Ats 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

  _________________

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010.

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM           TO             ..

COMMISSION FILE NUMBER: 0-51552

___________________

ATS CORPORATION

(Exact name of registrant as specified in its charter)

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

7925 Jones Branch Drive

McLean, Virginia	22102
(Address of principal executive offices)	(ZIP code)

(571) 766-2400

(Registrant’s telephone number, including area code)

________

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

___________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer o	Accelerated filer  o
Non-accelerated filer o	Smaller reporting company  x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

The number of shares of the issuer’s common stock, $0.0001 par value, outstanding as of November 2, 2010 was 22,583,593.

ATS CORPORATION

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 (audited)	3
	Consolidated Statements of Income (unaudited) for the three- and nine-month periods ended September 30, 2010 and September 30, 2009	4
	Consolidated Statements of Cash Flows (unaudited) for the three- and nine-month periods ended September 30, 2010 and September 30, 2009	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults upon Senior Securities	26
Item 4.	Reserved	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
SIGNATURES		28

2

ATS CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2010			2009
	(unaudited)			(audited)
ASSETS
Current assets
Cash	$	202,367		$	178,225
Restricted cash		1,326,792			1,324,510
Accounts receivable, net		20,783,006			22,497,444
Prepaid expenses		627,736			625,231
Income taxes receivable		304,925			205,339
Other current assets		25,949			46,057
Deferred income taxes, current		994,735			2,361,611
Total current assets		24,265,510			27,238,417
Property and equipment, net		2,609,778			3,011,621
Goodwill		55,370,011			55,370,011
Intangible assets, net		4,608,552			6,102,798
Other assets		146,567			146,567
Deferred income taxes		1,492,948			1,400,260
Total assets	$	88,493,366		$	93,269,674
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—		$	21,191,135
Accounts payable		5,890,236			4,753,800
Other accrued expenses and current liabilities		1,780,893			6,356,896
Accrued salaries and related taxes		3,595,483			4,541,509
Accrued vacation		2,396,430			2,259,538
Deferred revenue		305,212			1,392,457
Deferred rent – current portion		320,498			320,498
Total current liabilities		14,288,752			40,815,833
Long-term debt  – net of current portion		15,954,960			—
Deferred rent – net of current portion		2,518,249			2,658,055
Other long-term liabilities		5,795			5,795
Total liabilities		32,767,756			43,479,683
Commitments and contingencies
Stockholders’ equity:
Preferred stock $0.0001 par value, 1,000,000 shares authorized, and no shares issued and outstanding		—			—
Common stock $0.0001 par value, 100,000,000 shares authorized, 31,451,275 and 31,235,696 shares issued, and 22,553,382 and 22,489,803 shares outstanding		3,145			3,124
Additional paid-in capital		132,542,594			131,702,488
Treasury stock, at cost, 8,897,893 and 8,745,893 shares held		(31,663,758	)		(31,209,118	)
Accumulated deficit		(45,156,371	)		(50,062,979	)
Accumulated other comprehensive loss (net of tax benefit of $0 and $400,571)		—			(643,524	)
Total stockholders’ equity		55,725,610			49,789,991
Total liabilities and stockholders’ equity	$	88,493,366		$	93,269,674

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

3

ATS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010 (unaudited)		2009  (unaudited)			2010 (unaudited)			2009  (unaudited)
Revenue	$	29,246,619	$	32,074,434		$	89,004,930		$	89,497,757
Operating costs and expenses
Direct costs		20,406,798		21,342,643			62,325,800			59,990,312
Selling, general and administrative expenses		5,486,690		6,089,196			17,798,821			18,908,327
Depreciation and amortization		626,511		772,275			1,903,680			2,324,018
Total operating costs and expenses		26,519,999		28,204,114			82,028,301			81,222,657
Operating income		2,726,620		3,870,320			6,976,629			8,275,100
Other (expense) income
Interest, net		108,491		(597,742	)		(1,069,551	)		(2,164,426	)
Other income		959,440		60,037			1,463,332			60,037
Income before income taxes		3,794,551		3,332,615			7,370,410			6,170,711
Income tax expense		1,131,537		1,340,816			2,463,802			2,581,535
Net income	$	2,663,014	$	1,991,799		$	4,906,608		$	3,589,176
Weighted average number of shares outstanding
—basic		22,540,904		22,741,726			22,516,813			22,648,962
—diluted		22,627,723		22,846,549			22,605,726			22,697,864
Net income per share
—basic	$	0.12	$	0.09		$	0.22		$	0.16
—diluted	$	0.12	$	0.09		$	0.22		$	0.16

