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$16,769,668 was paid to converting shareholders. These conversions were also funded with the proceeds of our initial public offering. Following the completion of the acquisition, we announced and implemented a common stock repurchase program that was completed on September 7, 2007 with the repurchase of a total of 2,811,400 shares of common stock for a total of approximately $13.5 million and 3,705,755 warrants for approximately $1,430,000.
On January 9, 2007, we announced that after the close of the ATSI acquisition (occurring on January 15, 2007), the Company would and did repurchase 2,625,000 shares of the Company’s common stock from the founders of the Company for approximately $2,888.
As of the close of business on February 28, 2007, we acquired RISI, a 37-employee network systems integrator serving U.S. government defense and civilian agencies for approximately $1.3 million in cash, promissory notes and assumption of debt, plus $0.2 million in our common stock.
On September 1, 2007, we acquired PMG, a 149-employee information technology and multimedia services provider serving mostly U.S. government agencies, for approximately $16.6 million. In addition to this amount, there was the potential for $1.5 million of payments to the former owners should PMG meet certain performance objectives over a two year period ending August 31, 2009. As of December 31, 2008, $0.7 million has been earned and paid, leaving a potential $0.8 million remaining to be earned, should the remaining goals be met.
On November 9, 2007, we acquired NSS, a 175-employee provider of application development and information technology consulting to both government and commercial customers, for an aggregate consideration of approximately $35.4 million, which included $3.0 million in the form of ATSC common stock valued at the average price over the 15-day period before the closing of the transaction, and promissory notes and deferred payments totaling approximately $5.5 million.
On December 31, 2007, we merged RISI, PMG, and NSS into ATSI, which serves as our operating company. ATSC continues to serve as the holding company for ATSI. There are no other entities owned by ATSC other than ATSI.
The ATSC 2006 Omnibus Incentive Compensation Plan was approved by the stockholders at the January 12, 2007 stockholders’ meeting. The plan reserves 1.5 million shares of our common stock for issuance to our employees and employees of our subsidiaries.
Operations Overview
We work with the federal government under three primary contract types: cost-plus-fee, time-and-materials, and fixed-price contracts. Cost-plus-fee contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements which generate higher profit margins generally, relative to their higher risk. Where customer requirements are clear, we prefer to enter into time-and-materials and fixed-price arrangements rather than cost-plus-fee contracts.
Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other items to support the project. Thus, once we win new business, the key to delivering the revenue is through hiring new employees to meet customer requirements, retaining our employees, and ensuring that we deploy them on direct-billable jobs. Therefore, we closely monitor hiring success, attrition trends, and direct labor utilization. Since we earn higher profits from the labor services that our employees provide compared with subcontracted efforts and other reimbursable items, we seek to optimize our labor content on the contracts we win.
Cost of services includes labor, or the salaries and wages of our employees, plus fringe benefits; the costs of subcontracted labor and outside consultants; third-party materials; and other direct costs such as travel incurred to support contract efforts. Since we earn higher profits on our own labor services, we expect the ratio of cost of services to revenue to decline when our labor services mix increases relative to subcontracted labor or third-party material. Conversely, as subcontracted labor or third-party material purchases for customers increase relative to our own labor services, we expect the ratio of cost of services to revenue to increase. As we continue to bid and win larger contracts, our own labor services component could decrease. Typically, the larger contracts are broader in scope and require more diverse capabilities, thus resulting in
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more subcontracted labor. In addition, we can face hiring challenges in staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the economics of these larger jobs are nonetheless generally favorable because they increase income, broaden our revenue base, and have a favorable return on invested capital.
Depreciation and amortization expenses are affected by the level of our annual capital expenditures and the amount of identified intangible assets related to acquisitions. We do not presently foresee significant changes in our capital expenditure requirements. As we continue to make selected strategic acquisitions, the amortization of identified intangible assets may increase as a percentage of our revenue. We evaluate our intangible assets for impairment annually and as a result of our 2008 evaluation recorded a charge of $56.8 million during the fiscal year ended December 31, 2008.
Our operating income, or revenue minus cost of services, selling, general and administrative expenses, and depreciation and amortization, and thus our operating margin, or the ratio of operating income to revenue, is driven by the mix and execution on our contracts, how we manage our costs, and the amortization charges resulting from acquisitions.
Our cash position is driven primarily by the level of net income, working capital in accounts receivable and capital expenditures.
Contract Backlog
Future growth is dependent upon the strength of our target markets, our ability to identify opportunities, and our ability to successfully bid and win new contracts. The following table summarizes our contract backlog at the end of the 2008 and 2007 years: (in thousands)
 | | | | |
| | Year Ended December 31, |
| | | 2008 | | 2007 |
Backlog:
| | | | | | | | |
| Funded | | $ | 53,116 | | | $ | 97,256 | |
| Unfunded | | | 125,322 | | | | 133,336 | |
| Total backlog | | $ | 178,438 | | | $ | 230,592 | |
Our total backlog of approximately $178 million as of December 31, 2008 represented a 23% decrease over the fiscal year 2007 backlog, which was approximately $231 million as of December 31, 2007. We currently expect to recognize revenue during fiscal year 2009 from approximately 63% of our total backlog as of December 31, 2008.
Contract Mix
Contract profit margins are generally affected by the type of contract. We can typically earn higher profits on fixed-price and time-and-materials contracts than cost-reimbursable contracts. Thus, an important part of growing our operating income is to increase the amount of services delivered under fixed-price and time-and-materials contracts. The following table summarizes our historical contract mix, measured as a percentage of total revenue, for the periods indicated:
| | | | | | |
| | Successor | | Predecessor |
| | | Year Ended
December 31,
2008 | | Year Ended
December 31,
2007 | | Year Ended
October 31,
2006 |
| Time-and-materials | | | 63 | % | | | 66 | % | | | 50 | % |
| Fixed-price | | | 37 | % | | | 31 | % | | | 42 | % |
| Cost-reimbursable | | | — | % | | | 3 | % | | | 8 | % |
| Totals | | | 100 | % | | | 100 | % | | | 100 | % |
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Critical Accounting Policies and Significant Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ significantly from those estimates.
We believe the following critical accounting policies affect the more significant estimates and judgments used in the preparation of our financial statements.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or goods delivered, the contract price is fixed or determinable, and collectability is reasonably assured. The Company’s revenue is derived from primarily three different types of contractual arrangements: time-and-materials contracts, fixed-price contracts and cost-plus-fee contracts. Revenue on time-and-material contracts is recognized based on the actual hours performed at the contracted billable rates for services provided, plus materials’ cost for products delivered to the customer, and costs incurred on behalf of the customer. Revenue on fixed-price contracts is recognized ratably over the period of performance or as a percentage-of-completion depending on the nature of services to be provided under the contract. Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in performance of the contract. For cost-plus-fee contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.
The Company’s fixed price contracts are either service based or require some level of customization. Revenue is recognized ratably over the service period on fixed-price-service contracts. In accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, for certain of the Company’s fixed-price-completion contracts that involve the design, customization of software products or development of systems management applies the provisions of Statement of Position (SOP) 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue for such arrangements is recognized on the percentage-of-completion method using costs incurred in relation to total estimated project costs.
Contract costs include labor, material, subcontracting costs, and allocated allowable indirect costs. Revenue recognition requires judgment in estimating the revenue and associated costs, assessing risk in performance, and evaluating technical issues. The Company may estimate award fees and incentive fees or penalties in recognizing revenue based on anticipated awards or when there is sufficient information to determine.
On federal government contracts, the Company allocates costs to contracts consistent with the federal procurement regulations. The direct and indirect costs associated with these contracts are subject to government audit by DCAA. Management does not anticipate any material adjustment to the consolidated financial statements in subsequent periods for audits not yet performed. The incurred cost audits have been completed through the fiscal year ended October 31, 2005 for ATSI. The Company’s management performs periodic reviews with the program managers to assess contract performance. If an adjustment is necessary to a previous estimate, the change is normally recorded in the current period earnings.
Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under the contract, the costs of the effort, and an ongoing assessment of the Company’s progress toward completing the contract. From time to time, as part of its standard management process, facts develop that require the Company to revise our estimated total costs on revenue. To the extent that a revised estimate affects contract profit or revenue previously recognized, the Company records the cumulative effect of the revision in the period in which the revision becomes known. The full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes probable and can be reasonably estimated.
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Under certain circumstances, the Company may elect to work at risk prior to receiving an executed contract document. The Company has a formal procedure for authorizing any such at risk work to be incurred. Revenue, however, is deferred until a contract modification or vehicle is provided by the customer.
Goodwill and Other Purchased Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Other purchased intangible assets include the fair value of items such as customer contracts, backlog and customer relationships. SFAS No. 142,Goodwill and Other Intangible Assets (SFAS No. 142), establishes financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but rather tested for impairment on an annual basis or triggering event. Purchased intangible assets with a definite useful life are amortized on a straight-line basis over their estimated useful lives.
The Company performs an annual impairment test for goodwill each year. The Company’s testing approach utilizes a discounted cash flow analysis corroborated by market based approaches to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value exceeds the estimated fair value of the business, an impairment is indicated and SFAS No. 142 prescribes the method for determining the impairment amount, if any. After conducting the 2008 test, the Company concluded that goodwill was impaired $48.8 million. Prior to recording the goodwill impairment charges, the Company tested the purchased intangible assets and other long-lived assets as required by SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets and the carrying value of the customer-related intangibles was determined to be impaired by $8.0 million. The impairment was recognized in the third quarter of 2008. The impairment charge was primarily driven by discounted cash flow analysis reflecting unique business characteristics and future earnings potential. This is a non-cash charge that reduces the carrying amounts of the goodwill and intangibles recorded in connection with the acquisitions made in 2007. A significant portion of the goodwill had no tax basis. As such, the deferred tax benefit resulting from the impairment charge was $6.0 million, or 10.6% of the impairment charge. See Notes 7 and 8 for details of this transaction.
Long-Lived Assets (Excluding Goodwill)
In accordance with the provisions of SFAS No. 144 in accounting for long-lived assets such as property, equipment and intangible assets subject to amortization, the Company reviews the assets for impairment. If circumstances indicate the carrying value of the asset may not be fully recoverable, a loss is recognized at the time impairment exists and a permanent reduction in the carrying value of the asset is recorded. As noted above, the Company recorded an impairment charge of approximately $8 million related to customer-related intangible assets.
Income Taxes
Deferred income taxes are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which principally arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must analyze income tax reserves, as well as determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income, as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors.
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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-not threshold of financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. As of December 31, 2008, the Company does not have any material gross unrecognized tax benefits or liabilities.
Derivatives and Interest Rate Swaps
The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended. Accordingly, derivatives are recognized as either assets or liabilities in the consolidated balance sheet, and gains and losses are recognized based on changes in the fair values. Gains and losses on derivatives designated or deemed to be an effective hedge are recognized, net of tax in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements. As an offset to gains or losses recognized in comprehensive income a gross long-term asset or long-term liability is recognized, as well as an appropriate long-term deferred tax liability or asset. Gains and losses on derivatives that are not designated or intended to be an effective hedge are recorded to operations. The classification of gains and losses resulting from the changes in fair values is dependent on the intended use of the derivative and its resulting designation. The Company uses the change in variable cash flow method to measure the effectiveness of its hedges.
Results of Operations
The following table sets forth the results of operations as a percent of revenue for the years ended December 31, 2008, December 31, 2007 and December 31, 2006.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year to Year Change |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | 2007 to 2008 | | 2006 to 2007 |
| Successor | | Dollars | | Percentages | | Dollars | | Percent | | Dollars | | Percent |
Statement of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 131,548,557 | | | $ | 106,887,039 | | | $ | — | | | | 100.0 | % | | | 100.0 | % | | | — | | | $ | 24,661,518 | | | | 23.1 | % | | $ | 106,887,039 | | | | — | |
Operating costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct costs | | | 88,476,707 | | | | 75,010,192 | | | | — | | | | 67.3 | % | | | 70.2 | % | | | — | | | | 13,466,515 | | | | 18.0 | % | | | 75,010,192 | | | | — | |
| Selling, general and administrative expenses | | | 30,927,440 | | | | 25,925,693 | | | | 1,167,701 | | | | 23.5 | % | | | 24.3 | % | | | — | | | | 5,001,747 | | | | 19.3 | % | | | 24,757,992 | | | | 2,120.2 | % |
| Depreciation and amortization | | | 6,444,516 | | | | 4,877,244 | | | | — | | | | 4.9 | % | | | 4.6 | % | | | — | | | | 1,567,272 | | | | 32.1 | % | | | 4,877,244 | | | | 100.0 | % |
| Impairment charge | | | 56,772,541 | | | | — | | | | — | | | | 43.2 | % | | | — | | | | — | | | | 56,772,541 | | | | 100.0 | % | | | — | | | | — | |
| Total operating costs and expenses | | | 182,621,204 | | | | 105,813,129 | | | | 1,167,701 | | | | 138.8 | % | | | 99.0 | % | | | — | | | | 76,808,075 | | | | 72.6 | % | | | 104,645,428 | | | | 8,961.7 | % |
| Operating (loss) income | | | (51,072,647 | ) | | | 1,073,910 | | | | (1,167,701 | ) | | | (38.8%) | | | | 1.0 | % | | | — | | | | (52,146,557 | ) | | | (4,855.8%) | | | | 2,241,611 | | | | (192.0%) | |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest (expense) income, net | | | (3,427,859 | ) | | | (492,722 | ) | | | 5,551,779 | | | | (2.6%) | | | | (0.5%) | | | | — | | | | (2,935,137 | ) | | | 595.7 | % | | | (6,044,501 | ) | | | (108.9%) | |
| (Loss) gain on warrant liabilities | | | — | | | | (6,930,000 | ) | | | 5,880,000 | | | | — | | | | (6.5%) | | | | — | | | | 6,930,000 | | | | (100%) | | | | (12,810,000 | ) | | | (217.9%) | |
| Other income | | | 29,627 | | | | 248,612 | | | | — | | | | 0.0 | % | | | 0.2 | % | | | — | | | | (218,985 | ) | | | (88.1%) | | | | 248,612 | | | | 100.0 | % |
| (Loss) income before income taxes | | | (54,470,879 | ) | | | (6,100,200 | ) | | | 10,264,078 | | | | (41.4%) | | | | (5.7%) | | | | — | | | | (48,370,679 | ) | | | 792.9 | % | | | (16,364,278 | ) | | | (159.4%) | |
| Income tax (benefit) expense | | | (4,642,464 | ) | | | 453,529 | | | | 1,984,678 | | | | (3.5%) | | | | 0.4 | % | | | — | | | | (5,095,993 | ) | | | (1,123.6%) | | | | (1,531,149 | ) | | | (77.1%) | |
| Net (loss) income | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | | (37.9%) | | | | (6.1%) | | | | — | | | | (43,274,686 | ) | | | 660.3 | % | | $ | (14,833,129 | ) | | | (179.2%) | |
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| | | | | | | | | | | | |
| | | | | | | | | |
Year to Year Change |
| | | For the Period
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 | | For the Period
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 | | 2006 Predecessor to
2007 Successor |
| Predecessor | | Dollars | | Percentages | | Dollars | | Percent |
Statement of Income:
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue
| | $ | 21,318,054 | | | $ | 112,254,086 | | | | 100.0 | % | | | 100.0 | % | | $ | (5,367,047 | ) | | | (4.8%) | |
Operating Costs and Expenses
| | | | | | | | | | | | | | | | | | | | | | | | |
| Direct costs | | | 13,565,817 | | | | 72,471,117 | | | | 63.6 | % | | | 64.6 | % | | | 2,539,075 | | | | 3.5 | % |
| Selling, general and administrative expenses | | | 15,350,369 | | | | 37,012,188 | | | | 72.0 | % | | | 33.0 | % | | | (11,086,495 | ) | | | (30.0%) | |
| Depreciation and amortization | | | 64,097 | | | | 666,442 | | | | 0.3 | % | | | 0.6 | % | | | 4,210,802 | | | | 631.8 | % |
| Total operating costs and expenses | | | 28,980,283 | | | | 110,149,747 | | | | 135.9 | % | | | 98.1 | % | | | (4,336,618 | ) | | | (3.9%) | |
| Operating Income | | | (7,662,229 | ) | | | 2,104,339 | | | | (35.9%) | | | | 1.9 | % | | | (1,030,429 | ) | | | (49.0%) | |
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense, net | | | (108,200 | ) | | | (383,075 | ) | | | (0.5%) | | | | (0.3%) | | | | (109,647 | ) | | | 28.6 | % |
| Gain (Loss) on warrant liabilities | | | — | | | | — | | | | — | | | | — | | | | (6,930,000 | ) | | | — | |
| Other income | | | 54,266 | | | | 61,693 | | | | 0.3 | % | | | 0.1 | % | | | 186,919 | | | | 303.0 | % |
| Income (Loss) Before Income Taxes | | | (7,716,163 | ) | | | 1,782,957 | | | | (36.2%) | | | | 1.6 | % | | | (7,883,157 | ) | | | (442.1%) | |
| Income Tax (Benefit) Expense | | | (2,684,217 | ) | | | 1,282,762 | | | | (12.6%) | | | | 1.1 | % | | | (829,233 | ) | | | (64.6%) | |
| Income (Loss) from Continuing Operations | | $ | (5,031,946 | ) | | $ | 500,195 | | | | (23.6%) | | | | 0.4 | % | | | 7,053,924 | | | | (1,410.2%) | |
| Loss from Discontinued Operations | | | — | | | | 1,325,074 | | | | 0.0 | % | | | 1.2 | % | | | (1,325,074 | ) | | | — | |
| Net Income (Loss) | | $ | (5,031,946 | ) | | $ | (824,879 | ) | | | (23.6%) | | | | (0.7%) | | | $ | (5,728,850 | ) | | | 694.5 | % |
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007.
