UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1
TO
SCHEDULE
14A
(Rule
14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act of 1934
Filed
by
the Registrant x
Filed
by
a Party other than the
registrant ¨
Check
the
appropriate box:
|
x
|
Preliminary
Proxy Statement
|
|
¨
|
Confidential,
For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|
|
o
|
Definitive
Proxy Statement
|
|
¨
|
Definitive
Additional Materials
|
|
¨
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Soliciting
Material Pursuant to ss.
240.14a-12
|
FORTRESS
AMERICA ACQUISITION CORPORATION
(Name
of
Registrant as Specified in Its Charter)
(Name
of
Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
|
¨
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No
fee required.
|
|
¨
|
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction applies: Membership
interests in VTC, L.L.C. and Vortech, LLC.
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(2)
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Aggregate
number of securities to which transaction applies: All of the issued
and
outstanding membership interests of VTC, L.L.C. and Vortech,
LLC.
|
|
(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is
calculated and state how it was determined): Up to $38,275,641 will
be
paid for all of the issued and outstanding membership interests of
VTC,
L.L.C. and Vortech, LLC.
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(4)
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Proposed
maximum aggregate value of transaction:
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$38,275,641
|
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|
(5)
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Total
fee paid:
|
|
$4,095
|
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¨
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Fee
paid previously with preliminary materials:
|
|
¨
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid
previously. Identify the previous filing by registration statement
number,
or the form or schedule and the date of its
filing.
|
(1) Amount
previously paid:
(2) Form,
Schedule or Registration Statement No.:
(3) Filing
Party:
(4) Date
Filed:
FORTRESS
AMERICA ACQUISITION CORPORATION
4100
North Fairfax Drive, Suite 1150
Arlington,
Virginia 22203
Dear
Stockholder:
You
are
cordially invited to attend a special meeting of the stockholders of Fortress
America Acquisition Corporation, relating to the proposed acquisition of VTC,
L.L.C., doing business as “Total Site Solutions”, and Vortech, LLC (together,
“TSS/Vortech”), which will be held at 10:00 a.m., Eastern Time, on
_____________, 2006, at the offices of Squire, Sanders & Dempsey L.L.P.
located at 8000 Towers Crescent Drive, 14th
Floor,
Tysons Corner, Virginia 22182.
At
this
special meeting, you will be asked to consider and vote on the following
proposals:
1. To
approve the acquisition of TSS/Vortech (referred to as the “acquisition”)
substantially on the terms set forth in the Second Amended and Restated
Membership Interest Purchase Agreement dated July 31, 2006 (referred to as
the
“purchase agreement”) by and among Fortress America Acquisition Corporation,
VTC, L.L.C., Vortech, LLC, and Thomas P. Rosato and Gerard J. Gallagher, as
the
members of VTC, L.L.C. and Vortech, LLC, and the other transactions contemplated
by the purchase agreement;
2. To
amend
and restate our Amended and Restated Certificate of Incorporation to change
our
name from “Fortress America Acquisition Corporation” to “Fortress International
Group, Inc.” and to remove certain provisions only applicable to us prior to our
completion of a business combination (referred to as the
“amendment”);
3. To
approve the 2006 Omnibus Incentive Compensation Plan (referred to as the
“incentive compensation plan”);
4. To
elect
one director, for a three-year term expiring in 2009 (referred to as the
“nomination”); and
5. To
approve any adjournments or postponements of the special meeting for the purpose
of soliciting additional proxies.
As
provided in our Amended and Restated Certificate of Incorporation, we will
proceed with the acquisition only if (i) a majority of the shares cast, in
person or by proxy, in respect of common stock owned by our public stockholders
(those stockholders who purchased their shares as part of our initial public
offering or in the aftermarket) are voted in favor of the acquisition and
(ii)
public stockholders owning 20% or more of the shares sold in our initial
public
offering (1,560,000 or more of such shares) do not exercise their conversion
rights (as discussed below in this letter). The incentive compensation plan
and
the adjournment must be approved by the affirmative vote of the majority
of the
shares of our common stock present in person or represented by proxy at the
special meeting and entitled to vote on such matters. The amendment must
be
approved by the affirmative vote of the majority of the shares of our common
stock outstanding on the record date. To be elected as a director, a nominee
must receive the affirmative vote of a plurality of the shares of our common
stock present in person or represented by proxy at the special meeting and
entitled to vote on the election of directors.
None
of
our directors or officers purchased shares in our initial public offering or
in
the aftermarket.
As
provided in our Amended and Restated Certificate of Incorporation, public
stockholders voting against the acquisition are entitled to demand that their
shares of common stock be converted into cash. If the acquisition is
consummated, a demanding public stockholder that voted against the acquisition
will receive cash equal to such public stockholder’s pro rata portion of the
proceeds of our initial public offering that were placed into our trust account,
including a pro rata portion of any interest earned on such funds through
the
date that is two business days prior to the closing of the acquisition. Based
on
the amount of cash held in the trust account at September 30, 2006, we estimate
that you will be entitled to convert each share that you hold into approximately
$5.65.
After
careful consideration, our board of directors unanimously approved the
acquisition, the purchase agreement and the other transactions contemplated
by
the purchase agreement, and determined that the acquisition is in our best
interest and in the best interest of our stockholders. Our board of directors
has also determined that the fair market value of TSS/Vortech will exceed 80%
of
our net assets at the time of the acquisition. Our board of directors
has received a written opinion that, as of the date therein, and based upon
and subject to the assumptions, factors, qualifications and limitations set
forth therein, the consideration to be paid by us in the proposed acquisition
is
fair to our stockholders from a financial point of view. Our board of directors
also unanimously approved the amendment and the incentive compensation plan,
subject to stockholder approval of the acquisition. Finally, our board of
directors has approved the nomination of David J. Mitchell as a member of the
board of directors. If the acquisition is not approved, the amendment and the
incentive compensation plan will not be presented for approval at the special
meeting.
Our
board
of directors unanimously recommends that holders of our common stock vote “FOR”
the approval of the acquisition, the purchase agreement and the other
transactions contemplated by the purchase agreement, “FOR” the amendment, “FOR”
the incentive compensation plan, “FOR” the nomination and “FOR” any adjournments
or postponements of the special meeting for the purpose of soliciting additional
proxies.
Enclosed
is a notice of special meeting and proxy statement containing detailed
information concerning the acquisition, the purchase agreement and the
transactions contemplated by the purchase agreement, the amendment, the
incentive compensation plan and the nomination.
Your
vote
is important. Whether or not you plan to attend the special meeting, we urge
you
to read this material carefully, complete the enclosed proxy card and return
it
as promptly as possible.
Under
our
Amended and Restated Certificate of Incorporation, the acquisition must be
approved by a majority of the votes cast at the special meeting, in person
or by
proxy, in respect of shares of our common stock issued in our initial public
offering. If
you do not appear at the special meeting in person or by proxy, or if you
abstain by appearing in person and not voting or by returning a proxy and not
instructing how your shares should be voted by proxy on the acquisition, or
if
your shares are held in street name and you do not instruct your broker or
bank
how to vote, your shares will not be counted as being voted either “for” or
“against” approval of the acquisition, and you will not have the right to
convert your shares into a pro rata portion of the trust account. Further,
such
a failure to vote or to instruct your broker or bank how to vote your shares
will have the same effect as voting “against” the
amendment.
See
the section titled “Risk Factors” beginning on page ___ of this proxy statement
for a discussion of various factors that you should consider in connection
with
the acquisition since, upon completion of the acquisition, the operations and
assets of FAAC will largely be those of the business we acquire in the
acquisition.
This
proxy statement is dated _____________, 2006, and is first being mailed, along
with the attached proxy card, to stockholders on or about _____________,
2006.
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Sincerely,
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C.
Thomas McMillen
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Chairman
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FORTRESS
AMERICA ACQUISITION CORPORATION
4100
North Fairfax Drive, Suite 1150
Arlington,
Virginia 22203
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON _____________, 2006
NOTICE
IS
HEREBY GIVEN that a special meeting of stockholders of Fortress America
Acquisition Corporation, or FAAC, a Delaware corporation, will be held at
10:00 a.m., Eastern Time, on ____________ __, 2006, at the offices of
Squire, Sanders & Dempsey L.L.P. located at 8000 Towers Crescent Drive,
14th
Floor,
Tysons Corner, Virginia 22182, for the purposes of considering and voting upon
the following proposals:
1. To
approve the acquisition of VTC, L.L.C. and Vortech, LLC (referenced to as the
“acquisition”) substantially on the terms set forth in the Second Amended and
Restated Membership Interest Purchase Agreement dated July 31, 2006 (referred
to
as the “purchase agreement”) by and among Fortress America Acquisition
Corporation, VTC, L.L.C., Vortech, LLC, and Thomas P. Rosato and Gerard J.
Gallagher, as the members of VTC, L.L.C. and Vortech, LLC, and the other
transactions contemplated by the purchase agreement, as more fully described
in
the enclosed proxy statement;
2. To
amend
and restate our Amended and Restated Certificate of Incorporation to change
our
name from “Fortress America Acquisition Corporation” to “Fortress International
Group, Inc.” and to remove certain provisions only applicable to us prior to our
completion of a business combination (referred to as the
“amendment”);
3. To
approve the 2006 Omnibus Incentive Compensation Plan (referred to as the
“incentive compensation plan”);
4. To
elect
one director for a three-year term expiring in 2009 (referred to as the
“nomination”); and
5. To
approve any adjournments or postponements of the special meeting for the purpose
of soliciting additional proxies.
The
record date for determining stockholders entitled to notice of, and to vote
at,
the special meeting or any postponements or adjournments of the special meeting
is the close of business on _________ __, 2006. Only holders of record of shares
of our common stock on the record date are entitled to vote at the special
meeting or any postponements or adjournments of the special meeting. If we
have
not received sufficient proxies to constitute a quorum or sufficient votes
for
approval of the acquisition, the purchase agreement and the other transactions
contemplated by the purchase agreement, the amendment, the incentive
compensation plan and/or the nomination at the special meeting, the special
meeting may be adjourned for the purpose of soliciting additional
proxies.
A
complete list of our stockholders of record entitled to vote at the special
meeting will be available for ten days before the special meeting at FAAC’s
principal executive offices for inspection by stockholders during ordinary
business hours for any purpose germane to the special meeting.
All
FAAC
stockholders are cordially invited to attend the special meeting and cast your
vote in person. However, to ensure your representation at the special meeting,
you are urged to complete, sign, date and return the enclosed proxy card as
soon
as possible. Regardless of the number of shares you own, your vote is important.
If your shares are held in an account at a brokerage firm or bank, you must
instruct your broker or bank on how to vote your shares.
If
you do not appear at the special meeting in person or by proxy, or if you
abstain by appearing in person and not voting or by returning a proxy and not
instructing how your shares should be voted by proxy on the acquisition, or
if
your shares are held in street name and you do not instruct your broker or
bank
how to vote, your shares will not be counted as being voted either “for” or
“against” approval of the acquisition, and you will not have the right to
convert your shares into a pro rata portion of the trust account. Further,
such
a failure to vote or to instruct your broker or bank how to vote your shares
will have the same effect as voting “against” the
amendment.