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

4

ATS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended  September 30,
	2010			2009
	(unaudited)			(unaudited)
Cash flows from operating activities
Net income	$	4,906,608		$	3,589,176
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,903,680			2,324,018
Non-cash interest (income) expense SWAP agreement		(354,020	)		198,458
Stock-based compensation		560,863			405,727
Directors’ fees paid in equity		103,094			113,735
Deferred income taxes		856,016			87,772
Deferred rent		(139,806	)		(201,085	)
Gain on disposal of equipment		(8,722	)		—
Provision for bad debt		951,245			432,703
Changes in assets and liabilities, net of adjustments related to other comprehensive loss:
Accounts receivable		763,188			5,773,816
Prepaid expenses		(2,505	)		(179,273	)
Restricted cash		(2,282	)		(7,400	)
Other assets		20,315			215,537
Accounts payable		1,289,921			(429,160	)
Other accrued expenses and accrued liabilities		(3,177,887	)		(2,121,241	)
Accrued salaries and related taxes		(946,026	)		1,150,973
Accrued vacation		136,893			425,195
Accrued interest		(153,486	)		159,975
Income taxes payable and receivable, net		(62,838	)		62,549
Other current liabilities		(1,087,245	)		(236,333	)
Net cash provided by operating activities		5,557,006			11,765,142
Cash flows from investing activities
Purchase of property and equipment		(9,074	)		(135,414	)
Proceeds from release of escrows		—			3,758,637
Proceeds from disposals of equipment		10,000			—
Net cash provided by investing activities		926			3,623,223
Cash flows from financing activities
Borrowings on line of credit		51,366,004			45,760,848
Payments on line of credit		(54,594,279	)		(59,947,409	)
Issuance of notes payable		—			139,176
Payments on notes payable		(2,007,900	)		(1,364,996	)
Payments on capital leases		—			(64,152	)
Proceeds from exercise of stock options		5,587			—
Proceeds from stock issued pursuant to Employee Stock Purchase Plan		151,438			126,428
Payments to repurchase treasury stock		(454,640	)		(4,216	)
Net cash used in financing activities		(5,533,790	)		(15,354,321	)
Net increase in cash		24,142			34,044
Cash, beginning of period		178,225			364,822
Cash, end of period	$	202,367		$	398,866
Supplemental disclosures:
Cash paid or received during the period for:
Income taxes paid	$	1,669,146		$	2,436,380
Income tax refunds		2,258			12,148
Interest paid		1,789,871			1,861,649
Interest received		301,264			48,256

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

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ¾ BASIS OF PRESENTATION

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

The accompanying consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). These statements include all adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows. Certain information and note disclosures normally included in the annual financial statements have been condensed or omitted pursuant to those instructions, although the Company believes that the disclosures made are adequate to make the information presented not misleading. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the Company’s 2009 Annual Report on Form 10-K. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

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

Financial Statements Reclassifications – Certain amounts on the prior period financial statements and related notes have been reclassified to conform to the current presentation.

NOTE 2 ¾ RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

New pronouncements issued by the Financial Accounting Standards Board (“FASB”) with effective dates prior to September 30, 2010 are not applicable and have had no effect on the Company’s consolidated financial position or results of operations.

Standards Issued But Not Yet Effective

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

6

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

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic 605). ASU 2010-17 provides guidance on applying the milestone method of revenue recognition in arrangements with research and development activities. The Company does not expect this ASU to have a material impact on its revenue recognition when adopted for our fiscal year beginning January 1, 2011.

NOTE 3 ¾ RESTRICTED CASH

The Company is required to maintain $1.2 million on deposit with a financial institution to support a bonding requirement for one of the ATSI state contracts. This amount, and accumulated interest of $126,792 and $124,510 earned thereon as of September 30, 2010 and December 31, 2009, respectively, is reflected in restricted cash in the accompanying consolidated balance sheets. We expect the performance under this contract to be completed in 2010, whereby the bond will be released and the deposit refunded.

NOTE 4 ¾ ACCOUNTS RECEIVABLE

Total accounts receivable, net of allowance for doubtful accounts of $0.1 million at September 30, 2010 and $0.7 million at December 31, 2009, consisted of the following:

	September 30, 2010			December 31, 2009
Billed receivables	$	17,407,549		$	19,559,013
Unbilled receivables:
Amounts billable		551,902			112,300
Revenues recorded in excess of milestone billings on fixed-price contracts		2,887,398			3,474,459
Retainage		65,291			95,522
Total accounts receivable	$	20,912,140		$	23,241,294
Allowance for doubtful accounts		(129,134	)		(743,850	)
Total accounts receivable, net	$	20,783,006		$	22,497,444

NOTE 5 ¾ FAIR VALUE OF FINANCIAL INSTRUMENTS

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

7

Historically the Company accounted for its interest rate swap agreement as a cash flow hedge. The fair value of the interest rate swap was based on the net present value of its net projected cash flows, which are a level 3 input under ASC 820-25. On September 30, 2010, the Company terminated the swap arrangement resulting in an early payment in the amount of $375,000, the remaining balance of the swap liability, in accordance with the terms of the agreement. Accordingly, the fair value of the interest rate swap was reduced to zero at September 30, 2010.  Since the Company had previously recognized interest expense in 2009 and 2010 relating to the swap ineffectiveness, the effect of terminating the swap resulted in $335,301 in interest income for the three months and $217,156 for the nine months ended September 30, 2010, respectively, net of tax expense. The related deferred tax asset and other comprehensive income were reduced to zero as well. The fair value of the interest rate swap was $0 and $1,398,115 and reflected in other accrued expenses and current liabilities, as of September 30, 2010 and December 31, 2009, respectively.

NOTE 6 ¾ STOCK PLANS AND STOCK-BASED COMPENSATION

Under the fair value recognition provisions of ASC 718, Stock Compensation (formerly SFAS No. 123(R), Share Based Payment (“FAS 123(R)”)), the Company recognizes stock-based compensation expense based upon the fair value of the stock-based awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior. A summary of the components of the stock-based compensation expense recognized during the three- and nine-month periods ended September 30, 2010 and 2009 is as follows:

Compensation Related to  Options and Restricted Stock	Three Months  Ended September 30, 2010			Three Months Ended September 30, 2009			Nine months Ended September 30, 2010			Nine months  Ended September 30, 2009
Incentive stock options	$	47,000		$	37,000		$	191,000		$	119,000
Restricted stock		216,000			119,000			504,000			317,000
Stock grants to Directors in lieu of cash		—			—			103,000			114,000
Forfeitures in excess of estimate		(115,000	)		(17,000	)		(134,000	)		(30,000	)
Total stock-based compensation expense	$	148,000		$	139,000		$	664,000		$	520,000
Income tax benefit recognized for stock-based compensation expense	$	22,000		$	94,000		$	185,000		$	103,000

