourcash requirements to fund acquisitions will also be funded by cash generatedfrom operations and the aforementioned credit facility.

Netcash used by operating activities was $8.3 million for the nine months endedSeptember 30, 2007, while net cash provided by operating activities for thesame period in 2006 was $2.3 million. Net cash used by operating activities of the predecessor was $2.7million for the nine months ended July 31, 2006.  Cash used by operating activities isprimarily driven by net loss, adjusted for working capital changes, which wereprincipally changes in accounts receivable, current assets and accruedexpenses.

Netcash provided by investing activities was $26.5 million for the nine monthsended September 30, 2007.  During thenine months ended September 30, 2007, we obtained $121.0 million from the saleof U.S. government securities while investing $79.4 million in the acquisitionof ATSI, $1.0 million in the acquisition of RISI and $13.7 million in theacquisition of PMG which comprised the majority of this investing activity.

Netcash used by financing activities was $18.3 million for the nine months endedSeptember 30, 2007.  This was principallyused to repurchase shares of the Company’s stock.

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

TheCompany entered into a Credit Agreement with Bank of America on June 4,2007.  This agreement provides a $25.0million credit facility with the option for the Company to increase the amountavailable under the credit facility up to $50.0 million.  The credit agreement bears interest at theLIBOR rate plus between 150 to 225 basis points per annum, depending on theCompany’s ratio of funded debt to EBITDA. Pursuant to the agreement, theCompany is required to meet certain financial covenants as further described.  The covenants are an asset coverage ratio ofnot less than 1.20 to 1.0, a consolidated leverage ratio not to exceed 3.50 to1.0 and a consolidated fixed charge coverage ratio of at least 1.20 to 1.0.  The covenants are tested based on thefinancial position of the Company at the end of each calendar quarter.  At, and as of, September 30, 2007, theCompany was in full compliance with such covenants.  As of September 30, 2007, the Company had a$13,496,000 outstanding balance on the credit facility.

Undersome of our fixed-price contracts, we receive advance payments for work to beperformed in future months.  If we do notperform the work, the unearned portion of these advances will be returned toour clients.

**Off-BalanceSheet Arrangements**

Asof the three and nine months ended September 30, 2007, we did not have anyoff-balance sheet arrangements.

**ContractualObligations**

Thefollowing table summarizes our contractual obligations as of September 30, 2007that require us to make future cash payments. For contractual obligations, we included payments that we have anunconditional obligation to make.  

 

24

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| ** **                 | ** ** | **Less than  One Year** | ** ** | **One to Three  Years** | ** ** | **Three to Five  Years** | ** ** | **More than  Five Years** | ** ** | **Total** | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                 | ** ** | **(in thousands)**      | ** ** |
| Long-Term Debt Obligations |       | $                       | 86         |                    | $          | 13,496                   |       | $                         | —     |      | $          | — |   | $ | 13,582 |   |
| Capital Leases             |       | 81                      |       | 108                     |       | —                   |       | —                    |       | 189       |       |
| Operating Leases           |       | 2,858                   |       | 1,807                   |       | 69                       |       | —                    |       | 4,734     |       |
| Total                      |       | $                       | 3,025      |                    | 15,411     |                     | $          | 69                        |       | $         | —     |   | $ | 18,505 |   |
|                            |            |                         |            |                         |            |                          |            |                           |            |           |            |  |  |  |  |  |

 

***Recent Accounting Pronouncements***

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157 (“SFAS No. 157”), Fair ValueMeasurements.  SFAS No. 157 provides anew single authoritative definition of fair value and enhanced guidance formeasuring the fair value of assets and liabilities.  It requires additional disclosures related tothe extent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings.  SFAS No. 157is effective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  Weare currently evaluating what effect, if any, the adoption of SFAS No. 157 willhave on our financial position, results of operations, or cash flows.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115*(“SFAS No. 159”). SFAS No. 159 permitsan entity, at specified election dates, to choose to measure certain financialinstruments and other items at fair value. The objective of SFAS No. 159 is toprovide entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently,without having to apply complex hedge accounting provisions.SFAS No. 159 is effective for accounting periods beginning afterNovember 15, 2007. The Company will adopt SFAS No. 159 for the fiscal yearbeginning January 1, 2008 and is currently assessing the impact of adoptingSFAS No. 159 on the consolidated financial statements.

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

We are exposed to certainfinancial market risks, the most predominant being fluctuations in interestrates for borrowings under our credit facility. As of September 30, 2007, we had an approximate outstanding balance of$13,496,000 under our line of credit which was used to partly finance theacquisition of PMG.  We currently investour excess funds in an overnight bank sweep account.

**Item 4. Controls and Procedures**

Our management performed an evaluation under thesupervision and with the participation of our Chief Executive Officer(principal executive officer) and our Chief Financial Officer (principalfinancial officer) of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) or 15d-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of September 30,2007. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that as of September 30, 2007, the Company’sdisclosure controls and procedures were designed to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Commission’s rules and forms.