Revenue. The Company had $106.9 million of revenue in the year ended December 31, 2007, compared to $131.5 million of revenue in the year ended December 31, 2008. The increase in revenue is directly attributable to the full year impact of the acquisitions of PMG and NSS in August and November of 2007, respectively.
Direct Costs. The Company had $75.0 million in direct costs in the year ended December 31, 2007, compared to $88.5 million in direct costs in the year ended December 31, 2008. This increase is primarily due to an 18% increase in direct labor costs in the year ended December 31, 2008 in connection with our revenue growth of 23% over the year ended December 31, 2007.
Selling, General and Administrative Expenses. For the year ended December 31, 2007, the Company had $25.9 million of selling, general and administrative expenses, compared to $30.9 million for the year ended December 31, 2008. The increase of $5.0 million is primarily due to the inclusion of a full twelve-month year of operations for the entities acquired during fiscal 2007, resulting in increased overhead labor and labor-related costs of $2.7 and $1.2 million, respectively.
Depreciation. Depreciation expense for the year ended December 31, 2007 was $0.7 million compared to $1.3 million in 2008. The increase was primarily due to the depreciation of leasehold improvements and equipment acquired in connection with the Company’s relocation of its headquarters.
Amortization of Intangible Assets. Amortization expense for the year ended December 31, 2007 was $4.2 million, which reflects the amortization of intangible assets resulting from the acquisitions of ATSI, RISI, PMG and NSS. For the year ended December 31, 2008, the Company had $5.2 million of amortization
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expense. The 2008 expense reflects a full year of amortization expense for PMG and NSS, which were only included for 4 months and 1.5 months, respectively, during the fiscal year ended 2007. The amount of monthly amortization was subsequently reduced by the impairment charge taken at the end of August 2008.
Impairment Charge. The Company recognized an impairment charge in the amount of $56.8 million in the year ended December 31, 2008. The adverse economic climate and an updated outlook for businesses acquired in 2007, led to the impairment charge. The charge reduces the carrying value of goodwill and other intangibles recorded in connection with the acquisitions made in 2007.
Interest Income (Expense). Interest expense was $3.4 million in the year ended December 31, 2008, and interest expense was $0.5 million for the year ended December 31, 2007. The increased interest expense was primarily related to the increased debt associated with the acquisitions in 2007.
Gain (Loss) on Warrant Liabilities. There was a loss on warrant liabilities in the amount of $6.9 million for the year ended December 31, 2007. Because the warrant agreement, until March 14, 2007, was silent as to whether we were required to net cash settle the warrants if we were unable to deliver common stock to the warrant holders, we were required to mark the warrants to market as liabilities and therefore recognize gains or losses on the increase or decrease in the fair value of the warrants. Effective March 14, 2007, the warrant agreement was clarified to state that we are not required to net cash settle the instruments if we are unable to deliver shares of common stock to the warrant holders. As a result, we are no longer required to mark the liability to fair value and the liability was reclassified in the first quarter of 2007 to additional paid in capital.
Income (Loss) Before Income Taxes. The loss before income taxes for the year ended December 31, 2007 was $6.1 million, primarily due to a change in the fair value of the warrant liability. For the year ended December 31, 2008, income before taxes was a loss of $54.5 million, due to the effect of the impairment of goodwill and certain intangible assets.
Provision for Income Taxes. The provision for income tax was a benefit of $4.6 million for the year ended December 31, 2008 and an expense of $0.5 million for the year ended December 31, 2007. The effective income tax rates in fiscal years 2008 and 2007 were 8.5 percent and a negative 7.4 percent, respectively. The differences in the tax rates were heavily influenced by the impairments expense in fiscal 2008, which is not deductible for tax purposes, and the loss on warrant liability, which is also non-deductible for tax purposes.
Comparison of Operating Results for the Successor Company for the Twelve Months Ended December 31, 2007 Compared with the Twelve Months Ended October 31, 2006 for the Predecessor Company.
Revenue. Revenue decreased by 5% to $106.9 million for the twelve-month period ended December 31, 2007, from $112.3 million for the twelve months ended October 31, 2006. The decrease in revenue between these two periods is primarily related to a winding down of a contract and the period ended December 31, 2007 reflects eleven and one-half months of revenue for ATSI offset by increases in revenue related to the acquisitions of RISI and PMG, compared to a full twelve months of revenue for 2006.
Operating Cost and Expenses. Cost of services increased by 4% to $75.0 million for the twelve-month period ended December 31, 2007, from $72.5 million for the twelve months ended October 31, 2006. This was primarily due to the increased compensation costs during this period and the increased utilization of subcontractor labor versus ATSI labor.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 30% to $25.9 million in the twelve-month period ended December 31, 2007 from $37.0 million for the twelve months ended October 31, 2006. The primary reasons were factors related to the acquisition of ATSI by ATSC. ATSI was required to pay $4.7 million in retention bonuses (including associated payroll taxes), $1.7 million in payments under an employee stock option plan and phantom stock plan (including dividends), and $0.3 million in legal and accounting fees associated with the transaction.
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Depreciation and Amortization. Depreciation and amortization expense remained constant at $0.7 million for the twelve-month period ended December 31, 2007, and the twelve months ended October 31, 2006.
Amortization of Intangible Assets. Amortization of intangible assets increased to $4.2 million in the twelve-month period ending December 31, 2007 from $34,000 in the twelve-month period ended October 31, 2006 because of the amortization of the intangible assets associated with the acquisitions of ATSI, RISI, PMG and NSS.
Operating Income (Loss). Operating income decreased 49% to $1.1 million for the twelve-month period ended December 31, 2007 from $2.1 million for the twelve months ended October 31, 2006, due to lower revenue and increased amortization costs.
Interest Income (Expense). Interest expense equaled $492,000 in the twelve months ended December 31, 2007 compared to an expense of $383,000 for the twelve months ended October 30, 2006, because of higher borrowings during the 2007 period.
Loss on Derivative Liabilities Attributable to Warrants. For the twelve months ended December 31, 2007, we incurred a charge of $6.9 million on the change in fair value of the warrant liability.
Provision for Income Taxes. The provision for income taxes decreased by 65% to $0.4 million for the twelve months ended December 31, 2007 from $1.3 million for the twelve months ended October 30, 2006 because of the decrease in income. The effective income tax rate in the twelve months ended December 31, 2007 was a negative 7.4 percent, primarily due to the effect of the loss on the warrant liability, which is non-deductible for tax purposes. For the twelve months ended October 30, 2006, the effective tax rate was 71.9 percent, which was heavily impacted by a $4.2 million taxable income item not effecting book income.
Financial Condition, Liquidity and Capital Resources
Financial Condition. Total assets decreased $62.6 million to $106.4 million as of December 31, 2008 compared to $169.0 million as of December 31, 2007, primarily due to the impairment charge which decreased the carrying value of our goodwill and intangible assets. This was a non-cash charge, as operating income excluding the impairment was $5.7 million, generating $10.6 million in operating cash flows.
Our total liabilities decreased to $60.5 million as of December 31, 2008 from $73.7 million as of December 31, 2007. The decrease was due primarily to decreases in our long-term debt associated with our strong operating cash flow as discussed below and deferred income taxes relating to the deferred tax benefit arising from the impairment charge to goodwill and certain intangible assets.
Liquidity and Capital Resources. Our primary liquidity needs are to finance the costs of operations, acquire capital assets and to make selective strategic acquisitions. We expect to meet our short-term requirements through funds generated from operations and from a credit facility with Bank of America and Citizens Bank, which was initially signed on June 4, 2007, and subsequently raised to $50.0 million. As part of the agreement, we are required to meet certain financial covenants which are tested every quarter. As of December 31, 2008 we were in compliance with all covenants. Our cash requirements to fund acquisitions will be funded by cash generated from operations in addition to the credit facility. As of December 31, 2007 and December 31, 2008, we had a $41.1 and $32.6 million outstanding balance on the credit facility, respectively, leaving an available balance of $8.9 million and $17.4 million, respectively.
Net cash provided by operating activities was $10.6 million for the twelve months ended December 31, 2008, while net cash used by operating activities for December 31, 2007 was $3.7 million. Cash provided by operating activities is primarily driven by operating income (excluding the non-cash impairment charge), adjusted for working capital changes, which were principally changes in accounts receivable, income taxes receivable and accrued expenses.
Net cash used by investing activities was $1.2 million for the twelve months ended December 31, 2008. During the twelve months ended December 31, 2008, we used $0.4 million to purchase property and equipment and $0.8 million to make earn-out payments associated with one of our acquisitions.
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Net cash used by financing activities was $10.9 million for the twelve months ended December 31, 2008. During the twelve months ended December 31, 2008, we used $2.8 million to pay down notes payable associated with our acquisitions during fiscal 2007 and $8.5 million to pay down our line of credit.
We expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
As of the close of business on March 3, 2009, we had cash on hand of approximately $0.7 million.
Under some of our fixed-price contracts, we receive advance payments for work to be performed in future months. If we do not perform the work, the unearned portion of these advances will be returned to our clients.
Although we believe that funds generated by operations and available under our credit facility will be sufficient to fund our operations, additional capital, in the form of additional senior credit, other debt, or equity, would be needed to finance a significant additional acquisition.
Seasonality
Our quarterly operating margins are affected by, among other things, seasonality in our business model. We may experience a sequential decline in operating margins between our quarter ending June 30 and our quarter ending September 30. In the quarter ending September 30, we generally experience lower staff utilization rates. These lower utilization rates are attributable both to summer vacations and to increased proposal activity in connection with the end of the federal fiscal year.
Off-Balance Sheet Arrangements
As of December 31, 2008, we did not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2008 that require us to make future cash payments. For contractual obligations, we included payments that we have an unconditional obligation to make.
| | | | | | | | | | |
| | Less than
One Year | | One to
Three Years | | Three to
Five Years | | More than
Five Years | | Total |
| | | (In Thousands) |
| Long-Term Debt Obligations | | $ | 2,583 | | | $ | 34,493 | | | $ | — | | | $ | — | | | $ | 37,076 | |
| Capital Leases | | | 86 | | | | 1 | | | | — | | | | — | | | | 87 | |
| Operating Leases | | | 2,444 | | | | 3,822 | | | | 3,534 | | | | — | | | | 9,800 | |
| Total | | $ | 5,113 | | | $ | 38,316 | | | $ | 3,534 | | | | — | | | $ | 46,963 | |
Effects of Inflation
We generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years. Under our time and materials contracts, labor rates are usually adjusted annually by predetermined escalation factors. Our cost reimbursable contracts automatically adjust for changes in cost. Under our fixed-price contracts, we include a predetermined escalation factor, but generally, we have not been adversely affected by inflation.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted
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for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, for which the provisions of SFAS No. 157 should be applied retrospectively. In February 2008, the FASB issued Staff Position FAS 157-2,Effective Date of FASB Statement No. 157, which defers the implementation for the non-recurring nonfinancial assets and liabilities from fiscal years beginning after November 15, 2007 to fiscal years beginning after November 15, 2008. The statement provisions took effect for the Company as of January 1, 2008 and has not had a material effect on the Company’s financial position or results of operations, and management does not believe the deferred provisions will have a material effect on the Company’s financial position or results of operations when they become effective on January 1, 2009.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings 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 after November 15, 2007. The Company does not believe that adopting SFAS No. 159 has had an impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) — Business Combinations. SFAS No. 141(R) replaces FASB Statement No. 141 — Business Combinations. The new statement retains the fundamental requirements that the acquisition (or purchase) method of accounting be used for all business combinations and expands the definition of a business, thus increasing the number of transactions which may qualify as business combinations. Contingent consideration will be measured at fair value at the acquisition date, with changes in fair value recognized in earnings, and transaction-related expenses and restructuring costs will be expensed as incurred. Changes in acquired tax contingencies will be recognized in earnings if outside the purchase price allocation period (generally one year or less). Adjustments to finalize purchase price allocations will be shown as revised in future financial statements to reflect the adjustments as if they had been recorded on the acquisition date. Also, in the event of a bargain purchase (acquisition of a business at below fair market value of net assets acquired) a gain could be recognized, or in the event of a change in control of an existing investment a gain or loss could be recognized. SFAS No. 141(R) will be applied prospectively to business acquisitions with acquisition dates on or after January 1, 2009, early adoption is not permitted. The adoption of SFAS No. 141(R) will only impact the Company’s future acquisitions effect on its consolidated financial statements.
In December 2007, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”), “Share-Based Payment.” SAB 110 expresses the views of the staff regarding the use of a simplified method, as discussed in SAB 107, in developing an estimate of expected term of plain vanilla share options in accordance with SFAS No. 123R, “Share-Based Payment.” In SAB 107, the staff indicated that it believed that more detailed external information about employee exercise behavior would, over time, become readily available to companies. Therefore, the staff stated that it would not expect a company to use the simplified method for share option grants after December 31, 2007. In SAB 110, the staff stated that it understood that such detailed information may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. As allowed under SAB 110, we will continue to use the simplified method in estimating the expected term of our stock options until such time as more relevant detailed information becomes available.
Other new pronouncements issued but not yet effective until after December 31, 2008 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates for borrowings under our credit facility. As of December 31, 2008, we had an outstanding balance of $34,492,558 under our line of credit. We currently invest our excess funds in an overnight bank sweep account.
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In order to manage interest rate fluctuation exposure on the bank debt, the Company entered into an interest rate swap agreement with the Bank of America on November 9, 2007 providing the Company an ability to eliminate the variability of interest expense based on fluctuating rates on a $35 million notional amount of debt. The purpose of the derivative instrument is to hedge cash flows and not for trading purposes. The Company records cash payments and receipts related to its interest rate swap as adjustments to interest expense and as a component of operating cash flow. (See Note 11).
Item 8. Financial Statements and Supplementary Data
Reference is made to our financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We performed an assessment, as of December 31, 2008, of the effectiveness of the design and operation of our disclosure controls and procedures. This assessment was done under the supervision and with the participation of management, including our principal executive officer and principal financial officer. Included as Exhibits 32.1 and 32.2 to this Annual Report on Form 10-K are forms of “Certification” of our principal executive officer (our Chairman of the Board and Chief Executive Officer) and our principal financial officer (our Chief Financial Officer). The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K is the information concerning the assessment referred to in the Section 302 certifications and required by the rules and regulations of the SEC. You should read this information in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management is required to assess the effectiveness of our internal control over financial reporting as of the end of each fiscal year and report based on that assessment whether our internal control over financial reporting was effective. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management or our Board of Directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material adverse effect on our financial statements. |
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Limitations on the Effectiveness of Controls
Because of the inherent limitations in all control systems, no assessment of controls can provide absolute 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 in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Assessment of Effectiveness of Disclosure Controls Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008, based on the criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We determined that our internal control over financial reporting was effective.
Management, including our principal executive officer and our principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Changes in Internal Control Over Financial Reporting
During the fiscal year ended December 31, 2008, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The information as to Directors will be included in our Proxy Statement for the 2009 Annual Meeting of Stockholders (the “2009 Proxy Statement”) and is incorporated herein by reference.
Executive Officers
The following individuals were the executive officers of the Company as of February 10, 2009:
| | | | | | | | |
| Name | | Age | | Office Held | | Since | | Prior Business Experience (Last Five Years) |
| Edward H. Bersoff | | 66 | | Chairman and Chief
Executive Officer | | 2007 | | Chairman and Founder, Greenwich Associates since 2003 |
| Pamela A. Little | | 55 | | Executive Vice
President and Chief
Financial Officer | | 2007 | | Vice President and Chief Financial Officer, Athena Innovative Solutions (2005 – 2007), Vice President and Chief Financial Officer, ZKD, Inc. (2004 – 2005) |
| George Troendle | | 55 | | Executive Vice
President and Chief
Operating Officer | | 2008 | | Director, ATS Corporation (2007 – 2008), President Serco North America (2005 – 2006), Chief Executive Officer, Resource Consultants, Inc. prior to 2005 |
Audit Committee Financial Expert
The information as to the Audit Committee and the Audit Committee Financial Expert will be incorporated herein by reference to the Proxy Statement for the 2009 Annual Meeting of Stockholders.