Stock Options –The Company estimates the fair value of options as of the date of grant using the Black-Scholes option pricing model. A total of 50,000 and 158,000 options were granted during the three- and nine-month periods ended September 30, 2010, respectively. A total of 5,000 and 317,000 options were granted during the three and nine-month periods ended September 30, 2009, respectively.  The fair value of options granted during the nine-month period ended September 30, 2010 has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Options Granted January 4, 2010			Options Granted April 4, 2010			Options Granted May 18, 2010			Options Granted September 1, 2010
Expected dividend yield		—	%		—	%		—	%		—	%
Expected volatility		70.6	%		70.0	%		67.6	%		66.8	%
Risk free interest rate		2.5	%		2.5	%		2.5	%		1.6	%
Expected life of options	6.3 years			6.3 years			6.3 years			6.3 years
Forfeiture rate		4.25	%		4.25	%		4.25	%		4.25	%
Options granted		15,000			40,000			53,000			50,000

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The average fair value per option granted during the nine months ended September 30, 2010 was $1.82. As of September 30, 2010, there was $584,499 of unrecognized compensation expense related to unvested options. This cost is expected to be recognized over a weighted-average period of 2.8 years. The table below provides stock option information for the nine months ended September 30, 2010:

	Number of Shares			Weighted Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value of In-the- Money Options
Options outstanding at January 1, 2010		638,000		$	2.40		9.5	$	310,655	(1)
Options granted		158,000			2.86		9.7		7,850	(2)
Options expired		—			—		—		—
Options exercised		(2,750	)		2.03		—		—
Options forfeited		(160,250	)		2.49		—		—
Options outstanding at September 30, 2010		633,000		$	2.51		8.3	$	390,883	(2)
Options exercisable at September 30, 2010		203,500		$	2.81		7.5	$	123,055	(2)

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

(2) Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $2.84 as of September 30, 2010, over the exercise price, multiplied by the number of options.

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

		Options Outstanding						Options Exercisable
				Weighted-
				average		Weighted-				Weighted-
				Remaining		average				average
Exercise		Number		Life in		Exercise		Number		Exercise
Prices		Outstanding		Years		Price		Exercisable		Price
$	1.40		42,500		8.3	$	1.40		12,500	$	1.40
	1.50		175,250		8.6		1.50		44,875		1.50
	2.15		122,750		7.7		2.15		64,000		2.15
	2.23		5,000		9.0		2.23		1,250		2.23
	2.50		15,000		9.2		2.50		—		—
	2.80		50,000		9.9		2.80		—		—
	2.90		93,000		9.6		2.90		—		—
	3.40		20,000		7.2		3.40		10,000		3.40
	3.50		30,000		7.1		3.50		15,000		3.50
	3.67		15,000		7.0		3.67		7,500		3.67
	3.75		4,500		6.8		3.75		3,375		3.75
	4.88		60,000		6.4		4.88		45,000		4.88
			633,000		8.3	$	2.51		203,500	$	2.81

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

	No. of Shares			Weighted  Average Grant Date Fair Value
Unvested at January 1, 2010		462,986		$	2.42
Granted		226,200			2.74
Vested		(110,362	)		2.32
Forfeited		(81,428	)		1.97
Unvested at September 30, 2010		497,396			2.66

NOTE 7 ¾ EMPLOYEE STOCK PURCHASE PLAN

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

The Plan is a qualified plan under Section 423 of the Internal Revenue Code and, for financial reporting purposes, is considered non-compensatory under ASC 718, Stock Compensation (formerly SFAS No. 123R, Share Based Payment ). Accordingly, there is no stock-based compensation expense associated with shares acquired under the Plan for the nine-month period ended September 30, 2010. As of September 30, 2010, participants had purchased 316,893 shares since the inception of the Plan at a weighted average price per share of $1.86. During the nine months ended September 30, 2010, 66,920 shares were purchased at an average price per share of $2.26.

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NOTE 8 ¾ EARNINGS (LOSS) PER SHARE

Basic and diluted earnings per share information is presented in accordance with ASC 260, Earnings Per Share (formerly SFAS No. 128, Earnings Per Share). Basic earnings per share is calculated by dividing the net income/(loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average common shares outstanding which includes common stock equivalents. The Company’s common stock equivalents include stock options, restricted stock and warrants. The weighted average shares outstanding excludes unvested restricted shares.  The weighted average shares outstanding for the three months ended September 30, 2010 excludes stock options to purchase approximately 561,000 shares because such common stock equivalents have an exercise price in excess of the average market price of the Company’s common stock during the period, or would be anti-dilutive. Weighted average shares outstanding for the three months ended September 30, 2009 excludes warrants and stock options to purchase approximately 3,501,000 shares because such common stock equivalents had an exercise price in excess of the average market price of the Company’s common stock during the period, and as such were anti-dilutive.  The weighted average shares outstanding for the nine months ended September 30, 2010 excludes stock options to purchase approximately 559,000 shares

because such common stock equivalents had an exercise price in excess of the average market price of the Company’s common stock during the period, or would be anti-dilutive. Weighted average shares outstanding for the nine months ended September 30, 2009 excludes warrants and stock options to purchase approximately 3,557,000 shares because such common stock equivalents had an exercise price in excess of the average market price of the Company’s common stock during the period, and as such were anti-dilutive.  All warrants expired in October 2009.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income	$	2,663,014	$	1,991,799	$	4,906,608	$	3,589,176
Weighted average number of basic shares outstanding during the period		22,540,904		22,741,726		22,516,813		22,648,962
Dilutive effect of stock options and restricted shares after application of the treasury stock method		86,819		104,823		88,913		48,902
Weighted average number of diluted shares outstanding during the period		22,627,723		22,846,549		22,605,726		22,697,864
Basic earnings per share	$	0.12	$	0.09	$	0.22	$	0.16
Diluted earnings per share	$	0.12	$	0.09	$	0.22	$	0.16