After
careful consideration, our board of directors unanimously approved the
acquisition, the purchase agreement and the other transactions contemplated
by
the purchase agreement, and determined that the acquisition is in our best
interest and in the best interest of our stockholders. Our board of directors
has received a written opinion that, as of the date therein, and based upon
and
subject to the assumptions, factors, qualifications and limitations set forth
therein, the consideration to be paid by FAAC in the proposed acquisition is
fair to FAAC from a financial point of view. Our board of directors also
unanimously approved the amendment and the incentive compensation plan, subject
to stockholder approval. Our board of directors has approved the nomination
of
David J. Mitchell as a member of our board of directors. Our board of directors
unanimously recommends that holders of our common stock vote “FOR” the approval
of the acquisition, the purchase agreement and the other transactions
contemplated by the purchase agreement, “FOR” the amendment, “FOR” the incentive
compensation plan, “FOR” the nomination and “FOR” any adjournments or
postponements of the special meeting for the purpose of soliciting additional
proxies.
We
encourage your to read this entire proxy statement carefully as well as the
additional documents to which it refers.
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By
Order of the Board of Directors,
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C.
Thomas McMillen
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Chairman
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___________
__, 2006
TABLE
OF CONTENTS
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Page
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SUMMARY
OF MATTERS TO BE VOTED UPON
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1
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Summary
of Material Terms of the Acquisition
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1
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Additional
Proposals to be Voted Upon
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3
|
|
QUESTIONS
AND ANSWERS ABOUT THE ACQUISITION
|
4
|
|
SUMMARY
OF THE PROXY STATEMENT
|
11
|
|
Special
Meeting of Stockholders
|
11
|
|
Voting
Power; Record Date
|
11
|
|
Voting
Requirement for the Acquisition
|
11
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|
Conversion
Rights
|
12
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|
No
Appraisal or Dissenters Rights
|
12
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|
Amendment
Proposal
|
12
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|
Voting
Requirement for the Amendment Proposal
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12
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|
Incentive
Compensation Plan Proposal
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12
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|
Voting
Requirement for the Incentive Compensation Plan Proposal
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13
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|
Nomination
Proposal
|
13
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|
Voting
Requirement for the Nomination Proposal
|
13
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|
Adjournment
Proposal
|
13
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|
Vote
Requirement for the Adjournment Proposal
|
13
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Our
Board of Directors’ Recommendation
|
13
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General
Description of the Acquisition
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13
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Conditions
to the Completion of the Acquisition
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15
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Termination
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15
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Interests
of Our Directors and Officers in the Acquisition
|
15
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Voting
Agreement
|
16
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United
States Federal Income Tax Consequences of the Acquisition
|
16
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Regulatory
Matters
|
16
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SELECTED
HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
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17
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FAAC
PER SHARE DATA
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21
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MARKET
PRICE INFORMATION FOR FAAC
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22
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FORWARD-LOOKING
STATEMENTS
|
23
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RISK
FACTORS
|
24
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Risks
Related to the Acquisition of TSS/Vortech
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24
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Risks
Related to Our Business and Operations Following the
Acquisition
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27
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Risks
Related to Our Capital Structure and Our Experience as a Public
Company
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31
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THE
SPECIAL MEETING
|
36
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The
Special Meeting
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36
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Date,
Time and Place
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36
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Purpose
of the Special Meeting
|
36
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Board
of Directors Recommendation
|
36
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Record
Date; Who is Entitled to Vote
|
36
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Quorum
|
37
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Voting
Your Shares
|
37
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Who
Can Answer Your Questions About Voting Your Shares
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37
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No
Additional Matters May Be Presented at the Special Meeting
|
37
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Revoking
Your Proxy
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37
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Vote
Required to Approve the Acquisition
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38
|
-i-
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Conversion
Rights
|
38
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Voting
Requirement for the Amendment
|
39
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Voting
Requirement for the Incentive Compensation Proposal
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39
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Voting
Requirement for the Nomination
|
39
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Voting
Requirement for the Adjournment
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39
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Failures
to Vote, Abstentions and Broker Non-Votes
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39
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Solicitation
Costs
|
40
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Stock
Ownership
|
40
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APPROVAL
OF THE ACQUISITION AND THE OTHER TRANSACTIONS CONTEMPLATED BY
THE
PURCHASE AGREEMENT
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41
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General
Description of the Acquisition
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41
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Background
of the Acquisition
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41
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Factors
Considered by Our Board of Directors in Approving the
Acquisition
|
44
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Satisfaction
of Fair Market Value Requirement
|
47
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Fairness
Opinion
|
48
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U.S.
Federal Income Tax Consequences of the Acquisition
|
53
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Regulatory
Matters
|
54
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Consequences
If Acquisition Proposal Is Not Approved
|
54
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Required
Vote
|
54
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Recommendation
|
54
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Interest
of Our Directors and Officers in the Acquisition
|
54
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THE
PURCHASE AGREEMENT
|
56
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General;
Structure of the Acquisition
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56
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Purchase
Price - Payment
|
56
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Escrow
Amounts
|
57
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Working
Capital - Purchase Price Adjustment
|
57
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Closing
of the Acquisition
|
58
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Representations
and Warranties
|
58
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Materiality
and Material Adverse Effect
|
60
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Interim
Operations Relating to the Companies
|
60
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No
Solicitation
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60
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Access
to Information
|
60
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Reasonable
Efforts; Notification
|
60
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Indemnification
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60
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Fees
and Expenses
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61
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Public
Announcements
|
61
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Conditions
to the Completion of the Acquisition
|
61
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Termination
|
63
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Effect
of Termination
|
63
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Assignment
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63
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Amendment
|
63
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ESCROW
AGREEMENTS
|
64
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Balance
Sheet Escrow Agreement
|
64
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General
Indemnity Escrow Agreement
|
64
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REGISTRATION
RIGHTS AGREEMENT
|
64
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General
|
64
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Demand
Registration Rights
|
64
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Piggy-back
Registration Rights
|
64
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Form
S-3 Registration Rights
|
65
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Indemnification
|
65
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LOCK-UP
AGREEMENT
|
65
|
-ii-
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
66
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NOTES
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
75
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|
APPROVAL
OF THE PROPOSAL TO AMEND AND RESTATE OUR AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
|
78
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|
General
Description of the Amendment Proposal
|
78
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Consequences
If the Amendment Proposal Is Not Approved
|
78
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Required
Vote
|
78
|
|
Recommendation
|
78
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APPROVAL
OF THE 2006 OMNIBUS INCENTIVE COMPENSATION PLAN
|
79
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|
General
Description of the Incentive Compensation Proposal
|
79
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|
Summary
of the 2006 Omnibus Incentive Compensation Proposal
|
79
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|
Required
Vote
|
81
|
|
Recommendation
|
81
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|
APPROVAL
OF THE ELECTION OF A NOMINEE TO OUR BOARD OF DIRECTORS
|
82
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|
General
Description of the Nomination Proposal
|
82
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|
Required
Vote
|
82
|
|
Additional
Information
|
82
|
|
Recommendation
|
82
|
|
APPROVAL
OF PROPOSAL TO ADJOURN THE SPECIAL MEETING
|
83
|
|
General
Description of the Adjournment Proposal
|
83
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|
Consequences
if Adjournment Proposal is Not Approved
|
83
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|
Required
Vote
|
83
|
|
Recommendation
|
83
|
|
INFORMATION
ABOUT TSS/VORTECH
|
84
|
|
Overview
|
84
|
|
Mission-Critical
IT Industry
|
84
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|
Service
Offerings
|
85
|
|
Strategy
|
86
|
|
Competition
|
88
|
|
Contracts
and Customers
|
88
|
|
Sales
and Marketing
|
89
|
|
Facilities
|
89
|
|
Management
|
89
|
|
Employees
|
89
|
|
Legal
Proceedings
|
90
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS OF TSS/VORTECH
|
91
|
|
Executive
Overview
|
91
|
|
Our
Business
|
92
|
|
Contract
Base and Backlog
|
92
|
|
Revenues
|
93
|
|
Expenses
|
94
|
|
Critical
Accounting Policies and Estimates
|
95
|
|
Recent
Accounting Pronouncements
|
96
|
|
Results
of Operations
|
97
|
|
Effects
of Inflation
|
100
|
|
Liquidity
and Capital Resources
|
100
|
|
Off-Balance
Sheet Arrangements
|
101
|
|
Contractual
Obligations
|
102
|
-iii-
|
INFORMATION
ABOUT FORTRESS AMERICA ACQUISITION CORPORATION
|
103
|
|
Our
Business
|
103
|
|
Dividends
|
106
|
|
Employees
|
106
|
|
Periodic
Reporting and Audited Financial Statements
|
106
|
|
Legal
Proceedings
|
107
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS - FORTRESS AMERICA ACQUISITION CORPORATION
|
108
|
|
Critical
Accounting Policies
|
109
|
|
DIRECTORS
AND EXECUTIVE OFFICERS OF FORTRESS AMERICA ACQUISITION
CORPORATION
FOLLOWING THE ACQUISITION
|
110
|
|
Directors
|
110
|
|
Board
of Directors and Committees of the Board
|
112
|
|
Compensation
Committee
|
112
|
|
Audit
Committee
|
113
|
|
Code
of Ethics
|
113
|
|
Board
and Committee Meetings
|
113
|
|
Section
16(a) Beneficial Ownership Reporting Compliance
|
113
|
|
Compensation
of Directors
|
113
|
|
Executive
Compensation
|
113
|
|
Employment
Agreements
|
114
|
|
Consulting
Agreement with Washington Capital Advisors, LLC
|
116
|
|
Independent
Registered Public Accounting Firm
|
116
|
|
Stockholder
Communications with the Board of Directors
|
117
|
|
Promoters
|
117
|
|
BENEFICIAL
OWNERSHIP OF SECURITIES
|
118
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
119
|
|
Relating
to FAAC
|
119
|
|
Relating
to TSS/Vortech
|
120
|
|
Ongoing
and Future Transactions
|
121
|
|
PRICE
RANGE OF SECURITIES AND DIVIDENDS
|
122
|
|
Fortress
America Acquisition Corporation
|
122
|
|
Holders
of Common Stock
|
122
|
|
Dividends
|
122
|
|
DESCRIPTION
OF OUR COMMON STOCK
|
123
|
|
General
|
123
|
|
Common
Stock
|
123
|
|
Preferred
Stock
|
123
|
|
Dividends
|
124
|
|
Restrictive
Provisions of our Amended and Restated Certificate of Incorporation
and
By-Laws
|
124
|
|
STOCKHOLDER
PROPOSALS
|
125
|
|
MULTIPLE
STOCKHOLDERS SHARING ONE ADDRESS
|
125
|
|
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
|
125
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
125
|
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
-iv-
ANNEXES
A Second
Amended and Restated Membership Interest Purchase Agreement
B Escrow
Agreements
C Registration
Rights Agreement
D Second
Amended and Restated Certificate of Incorporation
E 2006
Omnibus Incentive Compensation Plan
F
Fairness
Opinion
G Audit
Committee Charter
-v-
SUMMARY
OF MATTERS TO BE VOTED UPON
This
summary briefly outlines the matters to be voted upon at the special meeting,
including principally approval of our acquisition of VTC, L.L.C. and Vortech,
LLC.