Code of Ethics
The company has adopted a Code of Business Conduct for all of its employees, including the principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct can be found on the Company’s internet web site atwww.atsc.com under “Investor Relations — Code of Conduct.��
Item 11. Executive Compensation
The information required by this item will be included in our 2009 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item will be included in our 2009 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required in this item will be included in the 2009 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required in this item will be included in the 2009 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | Documents filed as part of this Report |
| (A) | Reports of Independent Registered Public Accounting Firm Regarding ATS Corporation |
| (B) | Report of Independent Registered Public Accounting Firm Regarding ATSI |
| (C) | Consolidated Statements of Operations for the fiscal years ended December 31, 2008, 2007, and 2006 (successor) and the three months ended January 15, 2007 and fiscal year ended October 31, 2006 (predecessor) |
| (D) | Consolidated Balance Sheets as of December 31, 2008 and 2007 |
| (E) | Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2008, 2007, and 2006 (successor) and the three months ended January 15, 2007 and fiscal year ended October 31, 2006 (predecessor) |
| (F) | Consolidated Statements of Shareholders’ Equity for the fiscal years ended December 31, 2008, 2007 and 2006 (successor) |
| (G) | Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2008, 2007 and 2006 |
| (H) | Notes to Consolidated Financial Statements |
| (2) | Supplementary Financial Data |
Schedule II — Valuation and Qualifying Accounts for the fiscal years ended December 31, 2008, 2007 and 2006 (successor)
The following exhibits are included with this report or incorporated herein by reference:
| | |
Exhibit
Number | | Description |
| 2.1 | | Stock Purchase Agreement dated April 19, 2006 among Federal Services Acquisition Corporation, Advanced Technology Systems, Inc. and the shareholders of Advanced Technology Systems, Inc. (“ATSI”) (included as Annex A to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 2.2 | | First Amendment to ATSI Stock Purchase Agreement (included as Annex A-1 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 2.3 | | Second Amendment to ATSI Stock Purchase Agreement (included as Annex A-2 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 2.4 | | Third Amendment to ATSI Stock Purchase Agreement (included as Annex A-3 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 2.5 | | Stock Purchase Agreement dated as of August 24, 2007 by and among ATS Corporation, Potomac Management Group, Inc. and the Shareholders of Potomac Management Group, Inc. (incorporated by reference to Exhibit 2.1 to a Current Report on Form 8-K filed on September 7, 2007) |
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| | |
Exhibit
Number | | Description |
| 2.6 | | 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 on October 16, 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 Bylaws (incorporated by reference to Exhibit 3.1 to a Current Report on Form 8-K filed February 17, 2009) |
| 4.1 | | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1, as amended, initially filed on 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 Warrant Report on Form 8-K filed March 14, 2007) |
| 10.1 | | Credit Agreement with Bank of America dated June 4, 2007 (incorporated by reference to Exhibit 10.1 on a Form 8-K filed June 8, 2007) |
| 10.2 | | Amendment No. 1 to Credit Agreement with Bank of America dated June 29, 2007 (incorporated by reference to Exhibit 10.1 for the Quarterly Report on Form 10-Q filed November 8, 2007) |
| 10.3 | | Amendment No. 2 to Credit Agreement with Bank of America dated November 9, 2007 (incorporated by reference to Exhibit 10.1 to a Current Report on Form 8-K filed November 13, 2007) |
| 10.4 | | Amendment No. 3 to Credit Agreement with Bank of America dated May 9, 2008 (incorporated by reference to Exhibit 10.1 for the Quarterly Report on Form 10-Q filed May 12, 2008) |
| 10.5 | | Balance Sheet Escrow Agreement among Federal Services Acquisition Corporation, certain shareholders of Advanced Technology Systems, Inc. and Branch Banking and Trust Company as Escrow Agent (included as Annex B-1 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 10.6 | | General Indemnity Escrow Agreement among Federal Services Acquisition Corporation, certain shareholders of Advanced Technology Systems, Inc. and Branch Banking and Trust Company as Escrow Agent (included as Annex B-2 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 10.7 | | Expense Escrow Agreement among Federal Services Acquisition Corporation, certain shareholders of Advanced Technology Systems, Inc. and Branch Banking and Trust Company as Escrow Agent (included as Annex B-3 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 10.8 | | Accounting Method Tax Escrow Agreement among Federal Services Acquisition Corporation, certain shareholders of Advanced Technology Systems, Inc. and Branch Banking and Trust Company as Escrow Agent (included as Annex B-4 to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
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| | |
Exhibit
Number | | Description |
| 10.9 | | Form of Registration Rights Agreement among Federal Services Acquisition Corporation and each of the Initial Stockholders (incorporated by reference to Exhibit 10.14 to Form S-1/A filed July 29, 2005) |
| 10.10 | | Registration Rights Agreement among Federal Services Acquisition Corporation and certain shareholders of Advanced Technology Systems, Inc. (included as Annex C to the Definitive Proxy Statement (No. 000-51552) dated December 11, 2006 and incorporated by reference herein) |
| 10.11 | | Registration Rights Agreement among ATS Corporation and the Principal Stockholders of Number Six Software, Inc. dated November 9, 2007 (incorporated by reference, to Exhibit 10.10 for Form 10-K filed March 17, 2008) |
| 10.12 | | ATS Corporation 2006 Omnibus Incentive Compensation Plan, as amended (incorporated by reference, to Exhibit 99.1 to Form S-8 filed September 14, 2007) |
| 10.13 | | ATS Corporation 2007 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to Form S-8 filed September 14, 2007) |
| 10.14 | | Contract dated July 24, 2006, as modified September 29, 2006, under which Advanced Technology Systems, Inc. provides IT contractor support to mission areas under cognizance of the Office of the Secretary of Defense (incorporated by reference to Exhibit 10.11 on a Current Report on Form 8-K filed January 19, 2007) |
| 10.15 | | Contract, as modified October 2006, between Advanced Technology Systems, Inc. Public Safety Solutions Division and the Metropolitan Nashville Police Department (MNPD) with respect to Advanced Records Management System (ARMS) project (incorporated by reference to Exhibit 10.12 on a Current Report on Form 8-K filed January 19, 2007) |
| 10.19 | | Restricted Share Award Agreement with Dr. Edward H. Bersoff dated March 19, 2007 (incorporated by reference to Exhibit 10.2 on a Current Report on Form 8-K filed March 21, 2007) |
| 10.20 | | Restricted Share Award Agreement with Pamela A. Little dated May 4, 2007 (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2007) |
| 10.21 | | Restricted Share Award Agreement with George Troendle dated June 18, 2007 (incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2007) |
| 10.22 | | Restricted Share Award Agreement with Ginger Lew dated June 18, 2007 (incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2007) |
| 10.23 | | Restricted Share Award Agreement with Joseph A. Saponaro dated March 29, 2007 (incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 9, 2007) |
| 10.24 | | Restricted Share Award Agreement with Edward J. Smith dated March 29, 2007 (incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 9, 2007) |
| 10.25 | | Restricted Share Award Agreement with Pamela A. Little dated December 17, 2007 (incorporated by reference, to Exhibit 10.24 for Form 10-K filed March 17, 2008) |
| 10.26 | | Restricted Share Award Agreement with Dr. Edward H. Bersoff dated December 17, 2007 (incorporated by reference, to Exhibit 10.25 for Form 10-K filed March 17, 2008) |
| 10.27 | | Employment Agreement with Pamela A. Little dated February 3, 2008 (incorporated by reference to Exhibit 10.1 on a Current Report on Form 8-K filed February 6, 2008) |
| 10.28 | | Deed of Lease between West*Group Properties, LLC and ATS Corporation, dated February 11, 2008, for the property located at 7925 Jones Branch Drive, McLean, Virginia 22102 (incorporated by reference to Exhibit 10.1 on a Current Report on Form 8-K filed February 14, 2008) |
| *10.31 | | Restricted Share Award Agreement with Joel Jacks dated May 7, 2008 |
| *10.32 | | Restricted Share Award Agreement with Ginger Lew dated May 7, 2008 |
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| | |
Exhibit
Number | | Description |
| *10.33 | | Restricted Share Award Agreement with Joseph A. Saponaro dated May 7, 2008 |
| *10.34 | | Restricted Share Award Agreement with Peter Schulte dated May 7, 2008 |
| *10.35 | | Restricted Share Award Agreement with Edward J. Smith dated May 7, 2008 |
| *10.36 | | Restricted Share Award Agreement with George Troendle dated May 7, 2008 |
| 10.37 | | Amended and Restated Employment Agreement by and between ATS Corporation and Dr. Edward H. Bersoff dated August 4, 2008 (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 7, 2008) |
| 10.38 | | Employment Agreement with George Troendle dated August 7, 2008 (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on November 7, 2008) |
| *10.39 | | Restricted Share Award Agreement with Jack Tomarchio dated September 4, 2008 |
| *10.40 | | Restricted Share Award Agreement with Dr. Edward H. Bersoff dated January 2, 2009 |
| *10.41 | | Restricted Share Award Agreement with Pamela A. Little dated January 2, 2009 |
| *10.42 | | Restricted Share Award Agreement with George Troendle dated January 2, 2009 |
| 23.1 | | Consent of Eisner LLP regarding ATS Corporation financial statements for the years ended December 31, 2006 and 2005 |
| 23.2 | | Consent of Grant Thornton LLP regarding ATSI financial statements for the year ended October 31, 2006 |
| 23.3 | | Consent of Grant Thornton LLP regarding ATS Corporation financial statements for the years ended December 31, 2007 and December 31, 2008 |
| 31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15(d)-19(a) of the Securities Exchange Act of 1934, as amended |
| 31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15(d)-19(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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
ATS Corporation
We have audited the accompanying consolidated balance sheets of ATS Corporation (a Delaware corporation) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, comprehensive loss and cash flows for each of the two years in the period ended December 31, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ATS Corporation as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Grant Thornton LLP
McLean, Virginia
March 12, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
ATS Corporation
We have audited the accompanying statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for the year ended December 31, 2006 of ATS Corporation (formerly Federal Services Acquisition Corporation) (a development stage company). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ATS Corporation for the year ended December 31 2006, in conformity with U.S. generally accepted accounting principles.
/s/ Eisner LLP
New York, New York
March 20, 2007
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Advanced Technology Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Advanced Technology Systems, Inc. and Subsidiaries (a Virginia corporation) for the period November 1, 2006 through January 15, 2007 and the year ended October 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, Advanced Technology Systems, Inc and Subsidiaries’ results of operations and cash flows for the period from November 1, 2006 through January 15, 2007 and the year ended October 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
McLean, Virginia
March 13, 2008
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ATS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | |
| | ATS Corporation
(Successor) | | ATSI
(Predecessor) |
| | |
Year Ended December 31, | | For the
Period from
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 |
| | | 2008 | | 2007 | | 2006 |
| Revenue | | $ | 131,548,557 | | | $ | 106,887,039 | | | $ | — | | | $ | 21,318,054 | | | $ | 112,254,086 | |
Operating costs and expenses
| | | | | | | | | | | | | | | | | | | | |
| Direct costs | | | 88,476,707 | | | | 75,010,192 | | | | — | | | | 13,565,817 | | | | 72,471,117 | |
| Selling, general and administrative expenses | | | 30,927,440 | | | | 25,925,693 | | | | 1,167,701 | | | | 15,350,369 | | | | 37,012,188 | |
| Depreciation and amortization | | | 6,444,516 | | | | 4,877,244 | | | | — | | | | 64,097 | | | | 666,442 | |
| Impairment | | | 56,772,541 | | | | — | | | | — | | | | — | | | | — | |
| Total operating costs and expenses | | | 182,621,204 | | | | 105,813,129 | | | | 1,167,701 | | | | 28,980,283 | | | | 110,149,747 | |
| Operating (loss) income | | | (51,072,647 | ) | | | 1,073,910 | | | | (1,167,701 | ) | | | (7,662,229 | ) | | | 2,104,339 | |
Other (expense) income
| | | | | | | | | | | | | | | | | | | | |
| Interest income (expense), net | | | (3,427,859 | ) | | | (492,722 | ) | | | 5,551,779 | | | | (108,200 | ) | | | (383,075 | ) |
| Gain (loss) on warrant liabilities | | | — | | | | (6,930,000 | ) | | | 5,880,000 | | | | — | | | | — | |
| Other income | | | 29,627 | | | | 248,612 | | | | — | | | | 54,266 | | | | 61,693 | |
| (Loss) income before income taxes | | $ | (54,470,879 | ) | | $ | (6,100,200 | ) | | $ | 10,264,078 | | | $ | (7,716,163 | ) | | $ | 1,782,957 | |
| Income tax (benefit) expense | | | (4,642,464 | ) | | | 453,529 | | | | 1,984,678 | | | | (2,684,217 | ) | | | 1,282,762 | |
| (Loss) income from continuing operations | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | $ | (5,031,946 | ) | | $ | 500,195 | |
| Loss from discontinued operations | | | | | | | — | | | | — | | | | — | | | | 1,325,074 | |
| Net (loss) income | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | $ | (5,031,946 | ) | | $ | (824,879 | ) |
| Gain on derivative liabilities attributed to warrants | | | — | | | | — | | | | (5,880,000 | ) | | | — | | | | — | |
| Net (loss) income | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 2,399,400 | | | $ | (5,031,946 | ) | | $ | (824,879 | ) |
Weighted average number of shares outstanding
| | | | | | | | | | | | | | | | | | | | |
| - basic | | | 21,231,654 | | | | 18,848,722 | | | | 26,250,000 | | | | 19,022,500 | | | | 19,022,950 | |
| - dilutive | | | 21,231,654 | | | | 18,848,722 | | | | 30,137,477 | | | | 19,022,500 | | | | 19,368,322 | |
Basic net (loss) income per share
| | | | | | | | | | | | | | | | | | | | |
| - Continuing operations | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.32 | | | $ | (0.26 | ) | | $ | 0.03 | |
| - Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (0.07 | ) |
| - Net (loss) income | | $ | (2.35 | ) | | | (0.35 | ) | | | 0.32 | | | | (0.26 | ) | | | (0.04 | ) |
Diluted net (loss) income per share
| | | | | | | | | | | | | | | | | | | | |
| - Continuing operations | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.8 | | | $ | (0.26 | ) | | $ | 0.03 | |
| - Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (0.07 | ) |
| - Net (loss) income | | $ | (2.35 | ) | | | (0.35 | ) | | | 0.8 | | | | (0.26 | ) | | | (0.04 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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ATS CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | |
| | ATS Corporation |
| | | Year Ended December 31, |
| | | 2008 | | 2007 |
ASSETS
| | | | | | | | |
Current assets:
| | | | | | | | |
| Cash and cash equivalents | | $ | 364,822 | | | $ | 1,901,977 | |
| Accounts receivable, net | | | 29,268,647 | | | | 31,191,784 | |
| Prepaid expenses and other current assets | | | 537,974 | | | | 923,803 | |
| Income tax receivable, net | | | — | | | | 1,567,094 | |
| Other current assets | | | 22,771 | | | | 16,663 | |
| Deferred income taxes, current | | | 1,321,890 | | | | 1,335,965 | |
| Total current assets | | | 31,516,104 | | | | 36,937,286 | |
| Property and equipment, net | | | 3,712,340 | | | | 1,501,409 | |
| Goodwill | | | 59,128,648 | | | | 107,600,686 | |
| Intangible assets, net | | | 8,304,686 | | | | 21,446,868 | |
| Restricted cash | | | 1,316,530 | | | | 1,278,489 | |
| Other assets | | | 387,897 | | | | 259,353 | |
| Deferred income tax benefit | | | 2,003,348 | | | | — | |
| Total assets | | $ | 106,369,553 | | | $ | 169,024,091 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | | | | | |
Current liabilities:
| | | | | | | | |
| Current portion of long-term debt | | $ | 2,583,333 | | | $ | 2,820,191 | |
| Capital leases – current portion | | | 86,334 | | | | 96,558 | |
| Accounts payable and accrued expenses | | | 10,224,266 | | | | 8,634,665 | |
| Accrued salaries and related taxes | | | 2,999,576 | | | | 4,425,966 | |
| Accrued vacation | | | 2,220,865 | | | | 2,479,540 | |
| Income taxes payable, net | | | 600,121 | | | | — | |
| Deferred revenue | | | 1,745,352 | | | | 2,164,574 | |
| Deferred rent – current portion | | | 379,520 | | | | 80,984 | |
| Total current liabilities | | | 20,839,367 | | | | 20,702,478 | |
| Long-term debt – net of current portion | | | 34,492,558 | | | | 45,604,958 | |
| Capital leases – net of current portion | | | 745 | | | | 87,078 | |
| Deferred rent – net of current portion | | | 2,842,171 | | | | 94,069 | |
| Other long-term liabilities | | | 2,283,256 | | | | 724,654 | |
| Deferred income taxes | | | — | | | | 6,475,540 | |
| Total liabilities | | | 60,458,097 | | | | 73,688,777 | |
Shareholders’ equity:
| | | | | | | | |
| Preferred Stock $.0001 par value, 1,000,000 shares authorized, and no shares issued and outstanding | | | — | | | | — | |
| Common stock $0.0001 par value, 100,000,000 shares authorized, 30,867,304 and 27,529,010 shares issued, respectively | | | 3,087 | | | | 2,753 | |
| Additional paid-in capital | | | 130,767,038 | | | | 129,384,746 | |
| Treasury stock, at cost, 8,342,755 shares | | | (30,272,007 | ) | | | (30,272,007 | ) |
| Accumulated deficit | | | (53,190,822 | ) | | | (3,362,407 | ) |
| Other comprehensive income (net of $887,416 and $260,907 tax effect, respectively) | | | (1,395,840 | ) | | | (417,771 | ) |
| Total shareholders’ equity | | | 45,911,456 | | | | 95,335,314 | |
| Total liabilities and shareholders’ equity | | $ | 106,369,553 | | | $ | 169,024,091 | |
The accompanying notes are an integral part of these consolidated financial statements.