Shares outstanding during the nine months ended September 30, 2010 reflect the repurchase of 152,000 shares of ATSC common stock for approximately $455,000 pursuant to the share repurchase program which was approved by the Company’s Board of Directors on February 17, 2009. No stock was repurchased during the three months ended September 30, 2010.

NOTE 9 ¾ SEGMENT ACCOUNTING

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

11

NOTE 10 ¾ GOODWILL VALUATION

Goodwill represents the excess of purchase price over fair value of net assets of businesses acquired. Other purchased intangible assets include the fair value of items such as customer contracts, backlog and customer relationships. ASC Topic 350, Intangibles, Goodwill and Other (ASC 350) (formerly Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”)), establishes financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but rather tested for impairment on an annual basis or at an interim date in the event of a triggering event. Purchased intangible assets with a definite useful life are amortized on a straight-line basis over their estimated useful lives.

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

The Company performed its 2010 annual impairment test during the third quarter in connection with the preparation of its September 30, 2010 interim financial statements. Management determined that a discounted cash flow analysis combined with a market based approach utilizing level 2 data pursuant to ASC Topic 820-25 Fair Value Measurements and Disclosures (“ASC 820-25”) was the most appropriate valuation methodology to use in our analysis as it reflects ATSC’s business characteristics and forward earnings potential. Based on management’s forecast for the Company, we concluded that the estimated fair value of the Company significantly exceeded its book value as of the valuation date. As a result of this analysis, management concluded that goodwill was not impaired.

NOTE 11 ¾ INTANGIBLE ASSETS

Intangible assets consisted of the following:

	September 30, 2010			Weighted- Average Amortization Period	December 31, 2009			Weighted- Average Amortization Period
Customer contracts and related customer relationships	$	8,235,000		53 mos.	$	8,235,000		53 mos.
Acquired technology and in-process research and development		400,487		38 mos.		400,487		38 mos.
Other		711,799		60 mos.		711,799		60 mos.
Intangible assets	$	9,347,286		52 mos.	$	9,347,286		52 mos.
Less accumulated amortization		(4,738,734	)			(3,244,488	)
Total intangible assets, net	$	4,608,552			$	6,102,798

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

Year ending December 31,	Amount
2010	$	498,082
2011		1,992,328
2012		1,962,762
2013		155,380
Total intangible assets, net	$	4,608,552

12

NOTE 12 ¾ LEGAL PROCEEDINGS

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

We were a defendant in Maximus, Inc. vs. Advanced Technology Systems, Inc., in the Connecticut Superior Court, Complex Litigation Docket. The lawsuit regarded breach of contract and other claims related to a subcontract between Maximus and ATSI associated with a prime contract between Maximus and the State of Connecticut. Based on the complaint filed in the suit, Maximus sought damages in excess of $3.5 million. The case was filed in August 2007. In January of 2009, the case was consolidated for discovery purposes with an action brought by the State of Connecticut against Maximus relating to the prime contract.  On February 23, 2010, the State of Connecticut advised Maximus that it was accepting Maximus' settlement offer. On April 6, 2010, a settlement agreement was signed between Maximus and the Company. In accordance with the terms of the settlement, ATSC paid Maximus $1.5 million in return for a full release. The Company had fully accrued the $1.5 million settlement liability as of December 31, 2009.

Based on the claims asserted in the Maximus lawsuit, we 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. This indemnification demand was paid in August 2010, in the amount of $1.25 million.

NOTE 13 ¾ DEBT

Debt consisted of the following:

	September 30, 2010		December 31, 2009
Bank Financing	$	15,954,960	$	18,688,235
Notes payable		—		2,502,900
Total debt	$	15,954,960	$	21,191,135
Less current portion		—		(21,191,135	)
Debt, net of current portion	$	15,954,960	$	—

Notes Payable

The notes payable related to the acquisitions in 2007 were amortized over three years have been paid in full as of September 30, 2010.

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

Twelve-months Ending September 30,
2010	$	—
2011		—
2012		—
2013		15,954,960
Total long-term debt	$	15,954,960

13

Bank Financing

On June 1, 2010, ATSC, as Borrower, entered into an amended and restated credit agreement related to its previous credit facility with Bank of America, N.A., as Administrative Agent, and other various lender parties (the “Amended Credit Agreement”).  The Amended Credit Agreement provides for an increase in the credit facility from $50 million to $55 million and an extension to the term for an additional three years with a maturity in June 2013.  Borrowings under the facility are subject to compliance with covenants including an asset coverage ratio, leverage ratio, and a fixed charge ratio. Borrowings bear interest at rates based on 30-day LIBOR plus applicable margins based on a leverage ratio as determined quarterly.  The Amended Credit Agreement adjusted the applicable margins charged on the outstanding borrowings from a range of 2.0% to 3.5% to a range of 2.0% to 3.0% based on the leverage ratio. The fee for the unused portion of the facility ranges from .25% to .35% based on the leverage ratio compared to the previous facility’s terms of .20% to .375%. The covenants for the minimum fixed charge coverage ratio were adjusted slightly from 1.3:1 to 1.5:1 while the other financial covenants remained the same. The Amended Credit Agreement provides a basket for stock repurchase not to exceed $3.0 million in any period of twelve consecutive months, and total consideration for acquisitions in any twelve-month period greater than $20 million will require lender approval. As of September 30, 2010, the facility’s outstanding debt balance was $16.0 million. For the nine months ended September 30, 2010, the effective interest rate on the outstanding borrowings under the facility was 6.25%. The maximum availability under the facility at September 30, 2010 was $20.9 million, of which the Company has $16.0 million outstanding.