Summary
of Material Terms of the Acquisition
This
summary presents material information relating to our acquisition (referred
to
in this proxy statement as the “acquisition”) of VTC, L.L.C, doing business as
“Total Site Solutions” (referred to in this proxy statement as “VTC” or “TSS”)
and Vortech, LLC (referred to in this proxy statement as “Vortech” and together
with VTC the “companies” or “TSS/Vortech) pursuant to the Second Amended and
Restated Membership Interest Purchase Agreement dated July 31, 2006 (referred
to
in this proxy statement as the “membership interest purchase agreement” or the
“purchase agreement”), by and among Fortress America Acquisition Corporation
(referred to in this proxy as “FAAC”, we, us and our, unless the context
requires otherwise), TSS, Vortech, Thomas P. Rosato and Gerard J. Gallagher
as
the members of TSS and Vortech (referred to in this proxy statement as the
“selling members”), and Thomas P. Rosato, as the selling members’
representative. This summary may not contain all of the information that is
important to you. Please carefully read this entire proxy statement as well
as
the additional documents to which it refers.
Business
of the companies:
TSS and
Vortech are privately held companies that together provide a single source
solution for highly technical mission-critical facilities such as data centers,
operation centers, network facilities, server rooms, security operations
centers, communications facilities and the infrastructure systems that are
critical to their function. The companies’ services include technology
consulting, engineering and design management, construction management, system
installations, operations management, and facilities management and
maintenance.
General
description of the acquisition:
The
membership interest purchase agreement provides for our acquisition of all
of
the issued and outstanding membership interests of VTC and Vortech from their
respective members, for closing date purchase consideration of up to $38.5
million (subject to certain working capital adjustments), consisting of $11.0
million in cash, the assumption of up to $161,000 of the companies’ debt, up to
3,205,128 shares of our common stock as reduced by the amount of any debt
assumed by FAAC, and $10.0 million in two convertible, interest-bearing
promissory notes of $5.0 million each.
Of
the up
to 3,205,128 shares of our common stock to be issued at closing as purchase
consideration,
|
·
|
576,559
shares shall be issued to certain employees of the companies under
restricted stock grants;
|
|
·
|
up
to 67,825 shares shall be issued to Evergreen Capital LLC as partial
payment of certain outstanding consulting fees;
and
|
|
·
|
2,628,569
shares (as reduced for the assumption of up to $161,000 of
debt
and by any shares issued to Evergreen Capital LLC)
shall be issued to the selling members of VTC and
Vortech.
|
All
2,628,569 shares of our common stock issued to the selling members shall
be
subject to a lock-up agreement restricting the sale or transfer of those
shares
through July 13, 2008 and, in addition, shall be held in escrows maintained
by
an escrow agent (2,487,484 shares to be held in a general indemnity escrow
and
73,260 shares to be held in a balance sheet escrow, all as described below).
The
576,559 shares of our stock to be issued to certain employees of the companies
as restricted stock grants will be subject to forfeiture if the receiving
employee terminates his employment within three years of the closing of the
acquisition, in which event the forfeited shares will be delivered to the
selling members.
In
addition, at the closing of the acquisition, we will enter into employment
agreements with each of the selling members. Under these agreements, as
described in more detail below, each selling member will be entitled to initial
annual base compensation of $425,000, an annual bonus of up to 50% of his base
compensation, and if during the period from the closing of the acquisition
through July 13, 2008 the market price of our common stock reaches certain
thresholds, up to $5.0 million in shares of our common stock. We refer to the
potential issuance of additional shares under the employment agreements as
the
“share performance bonus”. For a more detailed discussion of the employment
agreements, please see “Directors and Executive Officers of Fortress America
Acquisition Corporation Following the Acquisition - Employment Agreements” on
page __.
For
a
more detailed discussion of the structure of the acquisition, please see “The
Purchase Agreement” on page __.
Escrow
of a portion of the purchase consideration:
Portions
of the stock otherwise payable at closing to the selling members are being
deposited into escrow accounts with an escrow agent as follows:
|
·
|
2,487,484
shares of our common stock to secure the selling members’ indemnification
obligations; and
|
|
·
|
73,260
shares of our common stock to secure post-closing adjustments to
the
purchase price in our favor.
|
Please
see “Escrow Agreements” on page __.
Convertible
promissory notes. Each
convertible promissory note bears interest at six percent per year and has
a
term of five years. Interest only is payable during the first two years of
each
note with principal payments commencing on the second anniversary of note and
continuing throughout the balance of the term of the note in equal quarterly
installments of $416,667. At any time after the sixth month following the
closing of the acquisition, the notes are convertible by the selling members
into shares of our common stock at a conversion price of $7.50 per share. At
any
time after the sixth month following the closing of the acquisition, the notes
are automatically convertible if the average closing price of our common stock
for 20 consecutive trading days equals or exceeds $7.50 per share.
Share
performance bonus.
Up to
$5.0 million in additional shares of our common stock will be issuable to each
selling member if during the period from the closing of the acquisition through
July 13, 2008, certain share performance thresholds (alternative and not
cumulative) set forth below are satisfied:
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $9.00 per share but is no more than $10.00
per
share, the selling member will be entitled to $0.5 million worth
of
additional shares; or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $10.00 per share but is no more than $12.00
per
share, the selling member will be entitled to $1.5 million worth
of
additional shares; or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $12.00 per share but is no more than $14.00
per
share, the selling member will be entitled to $3.0 million worth
of
additional shares; or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $14.00 per share, the selling member will be
entitled to $5.0 million worth of additional
shares.
|
Directors
and Executive Officers Following the Acquisition:
At the
effective time of the acquisition, C. Thomas McMillen, who has served as our
Chairman, and Harvey L. Weiss, who has served as our Chief Executive Officer,
in
each case since inception, will resign from those offices but remain as members
of the board of directors. At that time, Harvey L. Weiss will become our
Chairman; C. Thomas McMillen will become our Vice Chairman, Thomas P. Rosato
will become our Chief Executive Officer and Gerard J. Gallagher will become
our
President and Chief Operating Officer.
-2-
Additional
Proposals to be Voted Upon
In
addition to voting on the acquisition, our stockholders will vote on proposals
to amend and restate our Amended and Restated Certificate of Incorporation,
to
approve an incentive compensation plan, to elect a director to our board of
directors and to approve any adjournments or postponements of the special
meeting for the purpose of soliciting additional proxies. Please see “Approval
of the Proposal to Amend and Restate Our Amended and Restated Certificate of
Incorporation” on page __, “Approval of the 2006 Omnibus Incentive Compensation
Plan” on page __, “Approval of the Election of a Nominee to Our Board of
Directors” on page __ and “Approval of Proposal to Adjourn the Special Meeting”
on page __.
-3-
QUESTIONS
AND ANSWERS ABOUT THE ACQUISITION
| Q. |
What
is being voted on?
|
| A. |
There
are five proposals that you are asked to vote
on:
|
|
·
|
The
first proposal is to approve the acquisition of TSS/Vortech and the
other
transactions contemplated in the purchase
agreement.
|
|
·
|
The
second proposal is to approve the amendment and restatement of our
Amended
and Restated Certificate of Incorporation to effect the name change
of
FAAC to Fortress International Group, Inc. and eliminate certain
provisions that are applicable to us only prior to our completion
of a
business combination.
|
|
·
|
The
third proposal is to approve our 2006 Omnibus Incentive Compensation
Plan.
|
|
·
|
The
fourth proposal is to elect David J. Mitchell to our board of
directors.
|
|
·
|
The
fifth proposal allows the adjournment or postponement of the special
meeting to a later date if necessary to permit further solicitation
of
proxies.
|
| Q. |
Why
is FAAC proposing the acquisition of
TSS/Vortech?
|
|
A.
|
We
were organized to effect a business combination with an operating
business
in the homeland security industry. Under the terms of our Amended
and
Restated Certificate of Incorporation, prior to completing a business
combination, we must submit the transaction to our stockholders for
approval. Having negotiated the terms of a business combination with
TSS/Vortech, we are now submitting the transaction to stockholders
for
their approval.
|
TSS
and
Vortech are privately held companies that together provide a single source
solution for highly technical mission-critical facilities such as data centers,
operation centers, network facilities, server rooms, security operations
centers, communications facilities and the infrastructure systems that are
critical to their function. The companies’ services include technology
consulting, engineering and design management, construction management, system
installations, operations management, and facilities management and
maintenance.
Our
board
of directors believes that:
|
·
|
TSS/Vortech
provides a strong homeland security platform from which we can expand,
organically and through future acquisitions, in the large and growing
homeland security market;
|
|
·
|
TSS/Vortech
has strong core competencies and service offerings that we can build
upon;
|
|
·
|
TSS/Vortech’s
management has substantial experience and is willing to remain with
us
post-acquisition and accept a significant portion of the purchase
consideration in shares of our common
stock;
|
|
·
|
TSS/Vortech’s
business is currently profitable and not reliant for profits upon
speculative business plans; and
|
|
·
|
the
purchase price for TSS/Vortech is
reasonable.
|
| Q. |
What
will be FAAC’s strategy after the acquisition is
completed?
|
|
A.
|
We
plan to pursue a strategy for growth that includes both organic growth
and
acquisitions. We expect to achieve organic growth by increasing business
development and sales activities utilizing TSS/Vortech’s Solutions Path, a
process for program roll-outs that aligns projects requirements with
TSS/Vortech’s capabilities. When involved in the initial planning stages
of a facilities integration project, TSS/Vortech develops a comprehensive
project Solutions Path that meets rigorous design and scheduling
requirements for the timely delivery of high technology facilities
that
are critical to the customer’s continuous operations. The traditional
TSS/Vortech approach to the market begins with the sale of consulting
and
planning services at the beginning of a project cycle, which allows
TSS/Vortech to establish key customer relationships early on. TSS/Vortech
seeks to use these consulting engagements at the early stages of
a project
to offer its follow on engineering and design, construction management,
installation management and, upon the completion of a mission critical
project, its facilities maintenance and services offerings. TSS/Vortech
often finds that its on site presence results in additional contracts
for
adds-moves-changes, or AMCs. FAAC believes that increasing the number
of
TSS/Vortech’s sales and marketing persons will significantly improve its
opportunities for each of its traditional services and result in
organic
growth.
|
-4-
We
plan
to focus the acquisition portion of our growth strategy on the acquisition
of
specialty engineering and information technology/networking consulting and
system integration companies that focus on mission-critical facilities. There
are many independent, unaffiliated boutique engineering firms that specialize
in
the planning and design of mission-critical facilities. These firms, which
often
have customers among the largest and most prestigious financial services firms,
universities and health care institutions, e-commerce Internet companies,
Internet service providers, manufacturers and other companies considered part
of
the country’s critical infrastructure, generally prepare designs but do not
provide the engineering services and drawings needed to implement those designs.
We plan to identify and acquire specialty engineering firms in up to ten
high-potential geographic markets. With the comprehensive set of services
available from TSS/Vortech, we expect that the acquisition of these engineering
firms will significantly improve sales because TSS/Vortech would be a natural
follow-on service provider for much of the initial engineering work provided
by
these businesses. We further expect this acquisition strategy to give the
company a national foot print and increase the revenue and profit per employee.