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ATS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | |
| | | | | | | | | | |
| | ATS Corporation
Successor | | ATSI
Predecessor |
| | |
Years Ended December 31, | | For the
Period from
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 |
| | | 2008 | | 2007 | | 2006 |
Cash flows from operating activities
| | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | $ | (5,031,946 | ) | | $ | (824,879 | ) |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
| | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 1,254,287 | | | | 679,147 | | | | — | | | | 161,199 | | | | 666,442 | |
| Impairment charge | | | 56,772,541 | | | | — | | | | — | | | | — | | | | — | |
| Amortization of intangibles | | | 5,190,229 | | | | 4,215,418 | | | | — | | | | — | | | | — | |
| Stock-based compensation | | | 876,944 | | | | 1,034,017 | | | | — | | | | — | | | | — | |
| Deferred income taxes | | | (7,846,958 | ) | | | (1,820,581 | ) | | | (443,340 | ) | | | (2,742,066 | ) | | | (1,790,296 | ) |
| Deferred rent | | | (68,908 | ) | | | 175,053 | | | | — | | | | (66,230 | ) | | | (353,059 | ) |
| Loss on disposal of business | | | — | | | | — | | | | — | | | | — | | | | 374,738 | |
| (Gain) Loss on disposal of equipment | | | (1,223 | ) | | | — | | | | — | | | | 45,040 | | | | 22,829 | |
| Loss (gain) on derivative liabilities related to warrants | | | — | | | | 6,930,000 | | | | (5,880,000 | ) | | | — | | | | — | |
| Provision for bad debt | | | 258,018 | | | | 37,911 | | | | — | | | | — | | | | 656,680 | |
Changes in assets and liabilities, net of effects of acquisitions:
| | | | | | | | | | | | | | | | | | | | |
| Accounts receivable, net of bad debt | | | 1,241,120 | | | | 26,912 | | | | — | | | | (719,509 | ) | | | 3,781,029 | |
| Accrued interest payable and receivable | | | (31,537 | ) | | | 232,835 | | | | (50,293 | ) | | | — | | | | — | |
| Prepaid expenses and other current assets | | | 385,829 | | | | (286,613 | ) | | | (63,884 | ) | | | 347,514 | | | | (131,871 | ) |
| Accounts payable and other accrued expenses | | | 769,471 | | | | (256,652 | ) | | | 907,857 | | | | (471,590 | ) | | | 5,062 | |
| Accrued salaries and related taxes | | | (1,422,123 | ) | | | (5,229,988 | ) | | | — | | | | 5,072,024 | | | | (677,129 | ) |
| Accrued vacation | | | (258,675 | ) | | | (303,185 | ) | | | — | | | | (39,689 | ) | | | (250,604 | ) |
| Income taxes payable and receivable | | | 3,224,632 | | | | (2,195,796 | ) | | | (45,394 | ) | | | 70,504 | | | | (2,796,276 | ) |
| Other current liabilities | | | 293,321 | | | | (209,224 | ) | | | — | | | | — | | | | — | |
| Other long-term liabilities | | | (45,976 | ) | | | (137,826 | ) | | | — | | | | — | | | | 48,586 | |
| Other assets | | | (134,651 | ) | | | — | | | | — | | | | — | | | | — | |
| Restricted cash | | | (38,041 | ) | | | (60,707 | ) | | | — | | | | (13,072 | ) | | | (1,204,710 | ) |
| Net cash provided by (used in) operating activities | | $ | 10,589,885 | | | $ | (3,723,008 | ) | | $ | 2,704,346 | | | $ | (3,387,821 | ) | | $ | (2,473,458 | ) |
Cash flows from investing activities
| | | | | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | (371,232 | ) | | | (373,063 | ) | | | — | | | | (319,610 | ) | | | (323,318 | ) |
| Proceeds from sale of businesses | | | — | | | | — | | | | — | | | | — | | | | 1,080,350 | |
| Acquisition of businesses – net of cash acquired | | | (838,459 | ) | | | (123,249,859 | ) | | | — | | | | — | | | | (599,750 | ) |
| Sale of U.S. government securities held in trust fund | | | — | | | | 121,024,475 | | | | — | | | | — | | | | — | |
| Proceeds from disposal of equipment | | | 21,352 | | | | — | | | | — | | | | — | | | | — | |
| Purchase of U.S. government securities held in trust fund | | | — | | | | — | | | | (1,198,478,053 | ) | | | — | | | | — | |
| Maturities of U.S. government securities held in trust fund | | | — | | | | — | | | | 1,195,212,907 | | | | — | | | | — | |
| Deferred acquisition costs | | | — | | | | — | | | | (1,361,215 | ) | | | — | | | | — | |
| Release (deposit) of cash held in trust fund | | | — | | | | 1,332 | | | | 280,016 | | | | — | | | | — | |
| Net cash (used in) provided by investing activities | | $ | (1,188,339 | ) | | $ | (2,597,115 | ) | | $ | (4,346,345 | ) | | $ | (319,610 | ) | | $ | 157,282 | |
Cash flows from financing activities
| | | | | | | | | | | | | | | | | | | | |
| Borrowings on lines-of-credit | | | 62,707,090 | | | | 41,084,125 | | | | — | | | | 3,034,955 | | | | 1,700,000 | |
| Payments on lines-of-credit | | | (71,236,157 | ) | | | — | | | | — | | | | — | | | | — | |
| Payments on notes payable | | | (2,820,191 | ) | | | (645,833 | ) | | | — | | | | — | | | | — | |
| Payments on capital leases | | | (95,125 | ) | | | (76,459 | ) | | | — | | | | (18,055 | ) | | | (27,346 | ) |
| Payments to repurchase stock purchase warrants | | | — | | | | (2,081,121 | ) | | | — | | | | — | | | | — | |
| Proceeds from stock issued regarding ESPP | | | 271,547 | | | | — | | | | — | | | | — | | | | — | |
| Proceeds from exchange of stock for warrants (net of expenses) | | | 234,135 | | | | — | | | | — | | | | — | | | | — | |
| Payments to repurchase treasury stock | | | — | | | | (30,272,007 | ) | | | — | | | | — | | | | (4,662 | ) |
| Net cash provided by (used in) financing activities | | $ | (10,938,701 | ) | | $ | 8,008,705 | | | $ | — | | | $ | 3,016,900 | | | $ | 1,667,992 | |
| Net (decrease) increase in cash | | $ | (1,537,155 | ) | | $ | 1,688,582 | | | $ | (1,641,999 | ) | | $ | (690,531 | ) | | $ | (648,184 | ) |
| Cash and cash equivalents, beginning of period | | | 1,901,977 | | | | 213,395 | | | | 1,855,394 | | | | 718,571 | | | | 1,366,755 | |
| Cash and cash equivalents, end of period | | $ | 364,822 | | | $ | 1,901,977 | | | $ | 213,395 | | | $ | 28,040 | | | $ | 718,571 | |
Supplemental disclosures:
| | | | | | | | | | | | | | | | | | | | |
Cash paid or received during the period for:
| | | | | | | | | | | | | | | | | | | | |
| Income taxes paid | | $ | 2,726,412 | | | $ | 4,215,380 | | | $ | 2,483,385 | | | $ | 13,850 | | | $ | 5,026,797 | |
| Income tax refunds | | $ | 2,578,871 | | | $ | 4,201 | | | $ | — | | | $ | — | | | $ | 500 | |
| Interest paid | | $ | 3,510,719 | | | $ | 569,244 | | | $ | — | | | $ | 89,812 | | | $ | 385,979 | |
| Interest received | | $ | 29,913 | | | $ | 233,500 | | | $ | 5,501,486 | | | $ | 12,501 | | | $ | 13,847 | |
Non-cash activities:
| | | | | | | | | | | | | | | | | | | | |
| Accretion of trust fund relating to common stock subject to possible redemption | | $ | — | | | $ | — | | | $ | 604,756 | | | $ | — | | | $ | — | |
| Issuance of stock related to acquisition of businesses | | $ | — | | | $ | 4,750,000 | | | $ | — | | | $ | — | | | $ | — | |
| Notes payable issued related to acquisition of businesses | | $ | — | | | $ | 4,749,998 | | | $ | — | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
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ATS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | |
| | Successor |
| | |
Common Stock | | Additional
Paid-In
Capital | | Treasury Stock | | Accumulated
(Deficit)
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Shareholders’
Equity |
| | | Shares | | Amount | | Shares | | Amount |
| Balance – January 1, 2006 | | | 26,250,000 | | | $ | 2,625 | | | $ | 81,467,698 | | | | — | | | $ | — | | | $ | (5,186,075 | ) | | $ | — | | | $ | 76,284,248 | |
| Accretion of trust fund relating to common stock subject to possible redemption | | | — | | | | — | | | | — | | | | — | | | | — | | | | (604,756 | ) | | | | | | | (604,756 | ) |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,279,400 | | | | | | | | 8,279,400 | |
| Balance – December 31, 2006 | | | 26,250,000 | | | $ | 2,625 | | | $ | 81,467,698 | | | | — | | | $ | — | | | $ | 2,488,569 | | | $ | — | | | $ | 83,958,892 | |
| Stock-based compensation re: stock options and restricted shares | | | — | | | | — | | | | 948,737 | | | | — | | | | — | | | | — | | | | — | | | | 948,737 | |
| Stock based compensation re: directors fees | | | 23,081 | | | | 2 | | | | 85,278 | | | | — | | | | — | | | | — | | | | — | | | | 85,280 | |
| Common stock issued re: vested restricted shares | | | 55,500 | | | | 6 | | | | (6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Reclassification of warrants | | | — | | | | — | | | | 20,790,000 | | | | — | | | | — | | | | — | | | | — | | | | 20,790,000 | |
| Repurchases of warrants | | | — | | | | — | | | | (2,081,121 | ) | | | — | | | | — | | | | — | | | | — | | | | (2,081,121 | ) |
| Repurchase of shares from dissenting shareholders | | | — | | | | — | | | | 23,424,282 | | | | (5,531,355 | ) | | | (16,769,668 | ) | | | 702,753 | | | | — | | | | 7,357,367 | |
| Repurchases of common stock | | | — | | | | — | | | | — | | | | (2,811,400 | ) | | | (13,502,339 | ) | | | — | | | | — | | | | (13,502,339 | ) |
| Issuance of common stock related to acquisitions | | | 1,200,429 | | | | 120 | | | | 4,749,878 | | | | — | | | | — | | | | — | | | | — | | | | 4,749,998 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,553,729 | ) | | | — | | | | (6,553,729 | ) |
Change in fair value of interest rate swap agreement, net of
tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (417,771 | ) | | | (417,771 | ) |
| Balance – December 31, 2007 | | | 27,529,010 | | | $ | 2,753 | | | $ | 129,384,746 | | | | (8,342,755 | ) | | $ | (30,272,007 | ) | | $ | (3,362,407 | ) | | $ | (417,771 | ) | | $ | 95,335,314 | |
| Stock-based compensation re: stock options and restricted shares | | | — | | | | — | | | | 696,954 | | | | — | | | | — | | | | — | | | | — | | | | 696,954 | |
| Stock based compensation re: directors fees | | | 72,605 | | | | 7 | | | | 179,983 | | | | — | | | | — | | | | — | | | | — | | | | 179,990 | |
| Common stock issued re: vested restricted shares | | | 168,004 | | | | 17 | | | | (17 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Common stock issued re: ESPP | | | 125,481 | | | | 13 | | | | 271,534 | | | | — | | | | — | | | | — | | | | — | | | | 271,547 | |
| Warrant transaction | | | 2,972,204 | | | | 297 | | | | 233,838 | | | | — | | | | — | | | | — | | | | — | | | | 234,135 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (49,828,415 | ) | | | — | | | | (49,828,415 | ) |
| Change in fair value of interest rate swap agreement, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (978,069 | ) | | | (978,069 | ) |
| Balance – December 31, 2008 | | | 30,867,304 | | | $ | 3,087 | | | $ | 130,767,038 | | | | (8,342,755 | ) | | $ | (30,272,007 | ) | | $ | (53,190,822 | ) | | $ | (1,395,840 | ) | | $ | 45,911,456 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Predecessor |
| | | Common Stock Class A | | Common Stock Class B | | Treasury Stock | | Total
Shareholders’
Equity |
| | | Shares | | Amount | | Shares | | Amount | | Amount | | Retained
Earnings |
| Balance – November 1, 2005 | | | 9,219,700 | | | $ | 34,768 | | | | 10,000,000 | | | $ | 1,736 | | | $ | (32,696 | ) | | $ | 6,269,173 | | | $ | 6,272,981 | |
| Purchase of common stock | | | — | | | | — | | | | — | | | | — | | | | (4,662 | ) | | | — | | | | (4,662 | ) |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (824,879 | ) | | | (824,879 | ) |
| Balance – October 31, 2006 | | | 9,219,700 | | | $ | 34,768 | | | | 10,000,000 | | | $ | 1,736 | | | $ | (37,358 | ) | | $ | 5,444,294 | | | $ | 5,443,440 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,031,946 | ) | | | (5,031,946 | ) |
| Balance – January 15, 2007 | | | 9,219,700 | | | $ | 34,768 | | | | 10,000,000 | | | $ | 1,736 | | | $ | (37,358 | ) | | | 412,348 | | | $ | 411,494 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
| | | | | | |
| | Fiscal Year Ended December 31, |
| | | 2008 | | 2007 | | 2006 |
| Net income (loss) | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | |
| Change in fair value of interest rate swap agreements | | | (978,069 | ) | | | (417,771 | ) | | | — | |
| Comprehensive income | | $ | (50,806,484 | ) | | $ | (6,971,500 | ) | | $ | 8,279,400 | |
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Basis of Presentation
ATS Corporation (the “Successor Company” or the “Company”) was incorporated in Delaware on April 12, 2005. The Company was formed to serve as a vehicle for the acquisition of operating businesses in the federal services and defense industries through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combinations.
On January 15, 2007, the Company consummated a business combination and acquired all of the outstanding capital stock of Advanced Technology Systems, Inc. (the “Predecessor Company” or “ATSI”) and its subsidiaries (collectively, “ATSI”), a provider of systems integration and application development to the U.S. government, for approximately $80.2 million in cash and an aggregate of 173,913 shares of common stock of the Company, valued at $1.0 million. The Company funded the cash portion of the ATSI purchase price with the proceeds of its initial public offering. In connection with the acquisition of ATSI, holders of 2,906,355 shares of common stock voted against the acquisition and perfected their right to redeem their shares of common stock at $5.77 per share. An aggregate of $16,769,668, from proceeds of our initial public offering, was paid to these dissenting shareholders.
The Consolidated Financial Statements for the Successor Company include the accounts of ATS Corporation and its wholly owned subsidiaries, RISI, PMG and NSS, since the dates of acquisition for each company. All intercompany accounts, transactions, and profits among ATS Corporation and its subsidiaries are eliminated in consolidation. The consolidated financial statements for the Predecessor Company include the accounts of ATIS and all its subsidiaries, since the dates of acquisition. All intercompany accounts, transactions, and profits among ATSI and its subsidiaries are eliminated in consolidation.
ATSI has reviewed its business operations and determined that the Company operates in a single homogenous business segment. Financial information is reviewed and evaluated by the chief operating decision maker on a consolidated basis relating to the single business segment. The Company sells similar services that exhibit similar economic characteristics to similar classes of customers. Revenue is internally reviewed monthly by management on an individual contract basis as a single business segment.
Note 2 — Summary of Significant Accounting Policies
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported periods. The actual results could differ from those estimates. Significant management estimates include amounts estimated for costs to complete fixed-price contracts, estimated award fees for contracts, the amortization period for long-lived intangible assets, recoverability of long-lived assets, reserves for accounts receivable, the determination of the fair values for certain intangible assets, derivative financial instruments, and share-based payments, loss contingencies, and the valuation of income taxes.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or goods delivered, the contract price is fixed or determinable, and collectability is reasonably assured. The Company’s revenue is derived from primarily three different types of contractual arrangements: time-and-materials contracts, fixed-price contracts and cost-plus-fee contracts. Revenue on time-and-material contracts is recognized based on the actual hours performed at the contracted billable rates for services provided, plus materials cost for products delivered to the customer, and costs incurred on behalf of the customer. Revenue on fixed-price contracts is recognized ratably over the period of performance or as a percentage-of-completion depending on the facts and circumstances of the contract. Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
performance of the contract. For cost-plus-fee contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.
The Company’s fixed price contracts are either service based or require some level of customization. Revenue is recognized ratably over the service period on fixed-price-service contracts. In accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, for certain of the Company’s fixed-price-completion contracts that involve the design, customization of software products or development of systems management applies the provisions of Statement of Position (SOP) 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue for such arrangements is recognized on the percentage-of-completion method using costs incurred in relation to total estimated project costs.
Contract costs include labor, material, subcontracting costs, and allocated allowable indirect costs. Revenue recognition requires judgment in estimating the revenue and associated costs, assessing risk in performance, and evaluating technical issues. The Company may estimate award fees and incentive fees or penalties in recognizing revenue based on anticipated awards or when there is sufficient information to determine.
On federal government contracts, the Company allocates costs to contracts consistent with the federal procurement regulations. The direct and indirect costs associated with these contracts are subject to government audit by DCAA or other cognizant audit agencies. Management does not anticipate any material adjustment to the consolidated financial statements in subsequent periods for audits not yet performed. The incurred cost audits have been completed through October 31, 2005. The Company’s management performs periodic reviews with the program managers to assess contract performance. If an adjustment is necessary to a previous estimate, the change is normally recorded in the current period earnings.
Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under the contract, the costs of the effort, and an ongoing assessment of the Company’s progress toward completing the contract. From time to time, as part of its standard management process, facts develop that require the Company to revise its estimated total costs on revenue. To the extent that a revised estimate affects contract profit or revenue previously recognized, the Company records the cumulative effect of the revision in the period in which the revisions becomes known. The full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes probable and can reasonably be estimated.
Under certain circumstances, the Company may elect to work at risk prior to receiving an executed contract document. The Company has a formal procedure for authorizing any such at risk work to be incurred. Revenue, however, is deferred until a contract modification or vehicle is provided by the customer.
Operating Cost and Expenses
Direct costs consist of all directly-related contract costs, including compensation costs for personnel, material cost and any other direct costs. Also appropriate indirect overhead costs are applied to employee direct labor, subcontractor direct labor and material costs and included as direct costs. Selling, general and administrative expenses include executive, administrative and business development labor costs, indirect expenses related to the performance of these functions, and allocations for fringe benefits costs. Depreciation and amortization include the costs associated with the systematic expensing of the Company’s fixed assets, as well as the amortization of the intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
Stock Compensation
In December 2004, the FASB issued SFAS No. 123(R),Share Based Payment, which requires that compensation costs related to share-based payment transactions be recognized in financial statements. Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes stock-based compensation based upon the fair value of the stock-based awards using the Black-Scholes option pricing model and taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior.