The Company was in compliance with its loan covenant agreements as of September 30, 2010.

14

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

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. The factors described in our filings with the SEC, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements, including but not limited to:

· risks related to the government contracting industry, including possible changes in government spending priorities, especially during periods when the government faces significant budget challenges;

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

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

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

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

Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 under “Item 1A. Risk Factors.” Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update these forward-looking statements, even if our situation changes in the future.

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

Overview

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

15

For the nine-month periods ended September 30, 2010 and 2009, we generated revenue from the following mix of customers:

	Nine Months Ended September 30, 2010				Nine Months Ended September 30, 2009
Federal civilian agencies	$	42,839,000	48.1	%	$	42,344,000	47.3	%
Defense and homeland security		24,150,000	27.2	%		29,998,000	33.5	%
Commercial		22,016,000	24.7	%		17,156,000	19.2	%
Totals	$	89,005,000	100.0	%	$	89,498,000	100.0	%

Our largest clients during the nine months ended September 30, 2010 were the U.S. Department of Housing and Urban Development (“HUD”), Fannie Mae, the Pension Benefit Guaranty Corporation, the Defense Logistics Agency and the Defense Technology Security Administration, representing approximately $17.8 million, $11.7 million, $9.0 million, $6.7 million, and $5.9 million in revenues, respectively, accounting for 20.0%, 13.1%, 10.1%, 7.5%, and 6.6%, respectively, of total revenue.

	Nine Months Ended September 30, 2010				Nine Months Ended September 30, 2009
	(in thousands)				(in thousands)
U.S. Department of Housing & Urban Development	$	17,778	20.0	%	$	17,934	20.0	%
Fannie Mae		11,704	13.1	%		8,301	9.3	%
Pension Benefit Guaranty Corporation		9,029	10.1	%		6,555	7.3	%
Defense Logistics Agency		6,688	7.5	%		6,071	6.8	%
Defense Technology Security Administration		5,907	6.6	%		6,943	7.8	%

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

	Nine Months Ended September 30, 2010				Nine Months Ended September 30, 2009
Time-and-materials	$	58,980,000	66.3	%	$	61,594,000	68.8	%
Fixed-price		29,944,000	33.6	%		27,904,000	31.2	%
Cost-plus-fixed-fee		81,000	0.1	%		—	—
Totals	$	89,005,000	100.0	%	$	89,498,000	100.0	%

16

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

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

	Nine Months Ended September 30, 2010				Nine Months Ended September 30, 2009
Prime contracts	$	75,135,000	84.4	%	$	71,169,000	79.5	%
Subcontracts		13,870,000	15.6	%		18,329,000	20.5	%
Totals	$	89,005,000	100.0	%	$	89,498,000	100.0	%

Our most significant expense is direct costs, which consists primarily of project personnel salaries and benefits, and direct expenses incurred to complete projects. The number of consulting personnel assigned to a project will vary according to the size, complexity, duration, and demands of the project. As of September 30, 2010, we had 502 personnel who worked on our contracts.

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

Goodwill Valuation

See Note 10.

17

Contract Backlog

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

 The following table summarizes our contract backlog at September 30, 2010 and December 31, 2009, respectively:

	September 30, 2010		December 31, 2009
Backlog:
Funded	$	48,645,500	$	60,980,400
Unfunded		169,928,400		105,821,100
Total backlog	$	218,573,900	$	166,801,500

Our backlog includes orders under contracts that in some cases extend for several years, with the latest expiring in 2017. The most significant awards during the nine-month period ended September 30, 2010 were successful re-competitions with a Department of Defense agency valued at $27.5 million, the Nuclear Regulatory Commission (“NRC”) valued at $21.4 million, HUD awards valued at $14.6 million, Defense Logistics Agency valued at $13.7 million and the National Cancer Institute valued at $13.3 million.

We cannot guarantee that we will recognize any revenue from our backlog. The federal government has the prerogative to cancel any contract or delivery order at any time. Most of our contracts and delivery orders have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees in such cases. Backlog varies considerably from time to time as current contracts or delivery orders are executed and new contracts or delivery orders under existing contacts are won. Our estimate of the portion of the backlog as of September 30, 2010 from which we expect to recognize revenue during fiscal year 2010 is likely to change because the receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control.

18

Non-GAAP Financial Measures – EBITDA

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

	For the Three			For the Three		For the Nine		For the Nine
	Months Ended			Months Ended		Months Ended		Months Ended
	September 30, 2010			September 30, 2009		September 30, 2010		September 30, 2009
Net income	$	2,663,014		$	1,991,799	$	4,906,608	$	3,589,176
Adjustments:
Depreciation		128,428			221,972		409,434		673,110
Amortization of intangibles		498,083			550,303		1,494,246		1,650,908
Interest, net		(108,491	)		597,742		1,069,551		2,164,426
Taxes		1,131,537			1,340,816		2,463,802		2,581,535
EBITDA	$	4,312,571		$	4,702,632	$	10,343,641	$	10,659,155

 During the nine months ended September 30, 2010, we recorded other income of approximately $0.5 million associated with the adjustment of seller notes in addition to $1.25 million for the release of escrow from a previous acquisition. Adjusting EBITDA for these items would result in an adjusted EBITDA of $3,062,571 for the three months ended September 30, 2010 and $8,598,641 for the nine months ended September 30, 2010.