Another aspect of our acquisition strategy is to find and acquire businesses
with Network Operation Center (NOC) capability, situational awareness, and
command and control capability. We believe that these capabilities and services
will enhance the ability of TSS/Vortech to sell and deliver facilities
management services and will also increase capabilities for facility maintenance
and growth services. Finally, we intend expand our international business in
Europe, Asia and the Middle East through joint ventures and the acquisition
of
companies.
We
believe these strategies will improve our revenue growth and allow us to achieve
economies of scale that will enhance our profitability.
| Q. |
Who
will manage the acquired
company?
|
|
A.
|
Following
the acquisition, TSS/Vortech will be managed by members of the existing
management of TSS/Vortech, including Thomas P. Rosato, who will become
our
Chief Executive Officer, and Gerard J. Gallagher, who will become
our
President and Chief Operating Officer, and also by Harvey L. Weiss,
who
will become the Chairman of our Board of Directors, and C. Thomas
McMillen, who will become the Vice Chairman of our Board of Directors.
Mr.
Rosato has more than 25 years of experience in operating and managing
mission-critical service businesses and has overseen the building
of more
than $1 billion in projects. Mr. Gallagher has more than 25 years
of
experience in mission-critical fields, including nine years serving
as the
president of operating businesses in the industry. Mr. Weiss has
over 35 years of experience in security-related fields and has over
10
years of experience serving as president or chief executive officer
of
operating businesses. Mr. McMillen has since 2003 served as the chief
executive officer or chairman of companies focused on the homeland
security industry and has over 18 years of experience in government,
finance and mergers and acquisitions.
|
| Q. |
What
is FAAC paying for TSS/Vortech and what are the selling members
receiving?
|
|
A.
|
We
have agreed to purchase all of the issued and outstanding membership
interests of VTC, L.L.C. and Vortech, LLC for closing date consideration
of up to $38.5 million (subject to certain working capital adjustments)
consisting of up to $11.0 million in cash, the assumption of up
to
$161,000 of the companies’ debt, up to 3,205,128 shares of our common
stock, as reduced by the amount of any debt assumed by FAAC, and
$10.0
million in two convertible, interest-bearing promissory notes of
$5.0
million each.
|
-5-
|
In
addition, at the closing of the acquisition, we will entered into
employment agreements with each of the two selling members. Under
these
agreements, each selling member will be entitled to initial annual
base
compensation of $425,000, an annual bonus of up to 50% of his base
compensation and, if during the period from the closing of the acquisition
through July 13, 2008 the market price of our common stock reaches
certain
thresholds, up to $5.0 million in shares of our common
stock.
|
The
shares of our common stock to be delivered to the selling members will not
be
registered but will be the subject of a registration rights agreement entered
into at the closing of the acquisition. See “Registration Rights
Agreement”.
| Q. |
How
much of FAAC will existing FAAC stockholders own after the
acquisition?
|
|
A.
|
Immediately
after the acquisition, if no FAAC stockholder demands that FAAC convert
its shares into a pro rata portion of the trust account, existing
FAAC’s
stockholders will own approximately 61% of the outstanding common
stock of
FAAC. Existing FAAC stockholders would own less than that percentage
of
shares if one or more FAAC stockholders vote against the acquisition
and
demand conversion of their shares into a pro rata portion of the
trust
account. The ownership percentages of existing FAAC stockholders
will also
be reduced to the extent that the convertible notes are converted
into
shares and to the extent that contingent shares are issued to the
TSS/Vortech stockholders pursuant to the terms of the purchase
agreement.
|
| Q. |
What
vote is required in order to approve the
acquisition?
|
|
A.
|
The
acquisition does not require stockholder approval under Delaware
law. As
to transactions (such as mergers and sales of all or substantially
all of
a company’s assets) that do require stockholder approval under Delaware,
absent different requirements under the company’s certificate of
incorporation, Delaware law requires that the transaction be approved
by
the holders of a majority of the outstanding stock entitled to
vote on the
transaction. However, under our Amended and Restated Certificate
of
Incorporation, instead of requiring the approval of a majority
of the
outstanding stock entitled to vote on the transaction, the acquisition
must be approved by a majority of the votes actually cast at the
special
meeting, in person or by proxy, in respect of shares of our common
stock
issued in our initial public offering or purchased in the aftermarket.
Thus, votes in respect of shares issued other than in the public
offering
are not counted for the purpose of determining if the acquisition
has been
approved in accordance with our Amended and Restated Certificate
of
Incorporation. None of our directors or officers purchased shares
in our
initial public offering or in the aftermarket. In addition, as
provided in
our Amended and Restated Certificate of Incorporation, we will
not proceed
with the acquisition if public stockholders owning 20% or more
of the
shares sold in our initial public offering (1,560,000 or more of
such
shares) exercise their right to convert their shares of common
stock into
cash.
|
| Q. |
What
will happen if I fail to vote or abstain from
voting?
|
|
A.
|
Approval
of the acquisition requires a majority of the votes actually cast
by the
holders of shares of our common stock issued in our initial public
offering or purchased in the aftermarket (referred to in this proxy
statement as “public stockholders”), Therefore, if you do not appear at
the special meeting in person or by proxy, or if you abstain by appearing
in person and not voting or by returning a proxy and not instructing
how
your shares should be voted by proxy on the acquisition, or if you
shares
are held in street name and you do not instruct your broker or bank
how to
vote, your shares will not be counted as being voted either “for” or
“against” approval of the acquisition, and you will not have the right to
convert your shares into a pro rata portion of the trust account.
To
exercise your conversion rights, you must have voted against the
acquisition and affirmatively elect to convert your shares by checking
the
appropriate box, or directing your broker to check the appropriate
box, on
the proxy card and ensure that the proxy card is delivered prior
to our
special meeting. Additionally, you can convert your shares by voting
against the acquisition at the special meeting and demanding that
we
convert your shares to cash.
|
-6-
| Q. |
Do
I have the right to convert my shares into
cash?
|
|
A.
|
If
you hold shares of common stock issued in our initial public offering
(including such shares purchased in the aftermarket), then you have
the
right to vote against the acquisition proposal and demand that we
convert
your shares of common stock into cash (conversion rights). If the
acquisition is consummated, a demanding public stockholder that voted
against the acquisition will receive cash equal to such public
stockholder’s pro rata portion of the proceeds of our initial public
offering that were placed into our trust account, including a pro
rata
portion of any interest earned on such funds through the date that
is two
business days prior to the closing of the acquisition. However,
we will not proceed with the acquisition if public stockholders owning
20%
or more of the shares sold in our initial public offering (1,560,000
or
more of such shares) exercise such conversion
rights.
|
| Q. |
If
I have conversion rights, how do I exercise
them?
|
|
A.
|
If
you wish to exercise your conversion rights, you must vote against
the
acquisition and at the same time demand that we convert your shares
into
cash. If, notwithstanding your vote, the acquisition is consummated,
then
you will be entitled to receive your pro rata portion of the proceeds
of
our initial public offering that were placed into our trust account,
including a pro rata portion of any interest earned on such funds
through
the date that is two business days prior to the closing of the
acquisition. Based on the amount of cash held in the trust account
at
September 30, 2006, we estimate that you will be entitled to convert
each
share that you hold into approximately $5.65. If you exercise your
conversion rights, then you will be exchanging your shares for
cash and
will no longer own these shares. You will only be entitled to receive
cash
for these shares if you continue to hold these shares through the
closing
date of the acquisition and then tender your stock certificate
to us. If
the acquisition is not completed, then your shares will not be
converted
to cash under this procedure.
|
|
Prior
to exercising conversion rights, public stockholders should verify
the
market price of our common stock as they may receive higher proceeds
from
the sale of their common stock in the public market than from exercising
their conversion rights. Our shares of common stock are listed on
the Over
the Counter Bulletin Board, or OTCBB, under the symbol
FAAC.
|
| Q. |
What
will I receive in the
acquisition?
|
|
A.
|
If
the acquisition is completed and you vote your shares for the acquisition,
you will continue to hold the FAAC securities that you currently
own. If
the acquisition is completed but you have voted your shares against
the
acquisition and have elected to exercise your conversion rights,
your FAAC
shares will be cancelled and you will be entitled to receive your
pro rata
portion of the proceeds of our initial public offering that were
placed
into our trust account, including a pro rata portion of any interest
earned on such funds through the date that is two business days prior
to
the closing of the acquisition.
|
| Q. |
Will
FAAC securities still be traded on the OTCBB after the acquisition
is
completed?
|
|
A.
|
Yes.
We intend to apply to have our common stock approved for listing
on the
NASDAQ Capital Market. If the listing on NASDAQ is not approved,
we expect
that our common stock will continue to be quoted on the
OTCBB.
|
| Q. |
What
happens to the funds deposited in the trust account after consummation
of
the acquisition?
|
|
A.
|
Upon
consummation of the acquisition, any funds remaining in the trust
account
after payment of amounts, if any, to public stockholders exercising
their
conversion rights, will no longer be subject to the trust account
and will
be used to fund the acquisition, provide working capital, and fund
future
acquisitions, if any.
|
-7-
| Q. |
What
will the structure of the company be after the
acquisition?
|
|
A.
|
We
will own all of the issued and outstanding membership interests of
TSS/Vortech after closing of the
acquisition.
|
| Q. |
What
happens if the acquisition is not
consummated?
|
|
A.
|
If
the acquisition is not consummated, we will continue to search for
an
operating company to acquire. However, the trust account in which
a
substantial portion of the net proceeds of our initial public offering
are
held will be liquidated if we do not consummate a business combination
by
January 20, 2007. In any liquidation, the net proceeds of our initial
public offering held in the trust account, plus any interest earned
thereon, will be distributed pro rata to our public
stockholders.
|
| Q. |
When
do you expect the acquisition to be
completed?
|
|
A.
|
It
is currently anticipated that the acquisition will be completed,
or
closed, promptly following our special meeting on ____________ __,
2006.
|
| Q. |
Why
is FAAC proposing to amend and restate its Amended and Restated
Certificate of
Incorporation?
|
|
A.
|
Article
Fifth of our Amended and Restated Certificate of Incorporation is
only
applicable to us prior to our completion of a business combination.
In the
event that the acquisition is approved at the special meeting, Article
Fifth will no longer be applicable to us. Therefore, we are proposing
to
eliminate Article Fifth and make certain other corrections and minor
revisions to our Amended and Restated Certificate of Incorporation.