Deferred Financing Costs
Costs associated with obtaining the Company’s financing arrangements are deferred and amortized over the term of the financing arrangements using the effective interest method.
Income Taxes
Under SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), income taxes are accounted for using the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. The differences between the basis of the assets and liabilities for financial reporting and income tax purposes are recorded as deferred income taxes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. When required, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. If there is a change in tax rates the effect on deferred tax assets and liabilities is recognized in income in the period the change occurred.
In accordance with the recognition standards established by Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48 — Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109, the Company makes a comprehensive review of its portfolio of tax positions regularly. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed return, or planned to be taken in a future tax return or claim that has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, the Company does not recognize the tax benefits resulting from such positions and reports the tax effect as a liability for uncertain tax positions in its consolidated statements of financial position. The Company has no tax positions that have not been recognized.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial assets, including cash and cash equivalents and short term investments, accounts receivable, accounts payable and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of their short-term nature.
The fair value of the long-term debt approximates its carrying value at December 31, 2008. The fair value of the Company’s interest rate swaps as of December 31, 2008 was based on current market pricing models (See Note 11).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
Derivative Instruments and Hedging Activities
The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended. Accordingly, derivatives are recognized as either assets or liabilities in the consolidated balance sheet, and gains and losses are recognized based on changes in the fair values. Gains and losses on derivatives designated or deemed to be an effective hedge are recognized, net of tax in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements. As an offset to gains or losses recognized in comprehensive income a gross long-term asset or long-term liability is recognized, as well as an appropriate long-term deferred tax liability or asset. Gains and losses on derivatives that are not designated or intended to be an effective hedge are recorded to operations. The classification of gains and losses resulting from the changes in fair values is dependent on the intended use of the derivative and its resulting designation. The Company uses the change in variable cash flow method to measure the effectiveness of its hedges.
In order to manage interest rate fluctuation exposure on the bank debt, the Company entered into an interest rate swap agreement with the Bank of America on November 9, 2007 providing the Company an ability to eliminate the variability of interest expense based on fluctuating rates on a $35 million notional amount of debt. The purpose of the derivative instrument is to hedge cash flows and not for trading purposes. The Company records cash payments and receipts related to its interest rate swap as adjustments to interest expense and as a component of operating cash flow. As of December 31, 2007, the Company was party to one interest rate swap agreement with Bank of America. (See Note 11).
Accounting for Warrants and Derivative Instruments
On October 25, 2005, the Company consummated its initial public offering of 21,000,000 units. Each unit consists of one share of common stock and two redeemable common stock purchase warrants. Each warrant entitles the holder to purchase from the Company one share of its common stock at an exercise price of $5.00. The unexercised warrants expire October 19, 2009, or earlier upon redemption. The warrant agreement provides for the Company to register the shares underlying the warrants and was silent as to the penalty to be incurred in the absence of the Company’s ability to deliver registered shares to the warrant holders upon warrant exercise or cash settle the warrants.
Emerging Issues Task Force 00-19, or EITF 00-19,“Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,” provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under SFAS No. 133. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. A contract classified as an equity instrument is included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the warrants to purchase common stock included in the units sold in the Company’s initial public offering were separately accounted for as liabilities.
The agreement related to the Company’s warrants provided for the Company to register and maintain the registration of the shares underlying the warrants and, as originally published, did not specify a penalty in the absence of the Company’s ability to deliver registered shares to holders upon exercise of the warrants. Further, the warrant agreement did not specify that the Company would not be obligated to net cash settle the instrument. Paragraph 14 of EITF 00-19 states that if the contract allows the company to net-share or physically settle the contract only by delivering registered shares, it is assumed that the Company will be required to net-cash settle the contract, and as a result liability classification is required. Under EITF 00-19, registration of the common stock underlying the warrants was not within the Company’s control and, as a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
result, the Company was required to assume that it could have been required to settle the securities on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. The fair value of these securities was presented on the Company’s balance sheets as “warrant liabilities,” and the unrealized changes in the values of these derivatives were shown in the Company’s statements of operations as “Gain (loss) on warrant liability” through the date of the clarification agreement discussed below.
On March 14, 2007, the Company entered into a warrant clarification agreement to expressly state that, in the event a warrant would expire unexercised, without value and unredeemed on the expiration date, under no circumstances would the Company be required to net cash settle the warrants. This agreement modified the classification of the warrants from a liability to equity. The Company recognized a loss of $6,930,000 representing the change in fair value of the warrant liability from December 31, 2006 through March 14, 2007. The fair value of the warrants at March 14, 2007 of $20,790,000 was reclassified to additional paid in capital.
Accounts Receivable
Accounts receivable include amounts billed and due from customers, amounts earned but unbilled (primarily related to contracts accounted for under the percentage-of-completion method of accounting), and amounts retained by customers pending contract completion.
Credit Risk
Management believes that credit risk related to the Company’s accounts receivable is limited since the majority of balances outstanding are with agencies of the U.S. government and the associated creditworthiness of the U.S. government.
Financial Statements Reclassifications
Certain amounts on the prior period financial statements and related notes have been reclassified to conform to the current presentation.
Allowance for Doubtful Accounts
An allowance for bad debt against billed accounts receivable is established by the Company based on experience and information available regarding collectability of receivables. Since the majority of the Company’s receivables result from services provided to the U.S. government, the Company believes the credit risk to be relatively low. When the balance of an accounts receivable is determined to be uncollectible after exercising all means of collection, the receivable balances are written-off.
Property and Equipment
Property and equipment in excess of established thresholds are capitalized and recorded at cost. Furniture and equipment are depreciated using the straight-line method over the estimated useful life of the asset based on the asset class ranging from three to seven years. Leasehold improvements are amortized over the lease term or useful life of the improvements, whichever is shorter, using the straight-line method. All repairs and maintenance costs are expensed when incurred.
Goodwill and Other Purchased Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Other purchased intangible assets include the fair value of items such as customer contracts, backlog and customer relationships. SFAS No. 142,Goodwill and Other Intangible Assets (SFAS No. 142), establishes financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and indefinite lived intangible assets acquired in a purchase business combination are not amortized, but rather tested for impairment on an annual basis or triggering event. Purchased intangible assets with a definite useful life are amortized on a straight-line basis over their estimated useful lives.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
The estimated fair value of identified definitive lived intangible assets is amortized over the estimated useful life of the related intangible asset. We have a process pursuant to which we typically retain third-party valuation specialists to assist us with our analysis in determining the fair values and useful lives of identified intangible assets. We evaluate these assets for impairment when events occur that suggest a possible impairment. Such events could include, but are not limited to, the loss of a significant client or contract, decreases in federal government appropriations or funding for specific programs or contracts, or other similar events. We determine impairment of goodwill by comparing the carrying value of the reporting unit to the net present value of its future net cash flows. If an impairment occurs, we will record an impairment charge equal to the difference between the carrying value of the reporting unit and its estimated discounted cash flows using a discount rate based on our cost of capital and the related risks of recoverability (See Note 8).
Long-Lived Assets (Excluding Goodwill)
In accordance with the provisions of SFAS No. 144 in accounting for long-lived assets such as property and equipment and intangible assets subject to amortization, the Company reviews the assets for impairment. If circumstances indicate the carrying value of the asset may not be fully recoverable, a loss is recognized at the time impairment exists and a permanent reduction in the carrying value of the asset is recorded. The Company recognized an impairment to intangibles during the fiscal year ended of December 31, 2008. The Company’s quarterly assessment performed in December 2008 concluded that the carrying values of its long-lived assets as of December 31, 2008 are fully realizable. See Note 9.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income refers to revenue, expenses, and gains and losses that under US GAAP are included in comprehensive income, but excluded from the determination of net income (loss). The elements within other comprehensive income (loss), net of tax, represent the change in the fair value of interest rate swap accounted for as a cash flow hedge. As of December 31, 2008 and 2007, the accumulated other comprehensive loss, net of income tax effects, included losses of $1,395,840 and 417,771, respectively, related to the change in the fair value of the interest rate swap.
Income (Loss) Per Share
Basic and diluted net income (loss) per share information is presented in accordance with SFAS No. 128,Earnings Per Share. Basic income (loss) per share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted net income per share is calculated by dividing net income attributable to common stockholders by the weighted average common shares outstanding, which includes common stock equivalents. Diluted loss per share is calculated by dividing the net income (loss) attributable to common stockholders by only the weighted-average common shares outstanding during the period. Common stock equivalents are excluded from a calculation of diluted loss per share as the impact would be anti-dilutive. The Company’s common stock equivalents include stock options, restricted stock units, and warrants. The weighted average shares outstanding for the year ended December 31, 2008 excludes unvested restricted shares and excludes warrants and stock options to purchase approximately 3,358,040 shares, because such common stock equivalents have an exercise price in excess of the average market price of the Company’s common stock during the period, or would be anti-dilutive. For the year ended December 31, 2007, a total of 284,479 common stock equivalents were excluded from the calculation of diluted loss per share for the successor company. For the year ended December 31, 2006, the per share effects of potential common shares, such as warrants, aggregating to 3,887,477 shares have a dilutive effect of $0.05. For the periods ending January 15, 2007 and October 31, 2006, a total of 345,372 common stock equivalents were excluded from the calculation of diluted loss per share for the predecessor company as their effect would be antidilutive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, for which the provisions of SFAS No. 157 should be applied retrospectively. In February 2008, the FASB issued Staff Position FAS 157-2,Effective Date of FASB Statement No. 157, which defers the implementation for the non-recurring nonfinancial assets and liabilities from fiscal years beginning after November 15, 2007 to fiscal years beginning after November 15, 2008. The statement provisions took effect for the Company as of January 1, 2008 and has not had a material effect on the Company’s financial position or results of operations, and management does not believe the deferred provisions will have a material effect on the Company’s financial position or results of operations when they become effective on January 1, 2009.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings 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 after November 15, 2007. The adoption of SFAS No. 159 has had no impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) — Business Combinations. SFAS No. 141(R) replaces FASB Statement No. 141 — Business Combinations. The new statement retains the fundamental requirements that the acquisition (or purchase) method of accounting be used for all business combinations and expands the definition of a business, thus increasing the number of transactions which may qualify as business combinations. Contingent consideration will be measured at fair value at the acquisition date, with changes in fair value recognized in earnings, and transaction-related expenses and restructuring costs will be expensed as incurred. Changes in acquired tax contingencies will be recognized in earnings if outside the purchase price allocation period (generally one year or less). Adjustments to finalize purchase price allocations will be shown as revised in future financial statements to reflect the adjustments as if they had been recorded on the acquisition date. Also, in the event of a bargain purchase (acquisition of a business at below fair market value of net assets acquired) a gain could be recognized, or in the event of a change in control of an existing investment a gain or loss could be recognized. SFAS No. 141(R) will be applied prospectively to business acquisitions with acquisition dates on or after January 1, 2009, early adoption is not permitted. The adoption of SFAS No. 141(R) will only impact the Company’s future acquisitions effect on its consolidated financial statements.
In December 2007, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”), “Share-Based Payment.” SAB 110 expresses the views of the staff regarding the use of a simplified method, as discussed in SAB 107, in developing an estimate of expected term of plain vanilla share options in accordance with SFAS No. 123R, “Share-Based Payment.” In SAB 107, the staff indicated that it believed that more detailed external information about employee exercise behavior would, over time, become readily available to companies. Therefore, the staff stated that it would not expect a company to use the simplified method for share option grants after December 31, 2007. In SAB 110, the staff stated that it understood that such detailed information may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Recent Accounting Pronouncements – (continued)
beyond December 31, 2007. As allowed under SAB 110, we will continue to use the simplified method in estimating the expected term of our stock options until such time as more relevant detailed information becomes available.
Other new pronouncements issued but not yet effective until after December 31, 2008 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
Note 4 — Accounts Receivable
Accounts receivable consists of the following:
| | | | |
| | December 31, |
| | | 2008 | | 2007 |
| Billed receivables | | $ | 25,603,602 | | | $ | 23,583,044 | |
| Unbilled receivables at end of period | | | 4,371,919 | | | | 7,699,987 | |
| Other receivables | | | 64,114 | | | | — | |
| Total accounts receivable, current | | | 30,039,635 | | | | 31,283,031 | |
| Total accounts receivable | | | 30,039,635 | | | | 31,283,031 | |
| Allowance for doubtful accounts | | | (770,988 | ) | | | (91,247 | ) |
| Accounts receivable, net | | $ | 29,268,647 | | | $ | 31,191,784 | |
Unbilled receivables include contracts with milestone billings ($3.6 million), contracts billable within 30 days ($0.2 million), contract retentions ($0.2 million), and miscellaneous ($0.4 million). Consistent with industry practice, certain receivables related to long-term contracts are classified as current, although a portion of these amounts is not expected to be billed and collected within one year. Unbilled receivables at December 31, 2008 are expected to be billed and collected within one year.
Note 5 — Prepaid Expenses
Prepaid expenses consisted of the following:
| | | | |
| | December 31,
2008 | | December 31,
2007 |
| Insurance | | $ | 212,119 | | | $ | 414,619 | |
| Vendor Advances | | | 159,791 | | | | — | |
| Rent | | | — | | | | 345,428 | |
| Other | | | 166,064 | | | | 163,786 | |
| Total prepaids | | $ | 537,974 | | | $ | 923,803 | |
The Company aggressively managed its cash position in fiscal 2008. As a result, prepaid expenditures were maintained at a lower level than in fiscal 2007. An exception was advance payments made to a key vendor of a large public safety, multi-year contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Property and Equipment
Property and equipment consisted of the following:
| | | | |
| | December 31,
2008 | | December 31,
2007 |
| Equipment and furniture | | $ | 2,614,181 | | | $ | 1,228,932 | |
| Leasehold improvements | | | 2,194,659 | | | | 680,682 | |
| Property held under capital leases | | | 269,952 | | | | 270,455 | |
| Property and equipment, at cost | | | 5,078,792 | | | | 2,180,069 | |
| Less accumulated depreciation and amortization | | | (1,182,136 | ) | | | (595,886 | ) |
| Less accumulated depreciation and amortization for leased assets | | | (184,316 | ) | | | (82,774 | ) |
| Total property and equipment, net | | $ | 3,712,340 | | | $ | 1,501,409 | |
Depreciation and amortization of fixed assets was $1,254,287 for the year ended December 31, 2008 and $679,147 for the year ended December 31, 2007 for ATSC. Accumulated depreciation for property held under capital leases in 2008 and 2007 was $184,316 and $86,819, respectively.
Note 7 — Acquisitions
Advanced Technology Systems, Inc. (“ATSI”)
Effective the close of business of January 15, 2007, the Company acquired all of the outstanding capital stock of ATSI, a provider of systems integration services and application development to the U.S. government, for $80.2 million in cash, and 173,913 shares valued at approximately $1,000,000 as of the closing date. The Company was organized to effect a business combination with an operating business in the federal services and defense industries. ATSI is active primarily in the growing U.S. government information technology services market. ATSI designs, develops and integrates enterprise-wide information technology solutions, including custom software applications that address the U.S. government’s need to improve system efficiency, track human and financial capital, and reduce system downtime. Management believes that ATSI provides a strong federal services platform from which the Company can grow, has strong core competencies that the Company can build upon, and provides opportunities to create increased stockholder value.
In connection with the acquisition of ATSI, holders of 2,906,355 shares of common stock voted against the acquisition and perfected their right to redeem their shares of common stock at $5.77 per share. An aggregate of $16,769,668 was paid to such dissenting stockholders.
Under the purchase method of accounting, the purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based upon estimates, which assume that historical cost approximates fair value of the assets and liabilities of ATSI. As such, management allocated a substantial portion of the excess purchase price to non-amortizable intangible assets. The transaction resulted in $66.1 million of goodwill that is not deductible for income tax purposes. Additionally, approximately $17.0 million of the purchase price was allocable to customer-related intangible assets, which include customer contracts, backlog, and non-contractual customer relationships (including trade name recognition). Such intangible assets are being amortized over periods ranging from three to six years based upon factors such as customer relationships and contract periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Acquisitions – (continued)
The total purchase price paid, including transaction costs of approximately $4.2 million, has been allocated as follows:
| | |
| (In Thousands): | | |
| Cash | | $ | 80,248 | |
| Common stock (173,913 shares valued on the date of the purchase agreement – April 19, 2006) | | | 1,000 | |
| Transaction costs | | | 4,200 | |
| Total purchase price | | $ | 85,448 | |
Purchase price allocation:
| | | | |
| Current assets | | $ | 24,131 | |
| Property and equipment | | | 1,383 | |
| Intangible assets | | | 17,000 | |
| Goodwill | | | 66,123 | |
| Other assets | | | 2,107 | |
| Total assets acquired | | | 110,744 | |
| Current liabilities | | | 17,990 | |
| Long-term liabilities | | | 741 | |
| Deferred tax liability from acquisition intangibles | | | 6,565 | |
| Total liabilities assumed | | | 25,296 | |
| Net assets acquired | | $ | 85,448 | |
The fair value and the weighted-average amortization period of each of the components of the customer-related intangible assets are as follows:
| | | | |
| | Fair Value
(In Millions) | | Weighted-average
Amortization Period |
| Customer contracts | | $ | 10.0 | | | | 6.0 years | |
| Backlog | | | 6.0 | | | | 3.5 years | |
| Non-contractual customer relationships (including trade name recognition) | | | 1.0 | | | | 3.0 years | |
| Total/Average | | $ | 17.0 | | | | 4.9 years | |
The results of operations for ATSI have been included in the Consolidated Statements of Income from the acquisition date through December 31, 2008.