Recent Events

The Board of Directors has elected Sidney E. Fuchs, the Company’s Chief Operating Officer and Executive Vice President to serve as the Company’s President and Chief Executive Officer, beginning January 1, 2011.  Mr. Fuchs has also been appointed to the Company's board of directors, effective October 19, 2010.  Dr. Edward H. Bersoff will transition from his current management role as President and Chief Executive Officer of the Company beginning January 1, 2011 but will continue his service as Chairman of the Board after Mr. Fuchs takes office.

19

Results of Operations (unaudited)

Results of operations for the three- and nine-month periods ended September 30, 2010 compared with the three- and nine-month periods ended September 30, 2009 are presented below.

The following table sets forth certain financial data as dollars and as a percentage of revenue:

	For the Three		%			For the Three			%			For the Nine			%			For the Nine			%
	Months Ended					Months Ended						Months Ended						Months Ended
	September 30,					September 30,						September 30,						September 30,
	2010					2009						2010						2009
Revenue	$	29,246,619				$	32,074,434					$	89,004,930					$	89,497,757
Operating costs and expenses
Direct costs		20,406,798		69.8	%		21,342,643			66.5	%		62,325,800			70.0	%		59,990,312			67.0	%
Selling, general and administrative expenses		5,486,690		18.8	%		6,089,196			19.0	%		17,798,821			20.0	%		18,908,327			21.1	%
Depreciation and amortization		626,511		2.1	%		772,275			2.4	%		1,903,680			2.1	%		2,324,018			2.6	%
Total operating costs and expenses		26,519,999		90.7	%		28,204,114			87.9	%		82,028,301			92.2	%		81,222,657			90.8	%
Operating income		2,726,620		9.3	%		3,870,320			12.1	%		6,976,629			7.8	%		8,275,100			9.2	%
Other income (expense)
Interest, net		108,491		0.4	%		(597,742	)		(1.9	)%		(1,069,551	)		(1.2	)%		(2,164,426	)		(2.4	)%
Other income		959,440		3.3	%		60,037			0.2	%		1,463,332			1.6	%		60,037			0.1	%
Income before income taxes		3,794,551		13.0	%		3,332,615			10.4	%		7,370,410			8.3	%		6,170,711			6.9	%
Income tax expense		1,131,537		3.9	%		1,340,816			4.2	%		2,463,802			2.8	%		2,581,535			2.9	%
Net Income	$	2,663,014		9.1	%	$	1,991,799			6.2	%	$	4,906,608			5.5	%	$	3,589,176			4.0	%
Weighted average number of shares outstanding
—basic		22,540,904					22,741,726						22,516,813						22,648,962
—diluted		22,627,723					22,846,549						22,605,726						22,697,864
Net income per share
—basic	$	0.12				$	0.09					$	0.22					$	0.16
—diluted	$	0.12				$	0.09					$	0.22					$	0.16

20

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

Revenue – Revenue decreased by $2.8 million, or 8.8%, to $29.2 million for the three months ended September 30, 2010. This was primarily due to reductions in other direct costs related to a lower demand for computer equipment purchases and the effect of awards on re-competed contracts that transitioned from time-and-materials to fixed-price contracts.

Direct costs –Direct costs are comprised of direct labor, fringe on this labor, subcontract labor costs and other direct costs. Other direct costs are incurred in response to specific client tasks and may vary from period to period. The following chart shows the cost categories with significant cost variances for the three-month periods:

	Three Months Ended September 30, 2010					Three Months Ended September 30, 2009					Increase (Decrease)
	(in thousands)		%			(in thousands)		%			(in thousands)			%
Revenue	$	29,247		100	%	$	32,074		100	%	$	(2,827	)		8.8	%
Direct labor and fringe benefits		13,070		44.7	%		13,331		41.6	%		(261	)		(2.0	)%
Subcontractors		6,208		21.2	%		6,526		20.3	%		(318	)		(4.9	)%
Other direct costs		1,129		3.9	%		1,486		4.6	%		(357	)		(24.0	)%
Total direct costs	$	20,407		69.8	%	$	21,343		66.5	%	$	(936	)		(4.4	)%

Direct costs were 69.8% and 66.5% of revenue for the three months ended September 30, 2010 and 2009, respectively, an increase of 3.3%. Direct labor is the largest component of direct costs representing 64.0% and 62.5% of total direct cost for the the three months ending September 30, 2010 and  2009, respectively. Although direct labor dollars decreased slightly over the comparable period in 2009, as a percentage of revenue the direct labor dollars increased from 41.6% to 44.7% as a result of lower margins on time-and-materials and fixed price contracts. These margins improved in the third quarter by approximately 0.9% from the previous two quarters and are expected to continue to improve.  Subcontractor costs and other direct costs represented 25.1% and 24.9% of revenue and 36.0% and 37.5% of total direct costs for the three months ended September 30, 2010 and 2009, respectively.

Selling, general and administrative (“SG&A”) expenses – The components of SG&A are marketing, bid and proposal costs, indirect labor and the associated fringe benefits, facilities costs and other discretionary expenses.  SG&A expenses decreased $0.6 million to $5.5 million, or 18.8% of revenue, for the quarter ended September 30, 2010 compared to $6.1 million, or 19.0% of revenue, for the quarter ended September 30, 2009. The improvement in SG&A expense is attributable to controlling various indirect costs, partially offset by an increase in bad debt expense as a result of the recognition of receivables from one contract determined to be uncollectible.