In
addition, we are changing our name to Fortress International Group,
Inc.
|
| Q. |
What
vote is required to adopt the
amendment?
|
|
A.
|
The
amendment must be approved by the affirmative vote of a majority
of the
shares of our common stock outstanding on the record date. The officers
and directors of FAAC intend to vote all of their shares of common
stock
in favor of this proposal. If the acquisition is not approved, then
the
amendment will not be presented for
approval.
|
| Q. |
Why
is FAAC proposing to adopt the 2006 Omnibus Incentive Compensation
Plan?
|
| A. |
We
are proposing the incentive compensation plan
to:
|
| · |
create
incentives designed to motivate our employees and employees of our
subsidiaries to significantly contribute toward our growth and
profitability;
|
| · |
provide
our executives, directors and other employees and persons who, by
their
position, ability and diligence are able to make important contributions
to our growth and profitability, with an incentive to assist us in
achieving our long-term corporate objectives;
and
|
| · |
attract
and retain qualified executives and other employees, and to provide
such
persons with an opportunity to acquire an equity interest in
us.
|
| Q: |
Why
is FAAC proposing the adjournment
proposal?
|
|
A.
|
If,
prior to the special meeting, we do not receive sufficient votes
to
approve the acquisition, the amendment, the incentive compensation
plan
and/or the nomination, approval of the adjournment proposed will
permit to
adjourn the special meeting to solicit additional
proxies.
|
-8-
|
Q:
|
What
vote is required
to adopt the incentive compensation plan proposal and the adjournment
proposal?
|
|
A.
|
The
incentive compensation plan proposal and the adjournment proposal
must be
approved by the affirmative vote of the majority of the shares of
our
common stock present in person or represented by proxy at the special
meeting and entitled to vote on such matters. The officers and directors
of FAAC intend to vote all their shares of common stock in favor
of these
proposals. If the acquisition is not approved, then the incentive
compensation plan proposal will not be presented for
approval.
|
|
Q.
|
What
vote is required to elect David J. Mitchell to the board of
directors?
|
|
A.
|
To
be elected, a nominee must receive the affirmative vote of a plurality
of
the shares of our common stock present or represented by proxy at
the
special meeting and entitled to vote on the election of directors.
The
officers and directors of FAAC intend to vote all of their shares
of
common stock in favor of the election of David J. Mitchell to FAAC’s board
of directors.
|
| Q. |
If
I am not going to attend the special meeting in person, should I
return my
proxy card instead?
|
|
A.
|
Yes.
After carefully reading and considering the information contained
in this
document, please fill out and sign your proxy card. Then return the
enclosed proxy card in the return envelope as soon as possible, so
that
your shares may be represented at the special
meeting.
|
| Q. |
What
do I do if I want to change my
vote?
|
|
A.
|
Send
a later-dated, signed proxy card to our Secretary prior to the date
of the
special meeting or attend the special meeting in person, revoke your
proxy
and vote.
|
| Q. |
If
my shares are held in “street name” by my broker, will my broker vote my
shares for me?
|
|
A.
|
No.
Your broker can vote your shares only if you provide instructions
on how
to vote. You should instruct your broker to vote your shares, following
the directions provided by your broker. To exercise your conversion
rights, you must affirmatively elect to convert your shares by directing
your broker to vote against the acquisition and check the appropriate
box
on the proxy card with respect to conversion and ensure that the
proxy
card is delivered prior to our special
meeting.
|
| Q. |
What
are the federal income tax consequences to the
acquisition?
|
|
A.
|
Our
common stockholders who do not exercise their conversion rights will
continue to hold their common stock and as a result will not recognize
any
gain or loss from the acquisition. Common stockholders who exercise
their
conversion rights will recognize gain or loss to the extent that
the
amount received by such common stockholders upon conversion is greater
than or less than, respectively, such stockholder’s tax basis in their
shares. A stockholder’s tax basis in the shares generally will equal the
cost of the shares. A stockholder that purchased our units will have
to
allocate the cost between the shares and the warrants of the units
based
on their relative fair market values at the time of the purchase.
Assuming
the shares are held as a capital asset, the gain or loss will be
capital
gain or loss and will be long-term capital gain or capital loss if
such
stockholder’s holding period in the shares is longer than one
year.
|
| Q. |
Who
will pay for this proxy
solicitation?
|
|
A.
|
We
have retained Advantage Proxy to aid in the solicitation of proxies.
Advantage Proxy will receive a fee of approximately $7,000, as
well as
reimbursement for certain costs and out-of-pocket expenses incurred
by
them in connection with their services, all of which will be paid
by us.
In addition, officers and directors may solicit proxies by mail,
personal
contact, letter, telephone, facsimile and other electronic means,
for
which no additional compensation will be paid, though they may
be
reimbursed for their out-of-pocket expenses. We will bear the cost
of
preparing, assembling and mailing the enclosed form of proxy, this
proxy
statement and other material that may be sent to stockholders in
connection with this solicitation. We may reimburse brokerage firms
and
other nominee holders for their reasonable expenses in sending
proxies and
proxy material to the beneficial owners of our shares of common
stock.
|
-9-
|
Q.
|
Who
can help answer my
questions?
|
|
A.
|
If
you have questions about the solicitation of proxies, you may contact
Advantage Proxy at (800) 238-3410, ext.
34.
|
-10-
SUMMARY
OF THE PROXY STATEMENT
This
summary presents material information contained in this proxy statement relating
to:
· our
acquisition of TSS/Vortech;
· amending
and restating our Amended and Restated Certificate of
Incorporation;
· adopting
the 2006 Omnibus Incentive Compensation Plan; and
· electing
one director for a three-year term expiring in 2009
This
summary may not contain all of the information that is important to you. For
a
more complete description of the transactions contemplated by the purchase
agreement, you should carefully read this entire proxy statement as well as
the
additional documents to which it refers. A copy of the purchase agreement is
attached to this proxy statement as Annex A. For a more complete description
of
the amendment, the incentive compensation plan and the nomination, you should
carefully read this entire proxy statement as well as the additional documents
to which it refers. A copy of the Second Amended and Restated Certificate of
Incorporation is attached to this proxy statement as Annex D. A copy of the
2006
Omnibus Incentive Compensation Plan is attached to this proxy statement as
Annex
E. We have included page references to pages in this proxy statement to direct
you to a more complete description of the topics presented in this
summary.
Special
Meeting of Stockholders - See Page __
This
proxy statement is being furnished to holders of our common stock for use at
the
special meeting, and at any adjournments or postponements of that meeting,
in
connection with the approval of the acquisition, the purchase agreement and
the
other transactions contemplated in the purchase agreement, the amendment, the
incentive compensation plan and the nomination, as more fully described in
this
proxy statement. The special meeting will be held at 10:00 a.m., Eastern Time,
on ________ __, 2006, at the offices of Squire, Sanders & Dempsey L.L.P.
located at 8000 Towers Crescent Drive, 14th
Floor,
Tysons Corner, Virginia 22182.
Voting
Power; Record Date - See Page __
You
will
be entitled to vote or direct votes to be cast at the special meeting if you
owned shares of our common stock at the close of business on _________ __,
2006,
which is the record date for the special meeting. You will have one vote for
each share of our common stock you owned at the close of business on the record
date. Our warrants do not have voting rights.
Voting
Requirement for the Acquisition - See Page __
The
acquisition does not require stockholder approval under Delaware law. However,
under our Amended and Restated Certificate of Incorporation, the acquisition
must be approved by a majority of the votes cast at the special meeting,
in
person or by proxy, in respect of shares of our common stock issued in our
initial public offering or purchased in the aftermarket. Thus, votes in respect
of shares issued other than in the public offering will not be counted for
the
purpose of determining if the acquisition has been approved in accordance
with
our Amended and Restated Certificate of Incorporation. None of our directors
or
officers purchased shares in our initial public offering or in the
aftermarket.
Even
if
the acquisition is approved by the required stockholder vote, we will not
proceed with the acquisition if public stockholders owning 20% or more of the
shares sold in our initial public offering (1,560,000 or more of such shares)
exercise their conversion rights.
-11-
Conversion
Rights - See Page ___
As
provided in our Amended and Restated Certificate of Incorporation, public
stockholders have the right to vote against the acquisition and demand that
we
convert their shares of common stock into cash (referred to in this proxy
statements as “conversion rights”). If the acquisition is consummated, a
demanding public stockholder that voted against the acquisition will receive
cash equal to such public stockholder’s pro rata portion of the trust account in
which the net proceeds of our initial public offering are held, including
a pro
rata portion of any interest earned on such funds through the date that is
two
business days prior to the closing of the acquisition. However, we will not
proceed with the acquisition if public stockholders owning 20% or more of
the
shares of common stock sold in our initial public offering (1,560,000 or
more of
such shares) exercise such conversion rights. Based on the amount of cash
held
in the trust account at September 30, 2006, we estimate that you will be
entitled to convert each share of common stock that you hold into approximately
$5.65. If you exercise your conversion rights, then you will be exchanging
your
shares of our common stock for cash and will no longer own those shares.
You
will only be entitled to receive cash for these shares if you continue to
hold
these shares through the closing date of the acquisition and then tender
your
stock certificate to us. If the acquisition is not completed, then these
shares
will not be converted into cash. A stockholder who exercises conversion rights
will continue to own any warrants to acquire our common stock owned by such
stockholder, as such warrants will remain outstanding and unaffected by the
exercise of conversion rights.
No
Appraisal or Dissenters Rights - See Page __
No
appraisal or dissenters rights are available under the Delaware General
Corporation Law for our stockholders in connection with the
acquisition.
Amendment
Proposal - See Page ___
We
are
proposing to amend and restate our Amended and Restated Certificate of
Incorporation, upon consummation of the acquisition, to change our name from
“Fortress America Acquisition Corporation” to “Fortress International Group,
Inc.” and to eliminate certain provisions that are only applicable to us prior
to our completion of a business combination. As a result of the amendment,
after
the completion of the acquisition, our name will be “Fortress International
Group, Inc.” and Article Fifth of our Amended and Restated Certificate of
Incorporation will be deleted. The Amended and Restated Certificate of
Incorporation is attached to this proxy statement as Annex D. If the acquisition
is not approved, then the amendment proposal will not be presented for
approval.
Voting
Requirement for the Amendment Proposal - See Page ___
The
amendment must be approved by the affirmative vote of the majority of shares
of
our common stock outstanding on the record date.
Incentive
Compensation Plan Proposal - See Page ___
The
incentive compensation plan reserves 2,100,000 shares of our common stock (of
which 576,559 shares are to be issued to certain employees of TSS/Vortech at
the
closing) for issuance in accordance with the plan’s terms. The purpose of the
plan is:
|
·
|
to
create incentives designed to motivate our employees, and employees
of our
subsidiaries, to significantly contribute toward our growth and
profitability;
|
|
·
|
to
provide our executives, directors and other employees and persons
who, by
their position, ability and diligence are able to make important
contributions to our growth and profitability, with an incentive
to assist
us in achieving our long-term corporate objectives;
and
|
|
·
|
to
attract and retain qualified executives and other employees, and
to
provide such persons with an opportunity to acquire an equity interest
in
us.
|
After
the
closing date grants to TSS/Vortech employees, 1,523,441 shares of our common
stock, or approximately 12% of the shares expected to then be outstanding,
will
be available for future grants under the incentive compensation plan. The plan
is attached to this proxy statement as Annex E. If the acquisition is not
approved, then the incentive compensation plan proposal will not be presented
for approval.
-12-
Voting
Requirement for the Incentive Compensation Plan Proposal
-
See
Page __
The
incentive compensation plan must be approved by the affirmative vote of a
majority of the shares of our common stock present in person or represented
by
proxy at the special meeting and entitled to vote on such matter.
Nomination
Proposal - See Page ___
Our
board
of directors is divided into three classes, each of which will generally serve
for a term of three years with only one class of directors being elected in
each
year. The term of office of the first class of directors, consisting of David
J.
Mitchell, is expiring at the special meeting. Our board of directors has
unanimously approved the nomination of David J. Mitchell as a member of our
board of directors to serve a three-year term expiring in 2009.