Management concluded that there was no impact of FIN 48 on the purchase of ATSI.
Reliable Integration Services, Inc. (“RISI”)
On March 1, 2007, the Company acquired Reliable Integration Services, Inc. (“RISI”), a 37-employee network systems integrator serving U.S. government defense and civilian agencies, for approximately $1.3 million as set forth below. Management believes that RISI’s client base and work product complements ATSI’s client base and work product and provides opportunities for both companies to cross sell their services.
Under the purchase method of accounting, the purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, which assume that historical cost approximates fair value of the assets and liabilities of RISI. Upon completion of the purchase price allocation, management concluded that a substantial portion of the excess purchase price related to non-amortizable intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Acquisitions – (continued)
The results of operations for RISI are included in the consolidated statements of operations from the acquisition date through December 31, 2008.
The total purchase price paid, including transaction costs of $69,000, has been 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 | | $ | 385 | |
| Property and equipment | | | 16 | |
| Intangible assets | | | 300 | |
| Goodwill | | | 1,026 | |
| Other assets | | | 39 | |
| Total assets acquired | | | 1,766 | |
| Current liabilities | | | 362 | |
| Deferred tax liability from acquisition intangibles | | | 116 | |
| Total liabilities assumed | | | 478 | |
| Net assets acquired | | $ | 1,288 | |
Management determined that the transaction resulted in approximately$1.0 million of goodwill. Approximately $300,000 of the purchase price was allocated to acquired customer-related intangible assets, that include customer contracts, backlog, and non-contractual customer relationships (including trade name recognition), and are being amortized over periods ranging from three to six years based upon factors such as expected customer relationships and contract periods.
The fair value and the weighted-average amortization period of each of the components of the customer-related intangible assets are as follows:
| | | | |
| | Fair Value
(In Thousands) | | Weighted-average
Amortization Period |
| Customer contracts | | $ | 173 | | | | 6.0 years | |
| Backlog | | | 102 | | | | 3.5 years | |
| Non-contractual customer relationships (including trade name recognition) | | | 25 | | | | 3.0 years | |
| Total/Average | | $ | 300 | | | | 4.9 years | |
These intangibles are deductible for tax purposes. Management concluded that there was no impact of FIN 48 on the purchase of RISI.
Potomac Management Group, Inc. (“PMG”)
On September 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. In addition to this amount, there is the potential for $1.5 million of payments to the former owners should PMG meet certain performance objectives.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Acquisitions – (continued)
Under the purchase method of accounting, the purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based upon preliminary estimates, which assumed that historical cost approximates fair value of the assets and liabilities of PMG. As such, management allocated a substantial portion of the excess purchase price to non-amortizable intangible assets.
The results of operations for PMG are included in the consolidated statements of operations from the acquisition date through December 31, 2008.
The total purchase price paid, including transaction costs of $130,000, was 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 | | | 3,092 | |
| Goodwill | | | 12,400 | |
| Other assets | | | 32 | |
| Total assets acquired | | | 18,216 | |
| Current liabilities | | | 1,433 | |
| Non-current liabilities | | | 153 | |
| Total liabilities assumed | | | 1,586 | |
| Net assets acquired | | $ | 16,630 | |
The transaction resulted in $12.4 million of goodwill, which is being amortized for income tax purposes. Approximately $3.1 million of the purchase price was allocated to acquired customer-related intangible assets that include customer contracts, backlog, and non-contractual customer relationships (including trade name recognition), and are being amortized over approximately five years based upon factors such as expected customer relationships and contract periods.
In addition to this amount, there was the potential for $1.5 million of payments to the former owners should PMG meet certain performance objectives over a two year period ending August 31, 2009. As of December 31, 2008, $0.7 million has been earned and paid, leaving a potential $0.8 million remaining to be earned, should the remaining goals be met.
The original estimated value and the weighted-average amortization period of each of the components of the customer-related intangible assets are as follows:
| | | | |
| | Fair Value
(In Thousands) | | Weighted-average
Amortization Period |
| Customer contracts | | $ | 2,844 | | | | 5.3 years | |
| Non-contractual customer relationships (including trade name recognition) | | | 248 | | | | 5.0 years | |
| Total/Average | | $ | 3,092 | | | | 5.3 years | |
Management concluded that there was no impact of FIN 48 on the purchase of PMG.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Acquisitions – (continued)
Number Six Software, Inc. (“NSS”)
On November 9, 2007, ATS completed its acquisition of NSS, pursuant to an Agreement and Plan of Merger and Reorganization, dated October 12, 2007, by and among ATS, NSS, ATS NSS Acquisition, Inc. and certain NSS stockholders (the “Merger Agreement”). The aggregate consideration of approximately $35.4 million included $3.0 million in the form of ATS common stock valued at the average price over the 15-day period before the closing of the transaction, and promissory notes and deferred payments totaling approximately $5.5 million.
Under the purchase method of accounting, the purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based upon preliminary estimates, which assume that historical cost approximates fair value of the assets and liabilities of NSS. As such, a substantial portion of the excess purchase price was allocated to non-amortizable intangible assets. The transaction resulted in $28 million of goodwill that is not deductible for income tax purposes. Additionally, management allocated approximately $5.2 million of the purchase price to intangible assets. These include customer-related intangibles comprised of customer contracts and non-contractual customer relationships (including trade name recognition) as well as certain marketing-related and technology-related intangibles. Such intangible assets are being amortized over periods ranging from approximately two to five years based upon factors such as customer relationships and estimated life of technology.
The total purchase price paid, including transaction costs of approximately $0.9 million, was allocated as follows:
| | |
| (In Thousands): | | |
| Cash | | $ | 25,904 | |
| Common stock (845,812 shares valued over 15 days ended November 9, 2007) | | | 3,050 | |
| Promissory notes | | | 5,500 | |
| Transaction costs | | | 942 | |
| Total purchase price | | $ | 35,396 | |
| Less cash acquired | | | (1,177 | ) |
| Net acquisition cost | | | 34,219 | |
Purchase price allocation:
| | | | |
| Current assets | | $ | 7,428 | |
| Property and equipment | | | 200 | |
| Intangible assets | | | 5,241 | |
| Goodwill | | | 28,615 | |
| Other assets | | | 24 | |
| Total assets acquired | | | 41,508 | |
| Current liabilities | | | 5,339 | |
| Long-term liabilities | | | 238 | |
| Deferred tax liability from acquisition intangibles | | | 1,712 | |
| Total liabilities assumed | | | 7,289 | |
| Net assets acquired | | $ | 34,219 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Acquisitions – (continued)
The fair value and the weighted-average initial amortization period of each of the components of the customer-related intangible assets are as follows:
| | | | |
| | Fair Value
(In Thousands) | | Weighted-average
Amortization Period |
| Customer-related | | $ | 4,406 | | | | 2.2 years | |
| Marketing-related | | | 444 | | | | 2.2 years | |
| Technology-related | | | 391 | | | | 5.0 years | |
| Total/Average | | $ | 5,241 | | | | 2.4 years | |
The results of operations for NSS have been included in the Consolidated Statements of Income from the acquisition date through December 31, 2008.
Pro Forma Information (Unaudited)
The unaudited pro forma condensed statement of operations data presented below provides the consolidated revenue, net income (loss) and diluted earnings per share of the Company for the years ended December 31, 2007 and 2006 as if each of the acquisitions completed during the year had occurred on January 1, 2006. Excluding the tax affected impact of the gain on warrant liabilities in 2006 of $3.5 million and the loss on warrant liability in 2007 of $4.1 million from net income and net loss would result in an adjusted net loss of $3.5 million and $2.1 million for 2006 and 2007, respectively. This information does not purport to be indicative of the actual results that would have occurred had the acquisitions taken place at the beginning of the years as shown.
| | |
| | Year Ended
December 31,
2007 |
| Revenue | | $ | 148,067,865 | |
| Net (loss) income | | | (6,238,677 | ) |
| Diluted earnings per share | | $ | (0.31 | ) |
Note 8 — Goodwill
The Company recognized an increase in goodwill as a result of the acquisitions discussed in Note 7. As of December 31, 2008, there was $59.1 million in goodwill recorded. The amount of goodwill that is deductible for income tax purposes is approximately $15.2 million as of December 31, 2008.
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business acquisitions. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill must be recorded at the reporting unit level. Reporting units are defined as an operating segment. We operate as one segment and one reporting unit. SFAS No. 142 prohibits the amortization of goodwill, but requires that it be tested for impairment at least annually (at any time during the year, but at the same time each year), or more frequently if events or circumstances change, such as adverse changes in the business climate, that would more likely than not reduce the reporting unit’s fair value below its carrying amount.
The Company performed its annual impairment test in September 2008. The Company considered multiple valuation methods such as market based approaches and an income based approach using a discounted cash flow model in its analysis. The discounted cash flow method of valuing the reporting unit was considered most relevant as it considers expected future cash flows discounted as appropriate for achieving such results. We concluded that the estimated fair value of the Company was less than its carrying value as of the valuation date by $56.8 million and recognized an impairment charge, of which $48.8 million was related to goodwill and $8.0 million was related to customer related intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Goodwill – (continued)
Following the impairment and adjustments related to post-acquisition expenses, goodwill at December 31, 2008 was:
| | |
| |
| Balance, December 31, 2007 | | $ | 107,600,686 | |
| Impairment | | | (48,820,588 | ) |
| Other Adjustments | | | 348,550 | |
| Balance, December 31, 2008 | | $ | 59,128,648 | |
Other adjustments made to goodwill during the year included the payment of an earn-out associated with the PMG acquisition and other acquisition related adjustments required to finalize the purchase price allocations related to the 2007 acquisitions.
Note 9 — Intangible Assets
Intangible assets represent the customer contracts and backlog resulting from the acquisitions as follows:
| | | | |
| | Successor |
| | | December 31,
2008 | | December 31,
2007 |
| Customer contracts and relationships | | | 8,235,000 | | | $ | 18,448,000 | |
| Backlog | | | — | | | | 6,102,000 | |
| Other | | | 1,112,286 | | | | 1,112,286 | |
| Intangible assets | | | 9,347,286 | | | | 25,662,286 | |
| Less accumulated amortization | | | (1,042,600 | ) | | | (4,215,418 | ) |
| Total intangible assets, net | | $ | 8,304,686 | | | $ | 21,446,868 | |
The Company performed its annual impairment test in September 2008. As previously discussed in Note 8, the Company recorded an impairment charge of approximately $8 million related to intangible assets.
Intangible assets subject to amortization were evaluated as follows:
| | | | | | | | | | |
| Assets | | Weighted-
Average
Amortization Period | | Carrying
Amount as of
December 31,
2007 | | Amortization
2008 | | Impairment | | Adjusted
Carrying
Amount as of
December 31,
2008 |
| Customer-related intangible assets | | | 53 mos. | | | $ | 20,418,983 | | | $ | (4,853,100 | ) | | $ | (7,951,953 | ) | | $ | 7,613,930 | |
| Marketing-related intangible assets | | | 38 mos. | | | | 641,313 | | | | (254,522 | ) | | | | | | | 386,791 | |
| Technology-related intangible assets | | | 60 mos. | | | | 386,572 | | | | (82,607 | ) | | | | | | | 303,965 | |
| Totals | | | 52 mos. | | | $ | 21,446,868 | | | $ | (5,190,229 | ) | | $ | (7,951,953 | ) | | $ | 8,304,686 | |
The combined weighted average amortization period of all intangible assets is scheduled below.
| | | | |
| Basis for Amortization | | Asset Value | | Life |
| Customer contracts and relationships | | $ | 8,235,000 | | | | 53 mos. | |
| Other | | | 1,112,286 | | | | 46 mos. | |
| Total | | | 9,347,286 | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Intangible Assets – (continued)
The intangible assets are amortized over periods ranging from 26 to 60 months. Amortization expense for the years ended December 31, 2008 and 2007 was $5.2 million and $4.2 million, respectively. Expected amortization expense for each of the fiscal years through December 31, 2013 and thereafter is as follows:
| | |
| Fiscal Year Ended | | Amount |
| December 31, 2009 | | $ | 2,201,211 | |
| December 31, 2010 | | | 1,992,980 | |
| December 31, 2011 | | | 1,992,327 | |
| December 31, 2012 | | | 1,962,766 | |
| December 31, 2013 | | | 155,402 | |
| Total | | $ | 8,304,686 | |
Note 10 — Restricted Cash
The Company is required to maintain $1,200,000 on deposit with a financial institution to support a bonding requirement for one of ATSI’s state contracts. Such amount including interest earned is reflected in restricted cash in the accompanying consolidated balance sheet.
Note 11 — Long Term Debt
Long term debt consisted of the following:
| | | | |
| | Successor |
| | | December 31,
2008 | | December 31,
2007 |
| Bank Financing | | $ | 32,555,058 | | | $ | 41,084,125 | |
| Notes payable | | | 4,520,833 | | | | 7,341,024 | |
| Total long-term debt | | $ | 37,075,891 | | | $ | 48,425,149 | |
| Less current portion | | | (2,583,333 | ) | | | (2,820,191 | ) |
| Long-term debt, net of current portion | | $ | 34,492,558 | | | $ | 45,604,958 | |
At December 31, 2008, the aggregate maturities of long term debt were as follows:
| | |
| Year Ending December 31, | | |
| 2009 | | $ | 2,583,333 | |
| 2010 | | | 34,492,558 | |
| Total long-term debt | | $ | 37,075,891 | |
Bank Financing
ATSC has a credit facility with Bank of America, N.A. (“the Credit Agreement”) which provides for borrowing up to $50 million.
The Facility is a three-year, secured facility that permits continuously renewable borrowings of up to $50.0 million, with an expiration date of June 4, 2010. The Company pays a fee in the amount of .20% to .375% on the unused portion of the Facility, based on its consolidated leverage ratio, as defined. Any outstanding balances under the Facility are due in full June 4, 2010.
Borrowings under the Facility bear interest at rates based on 30 day LIBOR plus applicable margins based on the leverage ratio as determined quarterly. As of December 31, 2008, the effective interest rate, excluding the effect of amortization of debt financing costs, for the outstanding borrowings under the Facility was 4.65%.
On May 12, 2008, ATSC and Bank of America, N.A., executed Amendment No. 3 to the Credit Agreement (the “Third Amendment”). The following primary changes were made pursuant to such Third
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Long Term Debt – (continued)
Amendment: (i) amendment of the financial covenants to revise the required Consolidated Leverage Ratios, the required minimum Consolidated EBITDA, the required Consolidated Asset Coverage Ratio, and the required Consolidated Fixed Charge Coverage Ratios; (ii) inclusion of a requirement of the Lenders’ consent to acquisitions, if the pro forma Consolidated Leverage Ratio exceeds 2.50 to 1.00; (iii) inclusion of a new requirement that, depending on the Consolidated Leverage Ratio, either 50% or 100% of the Net Cash Proceeds from ATSC’s sale of Equity Interests shall be applied to prepay borrowings (provided, however, the prepayment requirement did not apply to either proceeds from the ATSC Early Warrant Exercise Program, or sales or issuances of Equity Interests to ATSC); (iv) adjustment of the due date for the accounts receivable aging report and accounts payable aging report from ATSC to 30 days after the end of each month; and (v) modification of the interest rate applicable to loans outstanding under the Third Amendment (with interest continuing to be based on LIBOR, but with increments ranging from 200 basis points to 350 basis points, depending on the Consolidated Leverage Ratio).
The Company capitalized $205,000 of debt issuance costs in 2007 associated with the Facility. An additional $130,091 in financing costs were capitalized in May 2008 in connection with the 3rd amendment to the Facility. All debt financing costs are being amortized from the date incurred to June 4, 2010, the maturity date of the Facility. The unamortized balance of $192,056 at December 31, 2008 is included in other long-term assets.
As a condition to the increase in the commitments by the bank under the credit facility, the Company entered into a forward interest rate swap agreement in November 2007 under which it exchanged floating-rate interest payments for fixed-rate interest payments. The agreement covers debt totaling $35.0 million and provides for swap payments through December 1, 2010 with such swaps being settled on a monthly basis. The fixed interest rate provided by the agreement is 4.47%.
The Company accounts for its interest rate swap agreement as a cash flow hedge under the provisions of SFAS No. 133. The Company has determined that the swap is effective for the variable rate debt. Accordingly, the fair value of the interest rate swap agreement at December 31, 2008 of $2.3 million has been reported in other long term liabilities with an offset, net of an income tax effect of $0.9 million, included in accumulated other comprehensive income within stockholders’ equity. The decrease in fair value of $1.0 million from $1.3 million as of December 31, 2007, which is net of income tax effects of $0.6 million, is reported as comprehensive loss in the accompanying consolidated statement of comprehensive income for the year ended December 31, 2008.