**Changesin Internal Control Over Financial Reporting**

As noted in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2006, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,conducted an assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2006, based on the criteria setforth in the framework in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Wedetermined that our internal control over financial reporting was ineffectivebecause of the following material weaknesses as described below:

1.             Through December 31, 2006, we had no operations, nofull-time personnel and very few personnel of any kind.  Our activities from inception in late 2005and into 2006 focused on completing our initial public offering, identifyingacquisition candidates and then completing the acquisition of ATSI. As a resultof these factors, we had neither the resources, nor the personnel, to have inplace adequate internal control.  Thematerial weaknesses in our internal control over financial reporting relatesprimarily to our inability to segregate duties.

 

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2.             In addition, we lacked documentation of the policies andprocedures that were in place.

We are aggressivelyaddressing the internal control weaknesses summarized above.  With the completion of the acquisition ofATSI in January 2007, we have additional personnel to address the segregationof duties in our financial reporting process. We have also enhanced our accounting and financial personnel with newhires, as well as the utilization of a third party consulting organization withexpertise in financial regulatory compliance. The Company has completed the documentation of its processes andinternal controls as required.  Theinitial testing of the controls has resulted in no material weaknesses.

Therewere no other changes in the Company’s internal control over financialreporting for the first nine months of 2007 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**Limitations on the Effectivenessof Controls**

Because of the inherentlimitations in all control systems, no assessment of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management’s override of the control.  The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions; over time, controls maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

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**PART II —OTHER INFORMATION**

**Item 1.Legal Proceedings**

Fromtime to time, we are involved in various legal matters and proceedingsconcerning matters arising in the ordinary course of business.  Other than possibly the below disclosure, wecurrently believe that any ultimate liability arising out of these matters andproceedings will not have a material adverse effect on our financial position,results of operations or cash flows.

AdvancedTechnology Systems, Inc. (“ATS”) is a defendant in *Maximus,Inc. vs. Advanced Technology Systems, Inc.*, pending in theConnecticut Superior Court, Hartford District. The lawsuit asserts claims under a subcontract between Maximus and ATSrelated to a prime contract between Maximus and the State of Connecticut.  The complaint seeks compensatory damages “inexcess of $3 million,” punitive damages and other relief.  The case was filed in August 2007 and is in avery preliminary stage.  ATS has filed amotion to dismiss certain of the claims and plans to deny the balance of theclaims and to assert counterclaims against Maximus.  In addition, based on the claims asserted inthe lawsuit, the Company has made an indemnification demand against the sellingshareholders of ATS under the stock purchase agreement governing thetransaction in which the Company acquired ATS. That demand is subject to the dispute resolution process provided for inthe stock purchase agreement.

**Item 1A.Risk Factors**

There are no materialupdates to the risk factors previously disclosed in our Form 10-K for the yearended December 31, 2006.  Therisks disclosed in our Annual Report on Form 10-K are not the only risks thatwe encounter. Additional risks and uncertainties not currently known to us orthat we currently deem to be immaterial also may materially adversely affectour business, financial condition and /or operating results.

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**
| **Purchases of Equity Securities by Issuer** | ** ** |
|-----------------------------------------------------------------------|------------|
| **Period**                                                            | ** ** | **Total Number of   Shares/Warrants Purchased** | ** ** | **Average Price Paid   per Share/Warrant** | ** ** | **Total Number of   Shares Purchased as   Part of Publicly   Announced Plans or   Programs** | ** ** | **Maximum Number   (or Approximate  Dollar Value) of   Shares (or Units)   that May Yet Be   Purchased Under the  Plans or Programs** | ** ** |
| July 1-31, 2007                                                       |       | 71,322 |   | $.41 |   | 71,322 |   | 0 |   |
|                                                                  |       |   |   |   |   |   |   |   |   |
| August 1-31, 2007                                                     |       | 13,900 |   | $.39 |   | 13,900 |   | 0 |   |
|                                                                  |       |   |   |   |   |   |   |   |   |
| September 1-30, 2007                                                  |       | 2,750,000 |   | $.38 |   | 2,750,000 |   | 0 |   |
|                                                                  |       |   |   |   |   |   |   |   |   |
| Total                                                                 |       | 2,835,222 |   | $.38 |   | 2,835,222 |   | 0 |   |

 

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(1)             FromJuly 1 to September 30, 2007, the Company repurchased 2,835,222 stock warrantsat an average price of $0.38 per warrant.

On January 16,2007, the Company announced a stock repurchase program of up to $15 million ofeither the Company’s common stock or its warrants, from time to time, subjectto market conditions.  On September 7,2007, the Company announced the completion of the warrant and common stockrepurchase program authorized by its Board of Directors, under which theCompany paid approximately $13.5 million in cash to redeem 2,811,400 shares ofcommon stock at an average price of $4.80 per share and approximately $1.4million in cash to purchase 3,705,755 warrants at an average price of $0.39 perwarrant.

**Recent Sales of Unregistered Securities**

On January 16, 2007,in connection with the closing of the acquisition of ATSI, the Company issued173,913 shares of common stock, valued at $1.0 million for purposes of thetransaction, to the selling shareholders of ATSI. These shares constituted aportion of the transaction consideration. The issuance of the shares was exemptas a private placement pursuant to Section 4(2) of the Securities Act of1933.