Voting
Requirement for the Nomination Proposal - See Page __
To
be
elected as a director, a nominee must receive the affirmative vote of a
plurality of the shares of our common stock present in person or represented
by
proxy at the special meeting and entitled to vote on the election of
directors.
Adjournment
Proposal - See Page __
In
the
event there are not sufficient votes at the time of the special meeting to
approve the acquisition proposal, the amendment proposal, the incentive
compensation plan proposal or the nomination proposal, our board of directors
may submit a proposal to adjourn the special meeting to a later date or dates,
if necessary, to permit further solicitation of proxies.
Vote
Requirement for the Adjournment Proposal - See Page __
The
adjournment proposal must be approved by the affirmative vote of a majority
of
shares of our common stock present in person or represented by proxy at the
special meeting and entitled to vote on such matter.
Our
Board of Directors’ Recommendation - See Page __
After
careful consideration, our board of directors has unanimously approved the
acquisition, the purchase agreement and the other transactions contemplated
by
the purchase agreement, and has determined that the acquisition is in our best
interest and in the best interests of our stockholders. Our board of directors
has also unanimously approved the amendment and the incentive compensation
plan,
and has approved the nomination of David J. Mitchell as a member of our board
of
directors. Our board of directors unanimously recommends that you vote or give
instruction to vote “FOR” the approval of the acquisition, the purchase
agreement and the other transactions contemplated by the purchase agreement,
the
amendment, the incentive compensation plan, and the nomination.
General
Description of the Acquisition - See Page __
At
the
special meeting, our stockholders will be asked to approve our acquisition
of
TSS/Vortech pursuant to the purchase agreement. The purchase agreement provides
for our acquisition of all of the issued and outstanding membership interests
of
VTC, L.L.C. and Vortech, LLC.
At
closing, the purchase price for all the issued and outstanding membership
interest of the companies is up to $38.5 million (subject to certain working
capital adjustments), payable as follows:
|
·
|
$11.0
million in cash;
|
|
·
|
up
to 3,205,128 shares of FAAC common stock at closing, of
which:
|
-13-
|
o
|
576,559
shares shall be issued to certain employees of the companies under
restricted stock grants (subject to forfeiture if the receiving
employee
terminates his employment within three years of the closing, in
which
event the forfeited shares shall be re-issued to the selling
members);
|
|
o
|
up
to 67,825 shares shall be issued to Evergreen Capital LLC as
partial
payment of certain outstanding consulting fees;
and
|
|
o
|
up
to 2,628,569 shares (as reduced for the assumption of up to
$161,000 of
debt and by any shares issued to Evergreen Capital LLC) shall
be issued to
the selling members of VTC and Vortech as consideration for
their
respective membership interests in the
companies;
|
|
·
|
the
assumption by FAAC of up to $161,000 in debt;
and
|
|
·
|
$10.0
million in two convertible, interest-bearing promissory notes of
$5.0
million each.
|
The
share
consideration is subject to a working capital purchase price adjustment. See
“The Purchase Agreement - Working Capital-Purchase Price
Adjustment”.
At
the
closing of the acquisition, a total of 2,560,744 shares of FAAC common stock
will be transferred to an escrow agent to secure any post-closing adjustment
in
the purchase price in FAAC’s favor and to secure the indemnification obligations
of the companies and the selling members.
In
addition, at the closing of the acquisition, we will enter into employment
agreements with each of the selling members. Under these agreements, each
selling member will be entitled to initial annual base compensation of $425,000,
an annual bonus of up to 50% of his base compensation, and if during the period
from the closing of the acquisition through July 13, 2008 the market price
of
our common stock reaches certain thresholds, up to $5.0 million in shares of
our
common stock. We refer to the potential issuance of additional shares under
the
employment agreements as the “share performance bonus”. For a more detailed
discussion of the employment agreements, please see “Directors and Executive
Officers of Fortress America Acquisition Corporation Following the Acquisition
-
Employment Agreements” on page __.
The
shares of our common stock to be delivered pursuant to the arrangements
described above will not be registered but will be the subject of a registration
rights agreement entered into at the closing of the acquisition. See
“Registration Rights Agreement”.
-14-
Conditions
to the Completion of the Acquisition - See Page __
Our
obligations and those of the companies and their members are subject to certain
customary closing conditions, including the following:
|
·
|
no
order or injunction enjoining the
acquisition;
|
|
·
|
no
statute, rule, order or decree shall have been enacted or promulgated
which would prohibit the acquisition or limit the ownership of the
companies;
|
|
·
|
receipt
of certain consents;
|
|
·
|
entering
into the escrow agreements; and
|
|
·
|
no
litigation regarding the acquisition shall be pending or
threatened.
|
Termination
- See Page __
The
membership interest purchase agreement may be terminated prior to the closing
of
the acquisition, as follows:
|
·
|
at
any time, by mutual written
agreement;
|
|
·
|
at
any time after January 20, 2007, by either the selling members or
us if
the closing shall not have occurred for any reason other than a breach
of
the membership interest purchase agreement by the terminating
party;
|
|
·
|
by
us, if there is a material breach of any agreement, representation
or
warranty by the selling members under the membership interest purchase
agreement that renders the satisfaction of any condition to our
obligations impossible and such breach is not waived by
us;
|
|
·
|
by
the selling members, if there is a material breach by us of any agreement,
representation or warranty under the membership interest purchase
agreement that renders the satisfaction of any condition to the
obligations of the selling members impossible and such breach is
not
waived by the selling members; and
|
|
·
|
by
either us or the selling members if a court of competent jurisdiction
permanently restrains or prohibits the
acquisition.
|
Interests
of Our Directors and Officers in the Acquisition - See Page
__
When
you
consider the recommendation of our board of directors that you vote to approve
the acquisition, you should keep in mind that certain of our executive officers
and members of our board of directors, and certain of their affiliates and
associates, have interests in the acquisition that are different from, or in
addition to, your interest as a stockholder. These interests include, among
other things:
|
·
|
If
the acquisition is not approved and we fail to consummate an
alternative
transaction within the time allotted pursuant to our Amended
and Restated
Certificate of Incorporation and we are therefore required to
liquidate,
the shares of common stock beneficially owned by our executive
officers
and directors and their affiliates and associates that were acquired
prior
to our initial public offering may be worthless because no portion
of the
net proceeds of our initial public offering that may be distributed
upon
our liquidation will be allocated to such shares. These shares
collectively have a market value of $9,282,000 based on our share
price of
$5.46 as of September 30, 2006. However, the 1,700,000 shares
acquired
prior to our initial public offering by these individuals are
held in
escrow and cannot be sold prior to July 13, 2008, during which
time the
value of the shares may increase or decrease. Similarly, the
warrants to
purchase our common stock held by our executive officers and
directors and
their affiliates and associates, with an aggregate market value
of
$300,000 as of September 30, 2006, may become worthless if the
acquisition
is not approved and we fail to consummate an alternative transaction
within the time allotted pursuant to our Amended and Restated
Certificate
of Incorporation.
|
|
·
|
Messrs.
McMillen and Weiss have agreed, pursuant to agreements with us
and Sunrise
Securities Corp., the representative of the underwriters of our
initial
public offering, that, if we liquidate prior to the consummation
of a
business combination, they may be personally liable to ensure
that the
proceeds of the trust account are not reduced by the claims of
vendors or
other entities that are owed money by us for services rendered
or products
sold to us or the claims of prospective target
businesses
|
| · |
After
the completion of the acquisition, it is expected that our directors
will
continue to serve on our board of directors and Harvey L. Weiss
will serve
as Chairman and C. Thomas McMillen as our Vice Chairman. In addition,
each
of our directors, will, following the acquisition, be compensated
in such
manner, and in such amounts, as our board of directors may determine
to be
appropriate. Moreover, Mr. Weiss is expected to enter into an
employment
agreement with us providing for initial base compensation of
$200,000 per
year, and a company controlled by Mr. McMillen is expected to
enter into a
consulting agreement with us providing for initial base consideration
of
$200,000 per year. See the description of these agreements under
“Directors and Executive Officers of Fortress America Acquisition
Corporation Following the Acquisition - Employment Agreements” and “-
Consulting Agreement with Washington Capital Advisors, LLC”
below.
|
-15-
Voting
Agreement
In
connection with and pursuant to the purchase agreement, FAAC, the selling
members, and Messrs. McMillen and Weiss agreed to enter into a voting agreement
on or prior to the closing date of the acquisition.
The
voting agreement terminates immediately following the re-election of directors
at FAAC’s 2008 annual meeting.
In
the
voting agreement, the selling members and Messrs. McMillen and Weiss agree
to
vote their shares in favor of the following with respect to the election of
directors:
|
·
|
the
selling members will have the right to propose the nomination of
four
nominees to our board of directors, two of whom must constitute
“independent directors” within the meaning of NASDAQ rules, provided that
at least one such “independent director” is approved by members of the
board of directors that are not so nominated by the selling members;
and
|
|
·
|
the
members of the board of directors who are not nominated by the
selling
members shall have the right to designate five members of the board
of
directors, three of whom must constitute “independent directors” within
the meaning of NASDAQ rules, provided that at least one such “independent
director” must be approved by the selling
members.
|
In
the
voting agreement, the selling members and Messrs. McMillen and Weiss also agree
to vote their shares to elect a to be agreed upon list of members of FAAC’s
board of directors. While any director may be removed from the board of
directors in the manner allowed by law and FAAC’s governing documents, both the
selling members and Messrs. McMillen and Weiss have agreed not to vote their
shares for the removal of the other group’s designees absent written approval of
such group.
In
the
voting agreement, the selling members and Messrs. McMillen and Weiss agree
to
vote their shares, to the extent applicable, in favor of electing the following
individuals to the following offices:
|
Harvey
L. Weiss
|
Chairman
of the Board of Directors
|
||
|
C.
Thomas McMillen
|
Vice
Chairman of the Board of Directors
|
||
|
Thomas
P. Rosato
|
Chief
Executive Officer
|
||
|
Gerard
J. Gallagher
|
President/Chief
Operating Officer
|
United
States Federal Income Tax Consequences of the Acquisition
-
See
Page ___
Our
common stockholders who do not exercise their conversion rights will continue
to
hold their common stock and as a result will not recognize any gain or loss
from
the acquisition.
Common
stockholders who exercise their conversion rights will recognize gain or loss
to
the extent that the amount received by such common stockholders upon conversion
is greater than or less than, respectively, such stockholder’s tax basis in
their shares. A stockholder’s tax basis in the shares generally will equal the
cost of the shares. A stockholder that purchased our units will have to allocate
the cost between the shares and the warrants of the units based on their
relative fair market values at the time of the purchase. Assuming the shares
are
held as a capital asset, the gain or loss will be capital gain or loss and
will
be long-term capital gain or loss if such stockholder’s holding period in the
shares is longer than one year.
Regulatory
Matters - See Page __
The
acquisition and the transactions contemplated by the purchase agreement are
not
subject to any federal, state or provincial regulatory requirement or
approval.