Notes Payable
The Company entered into notes with the sellers in connection with the acquisitions of RISI, PMG and NSS as scheduled below.
| | | | | | | | | | | | | | |
| Acquisition Related | | Date of
Note | | Original
Principal | | 2008
Principal
Payments | | 12/31/2008
Current
Portion | | 12/31/2008
Long Term
Portion | | 2008
Interest
Payments | | Interest
Rate |
| RISI | | | 2/28/2007 | | | $ | 86,857 | | | $ | 86,857 | | | $ | — | | | $ | — | | | $ | 3,764 | | | | 6.50 | %(1) |
| PMG | | | 8/31/2007 | | | | 2,250,000 | | | | 750,000 | | | | 750,000 | | | | 562,500 | | | | 121,481 | | | | 6.82 | %(2) |
| NSS | | | 11/9/2007 | | | | 5,500,000 | | | | 1,833,333 | | | | 1,833,334 | | | | 1,375,000 | | | | 296,954 | | | | 6.6275 | %(3) |
| NSS Note | | | Assumed | | | | 150,000 | | | | 150,000 | | | | — | | | | — | | | | — | | | | — | (4) |
| Total | | | | | | $ | 7,986,857 | | | $ | 2,820,190 | | | $ | 2,583,334 | | | $ | 1,937,500 | | | $ | 422,199 | | | | | |
| (1) | Balance paid August 2008. |
| (2) | Interest and principal payments due quarterly with final payment due August 2010. |
| (3) | Interest and principal payments due quarterly with final payment due November 2010. |
| (4) | Assumed note from NSS acquisition payable to founder in February 2008. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Accounts Payable, Accrued Expenses
Accounts payable, and accrued expenses consisted of the following:
| | | | |
| | Successor |
| | | December 31,
2008 | | December 31,
2007 |
| Vendor obligations | | $ | 5,549,740 | | | $ | 5,311,942 | |
| Accrued government fees | | | 88,891 | | | | 143,346 | |
| Bank overdraft | | | 2,734,869 | | | | 1,791,375 | |
| Accrued expenses | | | 1,043,821 | | | | 965,318 | |
| Contract loss reserves | | | 712,542 | | | | 243,162 | |
| Other | | | 94,403 | | | | 179,522 | |
| Total other accrued expenses and current liabilities | | $ | 10,224,266 | | | $ | 8,634,665 | |
Note 13 — Leases
The Company leases office space and certain equipment under various operating leases. Rent expense on certain leases containing fixed escalations or other lease incentives is recognized on a straight line basis over the term of each lease. The leases expire over the next four years. As of December 31, 2008, future minimum lease payments due under these leases are as follows:
| | | | | | | | | | | | |
| Year | | Operating
Leases | | Capital
Leases | | Facility
Rent | | Subtotal
Commitments | | Sublease
Income | | Net Lease
Payments |
| 2009 | | $ | 18,094 | | | $ | 96,235 | | | $ | 2,444,091 | | | $ | 2,558,420 | | | $ | 3,954 | | | $ | 2,554,466 | |
| 2010 | | | 16,586 | | | | 745 | | | | 2,089,386 | | | | 2,106,717 | | | | 663 | | | | 2,106,054 | |
| 2011 | | | — | | | | — | | | | 1,732,799 | | | | 1,732,799 | | | | — | | | | 1,732,799 | |
| 2012 | | | — | | | | — | | | | 1,745,153 | | | | 1,745,153 | | | | — | | | | 1,745,153 | |
| 2013 | | | — | | | | — | | | | 1,788,782 | | | | 1,788,782 | | | | — | | | | 1,788,782 | |
| Total | | $ | 34,680 | | | $ | 96,980 | | | $ | 9,800,211 | | | $ | 9,931,871 | | | $ | 4,617 | | | $ | 9,927,254 | |
| Less Interest | | | | | | | (9,901 | ) | | | | | | | | | | | | | | | | |
| Net Capital Leases | | | | | | | 87,079 | | | | | | | | | | | | | | | | | |
| Less Current Portion | | | | | | | (86,334 | ) | | | | | | | | | | | | | | | | |
| Long-term Capital Leases | | | | | | $ | 745 | | | | | | | | | | | | | | | | | |
Rent expense was approximately $3,216,000 and $3,075,000, for the years ended December 31, 2008 and 2007, respectively, for ATSC. For the two and a half month period ended January 15, 2007 and the year ended October 31, 2006 rent expense was $622,000 and $2,945,000, respectively, for ATSI.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Income (Loss) Per Share
Weighted average common shares are calculated as follows:
| | | | | | | | | | |
| | ATS Corporation (Successor) | | ATSI (Predecessor) |
| | | Years Ended December 31 | | January 15,
2007 | | Year Ended
October 31,
2006 |
| | | 2008 | | 2007 | | 2006 |
| Income (Loss) from Continuing Operations | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | $ | (5,031,946 | ) | | $ | 500,195 | |
| Loss from Discontinued Operations | | | — | | | | — | | | | — | | | | — | | | | 1,325,074 | |
| Net Income (Loss) | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 8,279,400 | | | $ | (5,031,946 | ) | | $ | (824,879 | ) |
| Gain on derivative liabilities attributed to warrants | | | — | | | | — | | | | (5,880,000 | ) | | | — | | | | — | |
| Net income (loss) allocable to common stockholders not subject to possible redemption | | $ | (49,828,415 | ) | | $ | (6,553,729 | ) | | $ | 2,399,400 | | | $ | (5,031,946 | ) | | $ | (824,879 | ) |
Weighted average number of shares outstanding
| | | | | | | | | | | | | | | | | | | | |
| - basic | | | 21,231,654 | | | | 18,848,722 | | | | 26,250,000 | | | | 19,022,500 | | | | 19,022,950 | |
| Shares from assumed conversion of options, warrants and restricted stock | | | — | | | | — | | | | 3,887,477 | | | | — | | | | 345,372 | |
| - dilutive | | | 21,231,654 | | | | 18,848,722 | | | | 30,137,477 | | | | 19,022,500 | | | | 19,368,322 | |
Basic net income (loss) per share
| | | | | | | | | | | | | | | | | | | | |
| - Continuing operations | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.32 | | | $ | (0.26 | ) | | $ | 0.03 | |
| - Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (0.07 | ) |
| - Net income (loss) | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.32 | | | $ | (0.26 | ) | | $ | (0.04 | ) |
Diluted net income (loss) per share
| | | | | | | | | | | | | | | | | | | | |
| - Continuing operations | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.08 | | | $ | (0.26 | ) | | $ | 0.03 | |
| - Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (0.07 | ) |
| - Net income (loss) | | $ | (2.35 | ) | | $ | (0.35 | ) | | $ | 0.08 | | | $ | (0.26 | ) | | $ | (0.04 | ) |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Income (Loss) Per Share – (continued)
The following table presents pro forma income per share attributable to common stockholders subject to possible conversion and not subject to possible conversion:
| | |
| | Year Ended
December 31,
2006 |
| Net income | | $ | 8,279,400 | |
| Interest income attributable to common stock subject to possible conversion | | | (604,756 | ) |
| Pro forma net income attributable to common stockholders not subject to possible conversion | | $ | 7,674,644 | |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion – basic | | | 22,052,100 | |
Pro forma net income per share, excluding shares subject to possible conversion
– basic | | $ | 0.35 | |
| Net income | | $ | 8,279,400 | |
| Interest income attributable to common stock subject to possible conversion (net of taxes of $561,204) | | | (604,756 | ) |
| Gain on derivative liabilities attributed to warrants | | | (5,880,000 | ) |
| Pro forma net income attributable to common stockholders not subject to possible conversion less gain on derivative liabilities attributed to warrants | | $ | 1,794,644 | |
| Pro forma weighted average number of shares outstanding excluding shares subject to possible conversion – basic | | | 22,052,100 | |
| Shares from assumed conversion on warrants | | | 3,887,477 | |
| Pro forma weighted average number of shares outstanding, excluding shares subject to possible conversion – diluted | | | 25,939,577 | |
Pro forma net income per share, excluding shares subject to possible conversion
– diluted | | $ | 0.07 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Stock Plans and Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R),Share Based Payment, which requires that compensation costs related to share-based payment transactions be recognized in financial statements. Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes stock-based compensation based upon the fair value of the stock-based awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior. A summary of the components of stock-based compensation expense recognized during the years ended December 31, 2008, 2007 and 2006 for the successor and the period November 1 through January 15, 2007 and the year ended October 31, 2006 for the predecessor is as follows:
| | | | | | | | | | |
| Compensation Related to Options and Restricted Stock and Selling Expenses | | Successor | | Predecessor |
| |
Year Ended December 31, | | Period from
November 1,
2006
through
January 15, 2007 | | Year Ended
October 31,
2006 |
| | 2008 | | 2007 | | 2006 |
| Non-qualified stock option expense | | $ | 119,066 | | | $ | 877,274 | | | $ | — | | | $ | 1,591,143 | | | $ | — | |
| Restricted stock | | | 577,888 | | | | 71,463 | | | | — | | | | — | | | | — | |
| Stock grants to directors in lieu of cash | | | 179,990 | | | | 85,280 | | | | — | | | | — | | | | — | |
| Total Stock-Based Compensation Expense | | $ | 876,944 | | | $ | 1,034,017 | | | $ | — | | | $ | 1,591,143 | | | $ | — | |
The fair value of options granted during the year ended December 31, 2008 and December 31, 2007 has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | | |
| | Year Ended
December 31,
2008 | | Year Ended
December 31,
2007 |
| Expected dividend yield | | | 0 | % | | | 0 | % |
| Expected volatility | | | 38.9 | % | | | 38 | % |
| Risk free interest rate | | | 2.99 | % | | | 4.4 | % |
| Expected life of options | | | 6.25 years | | | | 5.8 years | |
| Forfeiture rate | | | 4.25 | % | | | 4 | % |
Effective November 1, 2006, ATSI was required to adopt the provisions of SFAS No.123(R). However, no options were granted from the adoption date through January 15, 2007. In connection with the sale of ATSI to ATS Corporation, ATSI was required to redeem 345,372 outstanding stock options for approximately $1.6 million.
On January 12, 2007, the stockholders of the Company approved the ATS Corporation 2006 Omnibus Incentive Compensation Plan (the “Plan”). Under the Plan, the Company reserved 1.5 million shares of the Company’s common stock for issuance to employees and directors through incentive stock options, or non-qualified stock options or through restricted stock units. During 2008, the Company issued 178,500 and 102,604 stock options and restricted stock, respectively. During the year, 45,000 options vested but were subsequently forfeited after termination of employment. In addition, 105,000 options which were not vested, were forfeited in 2007. The stock options have vesting periods of up to four years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Stock Plans and Stock-Based Compensation – (continued)
A summary of the activity for the year ended December 31, 2008 is presented below:
| | | | | | | | |
(In Thousands, Except Share and
Per Share Data) | | Shares | | Weighted
Average
Exercise Price
Per Share | | Weighted
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| Options outstanding, January 1, 2007 | | | — | | | $ | — | | | | | | | $ | — | |
| Options granted | | | 809,000 | | | | 4.40 | | | | | | | | — | |
| Options forfeited | | | (405,000 | ) | | | 4.89 | | | | | | | | — | |
| Options outstanding, January 1, 2008 | | | 404,000 | | | $ | 3.92 | | | | 9.66 | | | $ | — | |
| Options granted | | | 178,500 | | | | 2.15 | | | | | | | | — | |
| Options forfeited | | | (188,000 | ) | | | 3.84 | | | | | | | | — | |
| Options outstanding, December 31, 2008 | | | 394,500 | | | $ | 3.16 | | | | 8.76 | | | | — | |
| Options exercisable at December 31, 2008 | | | 56,000 | | | $ | 3.92 | | | | 8.63 | | | $ | — | |
Options outstanding as of Decembers 31, 2008 were:
| | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise
Prices | | Number
Outstanding | | Weighted-average
Remaining
Life in Years | | Weighted-average
Exercise
Price | | Number
Exercisable | | Weighted-average
Exercise
Price |
| $2.15 | | | 170,500 | | | | 9.4 | | | $ | 2.15 | | | | — | | | $ | — | |
| 3.40 | | | 80,000 | | | | 9.0 | | | | 3.40 | | | | 20,000 | | | | 3.40 | |
| 3.50 | | | 30,000 | | | | 8.9 | | | | 3.50 | | | | 7,500 | | | | 3.50 | |
| 3.67 | | | 30,000 | | | | 8.8 | | | | 3.67 | | | | 7,500 | | | | 3.67 | |
| 3.75 | | | 4,500 | | | | 8.5 | | | | 3.75 | | | | 1,125 | | | | 3.75 | |
| 3.85 | | | 4,500 | | | | 8.3 | | | | 3.85 | | | | 1,125 | | | | 3.85 | |
| 4.32 | | | 15,000 | | | | 8.2 | | | | 4.32 | | | | 3,750 | | | | 4.32 | |
| 4.88 | | | 60,000 | | | | 8.2 | | | | 4.88 | | | | 15,000 | | | | 4.88 | |
| | | | 394,500 | | | | 9.0 | | | $ | 3.09 | | | | 56,000 | | | $ | 3.92 | |
The weighted average grant date fair value of options granted during the years ended December 31, 2008 and 2007 were $2.15 and $4.40. As of December 31, 2008 and 2007, there were approximately $449,000 and $470,000 of unrecognized compensation expense, respectively, net of forfeitures related to unvested options. This cost is expected to be recognized over a weighted-average period of 3.0 years. The fair value of options vested during the twelve month period ended December 31, 2008 and 2007 were approximately $220,000 and $591,000, respectively.
Pursuant to the Plan, during the year ended December 31, 2008, the Company granted 102,604 restricted shares valued at $0.2 million to certain employees and directors. The stock price range was from $1.8 to $2.30 per share. Such shares vest ratably over a five-year period. During 2008, 168,005 shares from current and previous years vested.
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Note 15 — Stock Plans and Stock-Based Compensation – (continued)
A summary of the status of the Company’s restricted shares as of December 31, 2008, and changes during the year is presented below:
| | | | |
| Nonvested Restricted Stock | | No. of
Shares | | Weighted-average
Grant-Date
Fair Value |
| Nonvested at January 1, 2007 | | | — | | | $ | — | |
| Granted | | | 665,662 | | | | 3.75 | |
| Vested | | | (40,000 | ) | | | 4.22 | |
| Nonvested at January 1, 2008 | | | 625,662 | | | $ | 3.72 | |
| Granted | | | 102,604 | | | | 2.11 | |
| Vested | | | (168,005 | ) | | | 3.69 | |
| Forfeited | | | (152,396 | ) | | | 3.57 | |
| Nonvested at December 31, 2008 | | | 407,865 | | | $ | 3.38 | |
There was $1.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to restricted shares granted under the Plan as of December 31, 2008. That cost is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of shares vested during the year ended December 31, 2008 was $620,119.
In addition to employee based stock compensation the directors have the option to be paid their fees in stock or cash. Director fees paid in the form of stock during 2008 and 2007 amounted to $179,990 and 85,280, respectively.
Stock Purchase Plan
On July 24, 2007, the Company adopted an employee stock purchase program with a commencement date of October 1, 2007. The program is officially called the 2007 Employee Stock Purchase Plan (the “ESPP Plan”). The Company initially reserved an aggregate of 150,000 shares of Common Stock exclusively for issuance under the ESPP Plan. Under the ESPP Plan eligible employees may acquire shares of the Company’s common stock at periodic intervals, namely four month offering periods (the “Offering Periods”) during which payroll deductions are made and shares are subsequently purchased at a discount. The ESPP Plan was approved by our shareholders at the May 7, 2008 annual meeting. As of December 31, 2008, 125,481 shares have been issued under the ESPP Plan.
The number of shares of common stock authorized under the ESPP Plan is subject to an automatic annual increase on the first day of the Company’s fiscal year by an amount equal to the lesser of (i) 100,000 shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors. On February 11, 2009, our Board approved an increase of 100,000 shares to the Plan.
Note 16 — Common Stock
Following the consummation of the acquisition of ATSI on January 16, 2007, the Company announced and implemented a common stock and warrant repurchase program. In connection with this program, the Company paid approximately $13.5 million in cash to redeem 2,811,400 shares of common stock at an average price of $4.80 per share and approximately $2,081,000 in cash to repurchase 5,619,805 warrants.
On January 16, 2007, the Company announced that it would repurchase 2,625,000 shares of the Company’s common stock from the founders at $0.0011 per share. Such shares were repurchased in January 2007.
On January 16, 2007, the Company announced that it would repurchase shares of those shareholders that 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.
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Note 16 — Common Stock – (continued)
On May 19, 2008, the Company announced the completion of its early warrant exercise program. As a result of the 33,400,020 warrants exercised in this program, 2,972,204 new shares of common stock were issued. This consisted of 33,073,703 warrants tendered for cashless exercise in exchange for 2,645,887 shares of common stock (on the basis of 12.5 warrants for one share of common stock), and 326,317 warrants exercised by payment of a reduced cash price of $2.25 per share. Proceeds received by the Company were $734,192 and expenses were $500,057. The 2,980,175 warrants that were not exercised during the tender offer had their original terms reinstituted and will expire on October 19, 2009, unless earlier exercised in accordance with their original terms.
On October 19, 2008, the Company agreed to release the 2,625,000 shares of common stock held in escrow by the initial stockholders of Federal Services Acquisition Corporation and former members of FSAC Partners, LLC. Also on October 19, 2008, the Company removed the restricted legend from the 46,296 shares held by the former owner of RISI. The legend restricted the resale of the subject shares.
During the fiscal year ended December 31, 2008, the Company did not repurchase any shares.
Note 17 — Income Taxes
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-not threshold of financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. Since adoption, the Company has not had any uncertain tax positions requiring derecognition.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. It or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states. For income tax returns filed by us, the Company is no longer subject to U.S. federal and state and local tax examinations by tax authorities for years before 2004, although carry forward tax attributes that were generated prior to 2004 may still be adjusted upon examination by tax authorities if they either have been or will be utilized. It is the Company’s policy to recognize interest and penalties related to income tax matters in penalty expense. For both the years ended December 31, 2008 and 2007, there were less than $0.1 million interest and penalties, respectively.