 

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On March 1,2007, in connection with the closing of the acquisition of RISI, the Companyissued 46,296 shares of common stock, valued at $0.2 million for purposesof the transaction, to the selling shareholders of RISI. These sharesconstituted a portion of the transaction consideration. The issuance of theshares was exempt as a private placement pursuant to Section 4(2) of theSecurities Act of 1933.

OnSeptember 1, 2007, in connection with the closing of the acquisition ofPMG, the Company issued 134,408 shares of common stock, valued at$0.5 million for purposes of the transaction, to the selling shareholdersof PMG. These shares constituted a portion of the transaction consideration.The issuance of the shares was exempt as a private placement pursuant toSection 4(2) of the Securities Act of 1933.

A total of 11,462shares of unregistered stock, valued at approximately $42,650, were issued tosix directors of the Company on July 20, 2007, and a total of 11,619 shares ofunregistered stock, valued at approximately $42,650, were issued to sixdirectors of the Company on October 16, 2007, in lieu of cash for director feecompensation.  The issuances of theseshares are exempt under Section 4(2) of the Securities Act of 1933, as amended.

**Item 3.  Defaults Upon SeniorSecurities.**

Not applicable.

**Item 4.  Submission of Mattersto a Vote of Security Holders.**

No matters were submitted toa vote of security holders during the third quarter of 2007.

 

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**Item 5.  Other Information.**

On June 29, 2007, the Company entered into a firstamendment to its Credit Agreement, dated as of June 4, 2007, among the Company,Bank of America, N.A., as administrative agent, and the other lenders a partythereto.  The purpose of the amendmentwas to add the definition of “Interest Rate Change Date” to the definition of “LIBORMonthly Floating Base Rate” in Section 1.01 of the Agreement.  A copy of this amendment is included asExhibit 10.1 to this Form 10-Q and is incorporated herein by reference.

**Item 6.  Exhibits.**
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 2.1                 |       | Agreement and Plan of Merger and Reorganization,  dated as of October 12, 2007, by and among ATS Corporation, ATS NSS  Acquisition, Inc., Number Six Software, Inc. and the Principal Stockholders  of Number Six Software, Inc. (incorporated by reference to Exhibit 2.1 to a Current  Report on Form 8-K filed October 16, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 2.2                 |       | Stock Purchase Agreement dated August 24, 2007 by  and among ATS Corporation, Potomac Management Group, Inc. and Potomac  Management Group, Inc.’s Stockholders (incorporated by reference to Exhibit  2.1 to a Current Report on Form 8-K filed September 7, 2007)                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 3.1                 |       | Second Amended and Restated Certificate of  Incorporation dated January 16, 2007 (incorporated by reference to Exhibit  3.1 to a Current Report on Form 8-K filed January 19, 2007)                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 3.2                 |       | Amended By-laws (incorporated by reference to  Exhibit 4.2 to the Registration Statement on Form S-8 filed on September 14,  2007, File No. 333-146075)                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 4.1                 |       | Specimen Unit Certificate (incorporated by reference  to Exhibit 4.1 to the Registration Statement on Form S-1, as amended,  initially filed May 4, 2005)                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 4.2                 |       | Specimen Common Stock Certificate (incorporated by  reference to Exhibit 4.2 to the Registration Statement on Form S-1, as  amended, initially filed on May 4, 2005)                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 4.3                 |       | Specimen Warrant Certificate (incorporated by  reference to Exhibit 4.3 to the Registration Statement on Form S-1, as  amended, initially filed on May 4, 2005)                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 4.4                 |       | Warrant Agreement between Continental Stock Transfer  & Trust Company and the Company (incorporated by reference to Exhibit 4.4  in our Annual Report on Form 10-K filed March 31, 2006)                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 4.5                 |       | Warrant Clarification Agreement between Continental  Stock Transfer & Trust Company and the Company (incorporated by reference  to Exhibit 4.1 to a Current Report on Form 8-K filed June 4, 2007)                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 10.1                |       | Amendment No. 1 to Credit Agreement with Bank of  America dated June 29, 2007                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 10.2                |       | Amended and Restated Employment Agreement by and  between ATS Corporation and Dr. Edward H. Bersoff, dated October 25, 2007  (incorporated by reference to Exhibit 10.1 to a Current Report on Form 8-K  filed October 29, 2007)                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 31.1                |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,  as amended                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 31.2                |       | Certification of Principal Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,  as amended                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 32.1                |       | Certification of Principal Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                |
| 32.2                |       | Certification of Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                             |

##### ** **

 

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##### **SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                   |   | ATS Corporation |
|------------------------|--------|-----------------|
|                   |   |            |
|                   |   | By:             | /s/ Edward H. Bersoff |
|                   |   |            | Chairman of the Board  and |
|                   |   |            | Chief Executive Officer |
|                   |   |            |   |
|                   |   | By:             | /s/ Pamela A. Little |
|                   |   |            | Chief Financial Officer |
|                   |   |            |
| Date: November 9, 2007 |   |            |

 

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