Depreciation and amortization – Depreciation and amortization expense decreased $0.2 million to $0.6 million for the quarter ended September 30, 2010 from $0.8 million for the quarter ended September 30, 2009 primarily due to a reduction of amortization as acquired intangible assets reach the end of their amortization periods.

Interest, net – The net interest (income)/expense was $(0.1) million and $0.6 million for the three-months ended September 30, 2010 and September 30, 2009, respectively. This decrease of $0.7 million in net interest expense was attributable to several factors.   As part of the indemnification settlement ATSC recognized $291,000 of interest income effectively reducing net interest expense for the quarter.  A reduction in the applicable margin from 3.5 to 2.0 on the outstanding balance of our credit line resulted in a decrease of $33,000 in interest expense. In addition, interest expense decreased $21,000 due to the declining outstanding loan balance on the credit facility and an additional $51,000 reduction due to the declining balance on the notes payable from the acquisitions in 2007.  Finally, the retirement of the interest rate swap at September 30, 2010 resulted in the recognition of approximately $307,000 in interest income as the interest expense had been recorded in the previous periods due to the ineffectiveness of the swap.

Our average outstanding debt balance for the quarter ended September 30, 2010 was $17.6 million compared to $20.4 million for the quarter ended September 30, 2009.

21

Income taxes – The Company reported an income tax expense of $1.0 million and $1.3 million for the three-month periods ended September 30, 2010 and 2009, respectively. The effective tax rates were 29.8% and 40.2% for the three-month periods ended September 30, 2010 and 2009, respectively. The significantly lower effective tax rate for the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009 was due to $1.0 million of the $1.25 million indemnification payment as a result of the settlement of the indemnification demand against the former principal owners of ATSI under the stock purchase agreement governing the transaction which adjusted the tax basis of the acquisition and is considered a non-taxable permanent difference.

Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009.

Revenue – Revenue decreased by $0.5 million, or 0.6%, to $89.0 million for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. This was the result of lower staffing requirements on Department of Defense contracts, partially offset by increased requirements on commercial and civilian contracts.

Direct costs –Direct costs are comprised of direct labor, fringe on this labor, subcontract labor costs and material and other direct costs. Material and other direct costs are incurred in response to specific client tasks and may vary from period to period. The following chart shows the cost categories with significant cost variances for the nine-month periods:

Revenue	Nine Months Ended September 30, 2010					Nine Months Ended September 30, 2009					Increase (Decrease)
	(in thousands)		%			(in thousands)		%			(in thousands)			%
Revenue	$	89,005		100	%	$	89,498		100	%	$	(493	)		5.5	%
Direct labor	$	40,546		45.6	%	$	38,239		42.7	%	$	2,307			6.0	%
Subcontractors		18,137		20.4	%		17,927		20.0	%		210			1.2	%
Other direct costs		3,643		4.1	%		3,824		4.3	%		(181	)		(4.7	)%
Total direct costs	$	62,326		70.0	%	$	59,990		67.0	%	$	2,336			3.9	%

Direct costs were 70.0% and 67.0% of revenue for the nine-month periods ended September 30, 2010 and 2009 respectively, an increase of 3.0%. Direct labor is the largest component of direct costs representing 65.0% and 63.7% of total direct costs. for the nine months ended September 30, 2010 and September 30, 2009, respectively. The increase in direct labor dollars is primarily attributable to increased staffing requirements and salary escalation.  Direct labor increased as a percent of revenue from 42.7% to 45.6% as a result of lower margins on time-and-materials and fixed price contracts  Subcontractor costs and other direct costs represented 24.5% and 24.3% of revenue and 35.0% and 36.3% of total direct costs for the nine-month periods ended September 30, 2010 and 2009, respectively.

Selling, general and administrative (“SG&A”) expenses – The components of SG&A are marketing, bid and proposal costs, indirect labor and the associated fringe benefits, facilities costs and other discretionary expenses.  SG&A expenses decreased $1.1 million to $17.8 million, or 20.0% of revenues, for the nine months ended September 30, 2010 compared to $18.9 million, or 21.1% of revenues, for the nine months ended September 30, 2009.  The improvement in the SG&A expense is attributable to controlling various indirect costs, as well as significant savings on legal fees due to the resolution of the arbitration with the previous owners of ATSI, partially offset by an increase in bad debt expense as a result of the recognition of receivables from one contract determined to be uncollectible.

Depreciation and amortization – Depreciation and amortization expense decreased $0.4 million to $1.9 million from $2.3 million, primarily due to a reduction of amortization as acquired intangible assets reach the end of their amortization periods.

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Interest, net – The net interest expense was $1.1 million and $2.2 million for the nine-months ended September 30, 2010 and September 30, 2009, respectively. This decrease of $ 1.1 million in net interest expense was attributable to several factors.   As part of the indemnification settlement ATSC recognized $291,000 of interest income effectively reducing interest expense for the year.  A reduction in the applicable margin from 3.5 to 2.0 on the outstanding balance of our credit line resulted in a decrease of $218,000 in interest expense. In addition, interest expense decreased $183,000 due to the declining outstanding loan balance on the credit facility and an additional $145,000 reduction due to the declining balance on the notes payable from the acquisitions in 2007.  Finally, the retirement of the interest rate swap at September 30, 2010 resulted in the recognition of approximately $444,000 in interest income as the interest expense had been recorded in previous periods due to the ineffectiveness of the swap.