-16-
SELECTED
HISTORICAL AND
PRO FORMA COMBINED FINANCIAL
INFORMATION
We
are
providing the following selected financial information to assist in your
analysis of the financial aspects of the acquisition. TSS/Vortech’s combined
balance sheet data as of December 31, 2003, 2004 and 2005, and the combined
statements of operations data for the years then ended, are derived from
TSS/Vortech’s combined financial statements audited by McGladrey & Pullen,
LLP, an independent registered public accounting firm, and from the unaudited
financial statements as of and for the six-month periods ended June
30, 2005 and 2006. TSS/Vortech’s combined audited financial statements as
of and for the years ended December 31, 2003, 2004 and 2005 and unaudited
combined financial statements for the six-month periods ended June 30, 2005
and
2006 are included elsewhere in this proxy statement.
The
FAAC
historical financial data as of December 31, 2004 and for the period from
December 20, 2004 (date of inception) through December 31, 2004 and as of
December 31, 2005 and for the year then ended are derived from the FAAC
financial statements audited by Goldstein Golub Kessler LLP, independent
registered public accountants, included elsewhere in this proxy statement,
and
from the unaudited financial statements as of and for the six-month period
ended
June 30, 2006.
The
selected financial information of TSS/Vortech and FAAC is only a summary and
should be read in conjunction with each company’s historical combined financial
statements and related notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained elsewhere herein. The
historical results included below and elsewhere in this proxy statement may
not
be indicative of the future performance of TSS/Vortech, FAAC or the combined
company resulting from the acquisition.
TSS/Vortech’s
Selected Historical Combined Financial Data
(in
thousands)
|
Years
Ended December 31,
|
Six
Months Ended
June 30,
|
|||||||||||||||
|
2005
|
2004
|
2003
|
2006
|
2005
|
||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Combined
Statements of
Operations
Data:
|
||||||||||||||||
|
Earned revenues
|
$
|
58,632
|
$
|
21,303
|
$
|
12,331
|
$
|
34,726
|
$
|
27,694
|
||||||
|
Cost
of earned revenues
|
50,057
|
15,769
|
8,393
|
28,719
|
23,538
|
|||||||||||
|
Gross
profit
|
8,575
|
5,534
|
3,938
|
6,007
|
4,156
|
|||||||||||
|
General
and administrative expenses
|
5,648
|
4,515
|
2,132
|
3,334
|
2,307
|
|||||||||||
|
Operating
income
|
2,927
|
1,019
|
1,806
|
2,673
|
1,849
|
|||||||||||
|
Interest
expense, net
|
35
|
29
|
4
|
10
|
18
|
|||||||||||
|
Income
from continuing operations
|
$
|
2,892
|
$
|
990
|
$
|
1,802
|
$
|
2,663
|
$
|
1,831
|
||||||
-17-
|
As
of December 31,
|
As
of
June
30,
|
||||||||||||
|
2005
|
2004
|
2003
|
2006
|
||||||||||
|
Combined
Balance Sheet Data:
|
(unaudited)
|
||||||||||||
|
Cash
and cash equivalents
|
$
|
1,737
|
$
|
1,503
|
$
|
1,072
|
$
|
2,928
|
|||||
|
Contract
and other receivables, net
|
11,137
|
2,669
|
3,593
|
12,299
|
|||||||||
|
Other
current assets
|
586
|
1,247
|
219
|
1,007
|
|||||||||
|
Total
assets
|
14,099
|
6,002
|
5,448
|
16,785
|
|||||||||
|
Current
liabilities
|
11,219
|
5,252
|
4,005
|
13,172
|
|||||||||
|
Total
long-term debt and capital lease
obligations,
net of current maturities
|
161
|
370
|
167
|
123
|
|||||||||
|
Members’
equity (divisional equity in 2004)
|
$
|
2,592
|
$
|
356
|
$
|
1,276
|
$
|
3,336
|
|||||
FAAC’s
Selected Historical Financial Information
(in
thousands, except per share data)
|
For
the Period From December 20, 2004 (inception) to
December
31, 2004
|
Year
Ended December
31,
2005
|
Six
Months Ended
June
30, 2006
|
||||||||
|
(unaudited)
|
||||||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Interest
income
|
$
|
-
|
$
|
525
|
$
|
772
|
||||
|
Net
income
|
$
|
(1
|
)
|
$
|
132
|
$
|
262
|
|||
|
Net
income per share - Basic
|
$
|
(.00
|
)
|
$
|
.03
|
$
|
.03
|
|||
|
As
of December 31,
2004
|
As
of December 31,
2005
|
As
of June 30, 2006
(unaudited)
|
||||||||
|
Total
assets (including U.S.
|
||||||||||
|
government
securities deposited
|
||||||||||
|
in
Trust Fund)
|
$
|
38
|
$
|
43,779
|
$
|
44,176
|
||||
|
Common
stock subject to possible conversion
|
-
|
$
|
8,389
|
$
|
8,389
|
|||||
|
Stockholders’
equity
|
$
|
24
|
$
|
34,951
|
$
|
35,213
|
||||
-18-
Selected
Unaudited Pro Forma Combined Financial Information of TSS/Vortech and
FAAC
The
following selected unaudited pro forma condensed combined balance sheet combines
our historical balance sheets and those of TSS/Vortech as of June 30, 2006,
giving effect to the transactions described in the purchase agreement as
if they
had occurred on June 30, 2006. The following selected unaudited pro forma
condensed combined statements of operations combine (i) our historical statement
of operations for the 12 months ended December 31, 2005 with those of
TSS/Vortech and (ii) our historical statement of operations for the six months
ended June 30, 2006 with those of TSS/Vortech, in each case giving effect
to the acquisition as if it had occurred on January 1, 2005. The following
selected unaudited pro forma condensed combined financial information is
intended to provide you with a picture of what our business might have looked
like had the acquisition been completed on or as of the dates specified above.
The combined financial information may have been different had the acquisition
actually been completed on or as of those dates. You should not rely on the
selected unaudited pro forma condensed combined financial information as
being
indicative of the historical results that would have occurred had the
acquisition occurred or the future results that may be achieved after the
acquisition. The following selected unaudited pro forma condensed combined
financial information has been derived from, and should be read in conjunction
with, the Unaudited Pro Forma Condensed Consolidated Financial Statements
and
related notes thereto starting on page ____.
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
At
June 30, 2006
|
|||||||
|
Assuming
No
Conversions
(1)
|
Assuming
Maximum
Conversions
(2)
|
||||||
|
Current
assets
|
$
|
45,910,069
|
$
|
37,202,968
|
|||
|
Non-current
assets
|
38,769,431
|
38,769,431
|
|||||
|
Current
liabilities
|
13,354,919
|
13,354,919
|
|||||
|
Non-current
liabilities
|
10,161,000
|
10,161,000
|
|||||
|
Stockholders’
equity
|
$
|
61,163,581
|
$
|
52,456,480
|
|||
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
At
December 31, 2005
|
At
June 30, 2006
|
||||||||||||
|
Assuming
No
Conversions
|
Assuming
Maximum Conversions
|
Assuming
No
Conversions
|
Assuming
Maximum Conversions
|
||||||||||
|
(1)
|
(2)
|
(1)
|
(2)
|
||||||||||
|
Revenues
|
$
|
58,632,293
|
$
|
58,632,293
|
$
|
34,726,161
|
$
|
34,726,161
|
|||||
|
Cost
of earned revenues
|
(46,620,829
|
)
|
(46,620,829
|
)
|
(28,719,264
|
)
|
(28,719,264
|
)
|
|||||
|
Gross
margin
|
12,011,464
|
12,011,464
|
6,006,897
|
6,006,897
|
|||||||||
|
Operating
costs
|
(9,740,687
|
)
|
(9,740,687
|
)
|
(5,802,438
|
)
|
(5,802,438
|
)
|
|||||
|
Interest
(expense)
income
and other income
|
(151,717
|
)
|
(246,366
|
)
|
(402,965
|
)
|
(261,926
|
)
|
|||||
|
Income
before income tax
|
2,119,060
|
2,024,411
|
607,424
|
466,385
|
|||||||||
|
Income
tax
|
(847,624
|
)
|
(809,764
|
)
|
(242,970
|
)
|
(186,554
|
)
|
|||||
|
Income
|
$
|
1,271,436
|
$
|
1,214,647
|
$
|
364,454
|
$
|
279,831
|
|||||
|
Net
income per share
|
|||||||||||||
|
Basic
|
$
|
0.10
|
$
|
0.11
|
$
|
0.03
|
$
|
0.03
|
|||||
|
Diluted
|
$
|
0.10
|
$
|
0.11
|
$
|
0.03
|
$
|
0.02
|
|||||
-19-
(1) Assumes
that no FAAC stockholder seeks conversion of FAAC stock into a pro rata share
of
the trust account.
(2) Assumes
that 1,560,000 shares of FAAC common stock were converted into a pro rata share
of the trust account.
-20-
FAAC
PER SHARE DATA
The
following table sets forth our selected historical per share information
and
that of TSS/Vortech and unaudited pro forma consolidated per share information
as of and for the year and six months ended December 31, 2005 and June 30,
2006,
respectively, giving effect to the acquisition as if it had occurred on January
1, 2005. We are providing this information to aid you in your analysis of
the
financial aspects of the acquisition. The unaudited pro forma consolidated
share
information should be read in conjunction with our historical financial
statements and those of TSS/Vortech and the related notes thereto included
elsewhere in this proxy statement. The historical per share information is
derived from financial statements of TSS/Vortech.
|
As
of and For the Year Ended
December
31, 2005
|
As
of and For the Six months
Ended
June 30, 2006
|
||||||||||||||||||
|
TSS/
Vortech
|
FAAC
|
Combined
Company
|
TSS/
Vortech
|
FAAC
|
Combined
Company
|
||||||||||||||
|
Weighted
average number of
|
|||||||||||||||||||
|
shares
of common stock
|
|||||||||||||||||||
|
outstanding
|
|||||||||||||||||||
|
Actual:
|
|||||||||||||||||||
|
Basic
|
-
|
5,107,534
|
-
|
-
|
9,550,000
|
-
|
|||||||||||||
|
Diluted
|
-
|
5,107,534
|
-
|
-
|
9,550,000
|
-
|
|||||||||||||
|
Pro
forma:
|
|||||||||||||||||||
|
Assuming
no conversions
|
|||||||||||||||||||
|
Basic
|
-
|
-
|
12,725,641
|
-
|
-
|
12,725,641
|
|||||||||||||
|
Diluted
|
-
|
-
|
13,091,266
|
-
|
-
|
13,987,406
|
|||||||||||||
|
Assuming
maximum conversions
|
|||||||||||||||||||
|
Basic
|
-
|
11,166,421
|
-
|
-
|
11,166,421
|
||||||||||||||
|
Diluted
|
-
|
11,532,046
|
-
|
-
|
12,428,186
|
||||||||||||||
|
Book
value - historical at
|
|||||||||||||||||||
|
June
30, 2006
|
$
|
3,336,389
|
$
|
35,212,749
|
$
|
38,549,138
|
|||||||||||||
|
Book
value - pro forma at
|
|||||||||||||||||||
|
June
30, 2006 (1)
|
|||||||||||||||||||
|
Assuming
no conversions
|
$
|
3,336,389
|
$
|
35,212,749
|
$
|
61,163,581
|
|||||||||||||
|
Assuming
maximum conversions
|
$
|
3,336,389
|
$
|
35,212,749
|
$
|
52,456,480
|
|||||||||||||
|
Book
value per share - pro
|
|||||||||||||||||||
|
forma
June 30, 2006
|
|||||||||||||||||||
|
Assuming
no conversions
|
|||||||||||||||||||
|
Basic
|
-
|
$
|
3.69
|
$
|
4.81
|
||||||||||||||
|
Diluted
|
-
|
$
|
3.69
|
$
|
4.37
|
||||||||||||||
|
Assuming
maximum
|
|||||||||||||||||||
|
conversions
|
|||||||||||||||||||
|
Basic
|
-
|
$
|
3.69
|
$
|
4.70
|
||||||||||||||
|
Diluted
|
-
|
$
|
3.69
|
$
|
4.22
|
||||||||||||||
(1)
Includes goodwill of $16,976,737.