The components of income tax expense (benefit) are as follows:
| | | | | | | | | | |
| | Successor | | Predecessor |
| | |
Year Ended December 31, | | Period from
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 |
| | | 2008 | | 2007 | | 2006 |
Current:
| | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 2,828,920 | | | $ | 1,875,857 | | | $ | 1,521,362 | | | $ | 77,913 | | | $ | 2,444,274 | |
| State and local | | | 375,574 | | | | 398,251 | | | | 906,656 | | | | (20,261 | ) | | | 433,725 | |
| Total current | | | 3,204,494 | | | | 2,274,108 | | | | 2,428,018 | | | | 57,652 | | | | 2,877,999 | |
Deferred:
| | | | | | | | | | | | | | | | | | | | |
| Federal | | | (6,927,277 | ) | | | (1,612,631 | ) | | | (280,149 | ) | | | (2,409,985 | ) | | | (1,388,614 | ) |
| State and local | | | (919,681 | ) | | | (207,948 | ) | | | (163,191 | ) | | | (331,884 | ) | | | (206,623 | ) |
| Total deferred | | | (7,846,958 | ) | | | (1,820,579 | ) | | | (443,340 | ) | | | (2,741,869 | ) | | | (1,595,237 | ) |
| Total income tax (benefit) expense | | $ | (4,642,464 | ) | | $ | 453,529 | | | $ | 1,984,678 | | | $ | (2,684,217 | ) | | $ | 1,282,762 | |
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Note 17 — Income Taxes – (continued)
The income tax expense differs from the amounts computed by applying the statutory U.S. income tax rate of 34% as a result of the following:
| | | | | | | | | | |
| | Successor | | Predecessor |
| | |
Year Ended December 31, | | Period from
November 1,
2006 through
January 15,
2007 | | Year Ended
October 31,
2006 |
| | | 2008 | | 2007 | | 2006 |
| Expected tax expense computed at the federal rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % |
| (Not includable) nondeductible items | | | -0.4 | % | | | -1.9 | % | | | -19.5 | % | | | -3.0 | % | | | 28.0 | % |
| Goodwill impairment | | | -29.1 | % | | | — | | | | — | | | | — | | | | — | |
| Fair value of warrants | | | — | | | | -38.6 | % | | | — | | | | — | | | | — | |
| State and local taxes, net of federal | | | 4.5 | % | | | -0.8 | % | | | 4.8 | % | | | 5.0 | % | | | 2.0 | % |
| Other | | | -0.5 | % | | | -0.1 | % | | | 0.0 | % | | | 0.0 | % | | | 8.0 | % |
| Total income tax (expense) benefit | | | 8.5 | % | | | -7.4 | % | | | 19.3 | % | | | 36.0 | % | | | 72.0 | % |
The tax effects of temporary differences that give rise to significant deferred tax assets (liability) are presented below:
| | | | |
| | Successor |
| | | As of December 31, |
| | | 2008 | | 2007 |
Deferred tax assets:
| | | | | | | | |
| Reserves and accruals | | $ | 1,243,448 | | | $ | 841,645 | |
| Goodwill | | | 2,296,397 | | | | — | |
| Fixed assets | | | — | | | | 75,117 | |
| Stock-based compensation | | | 211,790 | | | | 304,921 | |
| Deferred rent | | | 1,240,800 | | | | — | |
| Capital loss on sale of ATS International | | | 141,029 | | | | — | |
| Net operating loss carry forward | | | 357,831 | | | | 526,130 | |
| Start up costs | | | 434,515 | | | | 461,209 | |
| Other | | | 879,371 | | | | 363,735 | |
| Total deferred tax assets | | | 6,805,181 | | | | 2,572,757 | |
| Valuation allowance | | | (141,029 | ) | | | (141,617 | ) |
| Total deferred tax assets net of valuation allowance | | | 6,664,152 | | | | 2,431,140 | |
Deferred tax liabilities:
| | | | | | | | |
| Goodwill | | | — | | | | (223,071 | ) |
| Fixed assets | | | (1,123,725 | ) | | | — | |
| Intangible assets | | | (2,007,993 | ) | | | (7,011,313 | ) |
| Prepaid expenses | | | (207,196 | ) | | | (336,331 | ) |
| Other | | | — | | | | — | |
| Total deferred tax liabilities | | | (3,338,914 | ) | | | (7,570,715 | ) |
| Net deferred tax asset (liability) | | $ | 3,325,238 | | | $ | (5,139,575 | ) |
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Note 17 — Income Taxes – (continued)
As of December 31, 2008, the Company had a valuation allowance of $141,029 related to acquired capital loss carry forwards for which the Company believes more likely than not that the benefit will not be realized prior to expiration. To the extent the valuation allowance is reversed into income in the future due to the utilization of the deferred tax assets, the tax benefit will be recorded as a reduction to goodwill.
As of December 31, 2008 the Company had federal net operating loss carry forwards for tax purposes of approximately $0.9 million. These net operating loss carry forwards are limited by certain tax laws and are deductible ratably through 2020, although they begin to expire in 2010. As of December 31, 2008, the Company also had capital loss carry forwards for tax purposes of $366,000, which expire in 2010.
Components of tax expense above do not include the deferred tax benefits of unrealized gains or losses related to the interest rate swap (see Note 11) recorded to other comprehensive income and certain pre-acquisition true-ups recorded to goodwill.
Note 18 — Discontinued Operations
Pyramid
In January 2006, ATSI management decided to discontinue the operations of the Pyramid Products Solutions Group. The following represents the results of the operations of Pyramid:
| | |
| | Year Ended
October 31,
2006 |
| Revenue | | $ | 733,264 | |
| Loss before taxes | | | (1,725,455 | ) |
| Net loss | | | (1,059,084 | ) |
Note 19 — Customer Information
Revenue by customer sector was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | | Year Ended December 31 | | January 15, 2007 | | October 31, 2006 |
| ($ in Thousands) | | 2008 | | 2007 | | 2006 |
| Department of Defense | | $ | 44,332 | | | | 33.7 | % | | $ | 21,275 | | | | 19.9 | % | | $ | — | | | | — | | | $ | 3,890 | | | | 18.2 | % | | $ | 21,852 | | | | 19.5 | % |
| Federal civilian agencies | | | 51,699 | | | | 39.3 | % | | | 53,633 | | | | 50.2 | % | | | — | | | | — | | | | 8,748 | | | | 41.0 | % | | | 56,147 | | | | 50.0 | % |
| Commercial and other | | | 32,098 | | | | 24.4 | % | | | 26,531 | | | | 24.8 | % | | | — | | | | — | | | | 6,409 | | | | 30.1 | % | | | 30,094 | | | | 26.8 | % |
| State & local government | | | 3,420 | | | | 2.6 | % | | | 5,448 | | | | 5.1 | % | | | — | | | | — | | | | 2,271 | | | | 10.7 | % | | | 4,161 | | | | 3.7 | % |
| Total | | $ | 131,549 | | | | 100.0 | % | | $ | 106,887 | | | | 100.0 | % | | $ | — | | | | — | | | $ | 21,318 | | | | 100.0 | % | | $ | 112,254 | | | | 100.0 | % |
Note 20 — Retirement Savings Plan
The Company has a qualified 401(k) retirement plan (“401(k) Plan”) that was funded by contributions from the Company and substantially all full-time employees who elect to participate in the plan. The employer contributions are 50% of employee contributions, up to 3% of an employee’s gross salary. The employer contributions to the 401(k) Plan for the years ended December 31, 2008, 2007 and 2006 were $1,526,500, 895,995 and $0, respectively. The contributions for the period of November 1 through January 15, 2007 and the year ended October 31, 2006 for the predecessor were $261,680 and $536,727, respectively.
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Note 21 — Commitments & Contingencies
Employment Agreements
On August 7, 2008, the Company entered into an employment agreement with Mr. George Troendle. The agreement provides that Mr. Troendle will serve in the position of Chief Operating Officer of the Company for an initial term of two years, with subsequent automatic renewals for successive one-year terms, subject to the termination of either party. The agreement specifies the terms of annual salary and performance-based incentive compensation opportunity. The agreement includes customary provisions concerning proprietary information, non-competition, and rights upon termination, including termination by Mr. Troendle for “good reason,” by the Company for “cause,” and following a “change in control,” as each of those terms is defined in the agreement.
On August 4, 2008, the Company entered into an employment agreement with Dr. Edward H. Bersoff, the Company’s Chairman, President and Chief Executive Officer, amending Dr. Bersoff’s employment agreement, extending his employment term as Chief Executive Officer through December 31, 2009. The Company originally entered into an employment agreement with Dr. Bersoff on March 19, 2007, who had been serving in that capacity since January 16, 2007. The employment agreement specifies annual salary and incentive compensation for the terms of the agreement. The agreement also provides for between twelve and eighteen months’ salary and 50% of any incentive compensation targets if the Dr. Bersoff is terminated other than for cause.
On February 3, 2008, the Company entered into an employment agreement with Ms. Pamela A. Little. The agreement provides that Ms. Little will serve in the position of Chief Financial Officer and Senior Vice President of the Company for an initial term of five years, with subsequent automatic renewals for successive one-year terms, subject to the termination of either party. The agreement specifies the terms of annual salary and performance-based incentive compensation opportunity. The agreement includes customary provisions concerning proprietary information, non-competition, and rights upon termination, including termination by Ms. Little for “good reason,” by the Company for “cause,” and following a “change in control,” as each of those terms is defined in the agreement.
In addition, the Company has entered into employment agreements with certain key employees that provide for severance payments in the event of termination.
Legal Proceedings
From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. Other than possibly the matters discussed below, we currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
We are a defendant in Maximus, Inc. vs. Advanced Technology Systems, Inc., pending in the Connecticut Superior Court, Complex Litigation Docket. The lawsuit asserts breach of contract and other claims related to a subcontract between Maximus and ATSI associated with a prime contract between Maximus and the State of Connecticut. Based on the complaint filed in the suit, Maximus seeks damages in excess of $3.5 million. The case was filed in August 2007.
We have answered the complaint denying Maximus’ claims and have asserted counterclaims. In January of 2009, the case was consolidated for discovery purposes with an action brought by the State of Connecticut against Maximus relating to the prime contract. Discovery has commenced, although at a hearing conducted on March 9, 2009, further depositions were delayed until September 4, 2009 in order to give the State of Connecticut sufficient time to review documents received from Maximus. Trial, which had been scheduled for July 2010, is now anticipated to occur during the first quarter of 2011. Based on the claims asserted in the lawsuit, we have made an indemnification demand against the former principal owners of ATSI under the stock purchase agreement governing the transaction in which the Company (then Federal Services Acquisition Corporation) acquired ATSI.
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Note 21 — Commitments & Contingencies – (continued)
Following the indemnification demand, the former principal owners of ATSI brought an arbitration against us with the American Arbitration Association claiming that the former owners do not owe us any indemnification obligations for the Maximus lawsuit or the Maximus subcontract. At our request, the arbitration was stayed pending the outcome of the Maximus lawsuit described above.
We have also asserted other claims against the former principal owners of ATSI based on the stock purchase agreement governing the transaction, and the former ATSI owners have asserted certain counterclaims against us. Part of our claims against the former ATSI owners are covered by escrowed funds while all of the claims made by the former ATSI owners against us relate to the escrowed funds. These claims are currently the subject of an ad hoc arbitration, which is scheduled for hearing starting March 23, 2009.
Note 22 — Summarized Quarterly Financial Information (Unaudited)
The table below sets forth selected unaudited quarterly condensed financial operating results of the Company for years ended December 31, 2008 and 2007.
| | | | | | | | |
| | Year Ended December 31, 2008 |
| | | First | | Second | | Third | | Fourth |
| Revenue | | $ | 34,873,525 | | | $ | 33,788,772 | | | $ | 32,032,605 | | | $ | 30,853,655 | |
| Operating expenses | | | 33,760,930 | | | | 32,763,907 | | | | 87,837,435 | | | | 28,258,932 | |
| Income from operations | | $ | 1,112,595 | | | $ | 1,024,865 | | | $ | (55,804,830 | ) | | $ | 2,594,723 | |
| Other income (expense) | | | (733,530 | ) | | | (949,434 | ) | | | (910,371 | ) | | | (804,897 | ) |
| Gain (loss) on warrant liability | | | — | | | | — | | | | — | | | | — | |
| Provision for income (tax expense) benefit | | | (104,036 | ) | | | (8,579 | ) | | | 5,759,836 | | | | (1,004,757 | ) |
| Net income (loss) | | $ | 275,029 | | | | 66,852 | | | $ | (50,955,365 | ) | | $ | 785,069 | |
| Basic earnings per share | | $ | 0.01 | | | $ | — | | | $ | (2.28 | ) | | $ | 0.03 | |
| Diluted earnings per share | | $ | 0.01 | | | $ | — | | | $ | (2.28 | ) | | $ | 0.03 | |
Weighted-average shares outstanding:
| | | | | | | | | | | | | | | | |
| Basic | | | 19,242,698 | | | | 20,410,516 | | | | 22,381,860 | | | | 22,442,163 | |
| Diluted | | | 19,242,698 | | | | 20,465,439 | | | | 22,381,860 | | | | 22,442,163 | |
| | | | | | | | |
| | Year Ended December 31, 2007 |
| | | First | | Second | | Third | | Fourth |
| Revenue | | $ | 23,477,720 | | | $ | 26,247,681 | | | $ | 25,646,747 | | | $ | 31,514,891 | |
| Operating expenses | | | 23,361,351 | | | | 25,968,148 | | | | 24,936,237 | | | | 31,547,383 | |
| Income from operations | | $ | 116,369 | | | $ | 279,533 | | | $ | 710,510 | | | $ | (32,492 | ) |
| Other income (expense) | | | 144,186 | | | | 16,556 | | | | (124,478 | ) | | | (280,374 | ) |
| Gain (loss) on warrant liability | | | (6,930,000 | ) | | | — | | | | — | | | | — | |
| Provision for income taxes | | | (102,711 | ) | | | (171,461 | ) | | | (232,827 | ) | | | 53,420 | |
| Net income (loss) | | $ | (6,772,156 | ) | | $ | 124,628 | | | $ | 353,205 | | | $ | (259,446 | ) |
| Basic earnings per share | | $ | (0.33 | ) | | $ | 0.01 | | | $ | 0.02 | | | $ | (0.01 | ) |
| Diluted earnings per share | | $ | (0.33 | ) | | $ | 0.01 | | | $ | 0.02 | | | $ | (0.01 | ) |
Weighted-average shares outstanding:
| | | | | | | | | | | | | | | | |
| Basic | | | 20,307,248 | | | | 18,133,828 | | | | 18,194,081 | | | | 18,783,163 | |
| Diluted | | | 20,307,248 | | | | 18,440,030 | | | | 18,499,615 | | | | 18,783,163 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23 — Subsequent Events
Stock Buyback Program
On February 12, 2009, the Board of Directors approved a repurchase program authorizing the Company to purchase up to the lesser of $3.0 million or 2.0 million shares of Company common stock, in the open market from time to time over a twelve-month period. The timing of the share repurchases under the program is at the discretion of the Company and will depend on a variety of factors, including market conditions and bank approvals and may be suspended or discontinued at any time. Common stock acquired through the repurchase program will be held by the Company as treasury shares and may be used for general corporate purposes, including reissuances in connection with acquisitions, employee stock option exercises or other employee stock plans. The Company currently has approximately 22.5 million shares outstanding, which excludes any shares issuable upon the exercise of the Company’s outstanding warrants that expire in October of this year, to purchase approximately 3 million shares of common stock at an exercise price of $5.00 per share.
Shares Issued Under the ESPP
On February 12, 2009, the Board of Directors increased the authorized shares available under the ESPP by 100,000 shares of Corporation common stock, par value $0.001 per share, pursuant to the ESPP’s evergreen provision. The Form S-8 registration statement for registering such shares was submitted on March 4, 2009.
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ATS CORPORATION
Item 15(a) 2. Supplementary Financial Data
Schedule II — Valuation and Qualifying Accounts for fiscal years ended December 31, 2006, 2007 and 2008 for the successor corporation.
| | | | | | | | | | |
| Successor | | Balance at
Beginning
of Period | | Additions
at Cost | | Deductions | | Other
Changes | | Balance
at End
of Period |
2008
| | | | | | | | | | | | | | | | | | | | |
Reserves deducted from assets to which they apply:
| | | | | | | | | | | | | | | | | | | | |
| Allowances for doubtful accounts | | $ | 91,247 | | | $ | 1,278,264 | | | $ | (598,524 | ) | | $ | — | | | $ | 770,988 | |
2007
| | | | | | | | | | | | | | | | | | | | |
Reserves deducted from assets to which they apply:
| | | | | | | | | | | | | | | | | | | | |
| Allowances for doubtful accounts | | $ | — | | | $ | 2,076,591 | | | $ | (1,985,344 | ) | | $ | — | | | $ | 91,247 | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| | ATS CORPORATION |
| March 16, 2009 | | By: /s/ Edward H. Bersoff
Dr. Edward H. Bersoff
Chairman, President and
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
| Name | | Position | | Date |
/s/ Edward H. Bersoff
Dr. Edward H. Bersoff | | Chairman, President and Chief Executive Officer (Principal Executive Officer) | | March 16, 2009 |
/s/ Pamela A. Little
Pamela A. Little | | Executive Vice President and Chief Financial Officer | | March 16, 2009 |
/s/ Joel R. Jacks
Joel R. Jacks | | Director | | March 16, 2009 |
/s/ Joseph A. Saponaro
Joseph A. Saponaro | | Director | | March 16, 2009 |
/s/ Peter M. Schulte
Peter M. Schulte | | Director | | March 16, 2009 |
/s/ Edward J. Smith
Edward J. Smith | | Director | | March 16, 2009 |
/s/ Ginger Lew
Ginger Lew | | Director | | March 16, 2009 |
/s/ Jack Tomarchio
Jack Tomarchio | | Director | | March 16, 2009 |
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