Our average outstanding debt balance for the nine months ended September 30, 2010 was $17.9 million compared to $26.0 million for the nine months ended September 30, 2009.

Other income – Other income was $1.5 million for the nine-month period ended September 30, 2010, up from $60,000 for the nine-month period ended September 30, 200 due primarily to the resolution of acquisition-related indemnification claims.

Income taxes – The Company reported income tax expense of $2.5 million and $2.6 million for the nine-month periods ended September 30, 2010 and 2009, respectively. The effective tax rates were 33.4% and 41.8% for the nine-month periods ended September 30, 2010 and 2009, respectively. The significantly lower effective tax rate for the nine-month period ended September 30, 2010 compared to the nine-month period ended September 30, 2009 was primarily due to $1.0 million of the $1.25 million indemnification payment as a result of the settlement of the indemnification demand against the former principal owners of ATSI under the stock purchase agreement governing the transaction which adjusted the tax basis of the acquisition and is considered a non-taxable permanent difference.

Financial Condition, Liquidity and Capital Resources

Financial Condition – Total assets decreased by $4.8 million to $88.5 million as of September 30, 2010 from $93.3 million as of December 31, 2009. This decrease was primarily driven by a $1.7 million decrease in our accounts receivable related to reduced revenue in the third quarter, $1.5 million related to the amortization of intangible assets and $1.3 million related to recognized deferred tax assets.

Our total liabilities decreased $10.7 million to $32.8 million as of September 30, 2010 from $43.5 million as of December 31, 2009. Significant changes within total liabilities included a decrease in long-term debt by $5.2 million to $16.0 million from $21.2 million due to income from operations. In addition, accrued expenses decreased by $4.6 million to $1.8 million at September 30, 2010 compared to $6.4 million at December 31, 2009 due to the payment of $1.5 million to settle the Maximus litigation (See Note 12 - Legal Proceedings) and the amortization and retirement of the interest rate swap agreement totaling $1.4 million.  Also, deferred revenue decreased by $1.1 million to $0.3 million.

Liquidity and Capital Resources – Our primary liquidity needs are to finance the costs of operations, acquire capital assets and to make selective strategic acquisitions. We expect to meet our short-term requirements through funds generated from operations and from our $55 million credit facility with Bank of America. As of September 30, 2010, we had an outstanding balance of $16.0 million on our credit facility. As noted above, there has been a significant decrease in this debt due to positive cash flow from operations. The balance is expected to continue to decrease for the remainder of 2010. The facility is considered adequate to meet our operations liquidity and capital requirements. The maximum availability under the facility at September 30, 2010 was $20.9 million.

Net cash generated by operating activities was $5.6 million for the nine months ended September 30, 2010, compared to $11.8 million for the same period in 2009. Cash generated by operating activities was primarily driven by income from operations, , which was utilized to pay down the balance on our line of credit facility as discussed above. Results in 2009 reflect the collection of approximately $7.6 million in aged receivables, reducing days-sales-outstanding from 86 days to 60 days offset by the payment of the Maximus settlement of $1.5 million. Depreciation and amortization were also lower due to the effect of assets reaching the end of their depreciable and amortizable lives.

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Net cash provided by investing activities was $0.0 million for the nine months ended September 30, 2010, compared to $3.6 million provided in the same period in 2009, primarily as a result of the settlement of a working capital escrow claim.

Net cash used in financing activities was $5.5 million for the nine months ended September 30, 2010, compared to cash used in financing activities of $15.4 million in the same period in 2009. The cash was primarily used to pay down the credit facility and the notes payable from acquisitions in 2007.

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2010 that require us to make future cash payments.

	Less than One Year			One to Three Years			Three to Five Years			More than Five Years			Total
	(in thousands)
Long-Term Debt Obligations		$	—		$	15,955		$	—		$	—		$	15,955
Operating Leases			1,865			3,688			3,697			5,207			14,457
Total		$	1,865		$	19,643		$	3,697		$	5,207		$	30,412

Standards Issued But Not Yet Effective

See Note 2.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates for our borrowings under our credit facility. As of September 30, 2010, we had an outstanding balance of $16.0 million under our variable interest rate line of credit.

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Item 4. Controls and Procedures.

As of September 30, 2010, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures as defined by Rule 13a-15(e) of the Exchange Act were effective as of September 30, 2010. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

Changes in Internal Control Over Financial Reporting

During the nine months ended September 30, 2010, no changes occurred in the Company’s internal control over financial reporting that materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

See Part I, Item 1A, “Risk Factors,” of the Company’s 2009 Form 10-K for a detailed discussion of the risk factors affecting the Company.

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

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

Purchases of Equity Securities by Issuer

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
January 1-31, 2010		2,000	$	2.32		405,138	$	2,058,249
March 1-31, 2010		150,000		3.00		555,138		1,608,249
Total		152,000	$	2.99		555,138	$	1,608,249

No stock was repurchased during the three months ended September 30, 2010.  The Company repurchased approximately 152,000 shares of common stock for approximately $455,000 during the nine months ended September 30, 2010 as part of the repurchase program. The Company currently has approximately 22.6 million shares outstanding.

Recent Sales of Unregistered Securities

None.

Item 3.  Defaults upon Senior Securities.

Not applicable.

Item 4.  Reserved.

Item 5.  Other Information.

None.

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Item 6.  Exhibits.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ATS Corporation
	By:	/s/ Edward H. Bersoff
		Chairman of the Board, President and
		Chief Executive Officer
	By:	/s/ Pamela A. Little
		Executive Vice President and Chief Financial Officer
Date: November 3, 2010

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