-21-
MARKET
PRICE INFORMATION FOR FAAC
The
shares of our common stock, warrants and units are currently quoted on the
Over-the-Counter Bulletin Board, or OTCBB, under the symbols “FAAC,” “FAACW” and
“FAACU,” respectively. On June 5, 2006, the last day for which information was
available prior to the date of the public announcement of the proposed
acquisition, the last quoted sale prices of FAAC, FAACW and FAACU were $5.39,
$0.58 and $6.665, respectively. Each of our units consists of one share of
our
common stock and two redeemable common stock purchase warrants.
There
is
no established public trading market for the shares of common stock of
TSS/Vortech.
The
following table sets forth, for the calendar quarter indicated, the quarterly
high and low bid information of our common stock, warrants and units as reported
on the OTCBB. The quotations listed below reflect interdealer prices, without
retail markup, markdown or commission and may not necessarily represent actual
transactions:
|
Quarter
Ended
|
Common
Stock (FAAC)
|
Warrants
(FAACW)
|
Units
(FAACU)
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
December
31, 2005
|
$
|
5.24
|
$
|
5.02
|
$
|
0.51
|
$
|
0.40
|
$
|
6.10
|
$
|
5.76
|
|||||||
|
March
31, 2006
|
$
|
5.60
|
$
|
5.22
|
$
|
0.78
|
$
|
0.36
|
$
|
7.15
|
$
|
5.95
|
|||||||
|
June
30, 2006
|
$
|
5.57
|
$
|
5.37
|
$
|
0.83
|
$
|
0.49
|
$
|
7.20
|
$
|
6.25
|
|||||||
|
September
30, 2006
|
$
|
5.48
|
$
|
5.35
|
$
|
0.55
|
$
|
0.41
|
$
|
6.50
|
$
|
6.12
|
|||||||
-22-
FORWARD-LOOKING
STATEMENTS
This
proxy statement includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements can be identified by
the
use of forward-looking terminology, including the words “believes,” “estimates,”
“anticipates,” “expects,” “intends,” “may,” “will” or “should,” or, in each
case, their negative or other variations or comparable terminology. Such
statements include, but are not limited to, any statements relating to our
ability to consummate the acquisition or other business combination and any
other statements that are not historical facts. These statements are based
on
management’s current expectations, but actual results may differ materially due
to various factors, including, but not limited to:
|
·
|
our
being a development stage company with no operating
history;
|
|
·
|
risks
that the acquisition of TSS/Vortech may not be completed due to
failure of
the conditions to closing of the acquisition being satisfied or
other
factors;
|
|
·
|
our
personnel allocating their time to other businesses and potentially
having
conflicts of interest with our business and the
acquisition;
|
|
·
|
the
ownership of our securities being
concentrated;
|
| · |
TSS/Vortech’s
reliance on a single customer for a majority of its
revenues;
|
|
·
|
TSS/Vortech’s
backlog is declining and may not be
replaced;
|
|
·
|
risks
associated with the homeland security sector;
and
|
|
·
|
those
other risks and uncertainties detailed under the heading “Risk Factors”
beginning on page __.
|
By
their
nature, forward-looking statements involve risks and uncertainties because
they
relate to events and depend on circumstances that may or may not occur in the
future. We caution you that forward-looking statements are not guarantees of
future performance and that our actual results of operations, financial
condition and liquidity, and developments in the industry in which we operate,
may differ materially from those made in or suggested by the forward-looking
statements contained in this proxy statement. In addition, even if our results
of operations, financial condition and liquidity, and developments in the
industry in which we operate, are consistent with the forward-looking statements
contained in this proxy statement, those results or developments may not be
indicative of results or developments in subsequent periods.
These
forward-looking statements are subject to numerous risks, uncertainties and
assumptions about us. The forward-looking events we discuss in this proxy
statement speak only as of the date of the proxy statement and might not occur
in light of these risks, uncertainties and assumptions.
-23-
RISK
FACTORS
You
should carefully consider the following risk factors, together with all of
the
other information included in this document, before you decide whether to vote
or instruct your vote to be cast to approve the acquisition. As our operations
will be those of TSS/Vortech upon completion of the acquisition, the risk
factors that relate to the business and operations of TSS/Vortech also apply
to
us as the successor to TSS/Vortech’s business.
Risks
Related to the Acquisition of TSS/Vortech
We
may not be able to consummate the acquisition, or another business combination,
within the required time frame, in which case we would be forced to
liquidate.
We
must
complete a business combination with a fair market value of at least 80% of
our
net assets at the time of acquisition by January 20, 2007. If we fail to
consummate the acquisition within the required time frame, we will be forced
to
liquidate our assets.
If
we are forced to liquidate before a business combination, our public
stockholders will receive less than $6.00 per share upon distribution of the
trust account, and our warrants will expire
worthless.
If
we are
unable to complete the acquisition or another business combination and are
forced to liquidate our assets, the per share liquidation value will be less
than $6.00 because of the expenses related to our initial public offering, our
general and administrative expenses and the costs of performing due diligence
for the acquisition, negotiating the purchase agreement and otherwise seeking
a
business combination. Furthermore, the warrants will expire worthless if we
liquidate before the completion of a business combination.
Certain
of our key personnel may join us following the acquisition and may be unfamiliar
with the requirements of operating a public company, which may adversely affect
our operations, including significantly reducing our revenues and net income,
if
any.
Our
ability to successfully effect the acquisition of TSS/Vortech will be completely
dependent upon the efforts of our key personnel, and after the consummation
of
the acquisition, our current senior executives will take a substantially reduced
role with us, will be actively engaged in other business matters outside of
FAAC, and will only work on FAAC-related matters on a part-time basis. Upon
the
completion of the acquisition, our current Chairman of the Board, C. Thomas
McMillen, will resign, and our current Chief Executive Officer, President and
Secretary, Harvey L. Weiss, will resign from those positions and will become
Chairman of the Board. Thomas P. Rosato will become our Chief Executive Officer,
and Gerard J. Gallagher will become our President and Chief Operating Officer.
Neither Mr. Rosato nor Mr. Gallagher have significant public company experience
and are unfamiliar with the unique requirements of operating a public company
under U.S. securities laws. In addition, we do not currently have a Chief
Financial Officer. Although we are currently engaged in a search for a Chief
Financial Officer, we do not know when we will find a qualified candidate or
whether the individual we hire will have public company experience. Accordingly,
we could be required to expend significant resources to assist the new
management team with regulatory and stockholder relations issues, which could
be
expensive and time-consuming and could lead to various regulatory issues that
may adversely affect our operations, including significantly reducing our
revenues and net income, if any.
We
expect to incur significant costs associated with the acquisition, whether
or
not the acquisition is completed, which costs will significantly reduce the
amount of cash available to be used to consummate a business
combination.
We
expect
to incur significant costs associated with the acquisition, whether or not
the
acquisition is completed. By incurring these costs, we will significantly reduce
the amount of cash available to be used for consummating a business
combination.
-24-
As
a result of the acquisition, our stockholders will be solely dependent on a
single business.
As
a
result of the acquisition, our stockholders will be solely dependent upon the
performance of TSS/Vortech. TSS/Vortech will remain subject to a number of
risks
that relate generally to the homeland security and mission critical information
technology, or IT, industries and other risks. See “Risk Factors - Risks Related
to our Business and Operations Following the Acquisition.”
If
the acquisition’s benefits do not meet the expectations of financial or industry
analysts, the market price of our common stock may
decline.
The
market price of our common stock may decline as a result of the acquisition
if:
|
·
|
we
do not achieve the perceived benefits of the acquisition as rapidly
as, or
to the extent anticipated by, financial or industry analysts;
or
|
|
·
|
the
effect of the acquisition on our financial results is not consistent
with
the expectations of financial or industry
analysts.
|
Accordingly,
investors may experience a loss as a result of a decreasing stock
price.
Our
directors may have certain conflicts in determining to recommend the acquisition
of TSS/Vortech since certain of their interests, and certain interests of their
affiliates and associates, are different from, or in addition to, your interests
as a stockholder.
Although
none of our directors is an investor or potential investor in TSS or Vortech,
members of our board of directors have interests in and arising from the
acquisition of TSS/Vortech that are different from, or in addition to, your
interests as a stockholder which could result in a real or perceived conflict
of
interest. These interests include the fact that certain of the shares of common
stock owned by them, or their affiliates and associates, would become worthless
if the acquisition is not approved and we otherwise fail to consummate a
business combination prior to our liquidation date. Such shares, as of June
30,
2006, had a market value of approximately $9,163,000. Similarly, the warrants
owned by such directors, affiliates and associates to purchase 600,000 shares
of
common stock, with an aggregate market value of $300,000 as of June 30, 2006,
would expire worthless. If the acquisition is approved, Messrs. McMillen and
Weiss will continue to serve as members of our board of directors after the
acquisition, and will be compensated for such services.
We
plan to issue shares of our common stock to complete the acquisition of
TSS/Vortech, which will reduce the equity interest of our
stockholders.
Our
Amended and Restated Certificate of Incorporation authorizes the issuance
of up
to 50.0 million shares of common stock, par value $0.0001 per share, and
1.0
million shares of preferred stock, par value $0.0001 per share. We currently
have 22,750,000 authorized but unissued shares of our common stock available
for
issuance (after appropriate reservation for the issuance of shares upon full
exercise of our outstanding warrants and the unit purchase option granted
to
Sunrise Securities Corp., the representative of our underwriters in our initial
public offering) and all of the 1.0 million shares of preferred stock available
for issuance. As set forth in the purchase agreement, the selling members
will
receive a portion of the purchase price for the acquisition in shares of
our
common stock. The selling members will receive an aggregate of up to 2,628,569
shares of our common stock on the closing date (as reduced for the assumption
of
up to $161,000 of debt and by any shares issued to Evergreen Capital LLC),
an
aggregate of 576,559 shares of our common stock will be issued to key employees
of TSS/Vortech on the closing date, up to 67,825 shares of our common stock
will
be issued to Evergreen Capital LLC on the closing date, the $10.0 million
in
convertible, interest-bearing promissory notes delivered by us at the closing
of
the acquisition will be convertible into shares of our common stock, and
the
selling members may receive up to an aggregate of $10.0 million in shares
of our
stock in the future under the terms of their employment agreements. The issuance
of such shares will reduce the equity interest of our stockholders on a pro
rata
basis.
-25-
Voting
control by our executive officers, directors and other affiliates may limit
your
ability to influence the outcome of director elections and other matters
requiring stockholder approval.
Upon
consummation of the merger, persons who are parties to the voting agreement
(Messrs. McMillen, Weiss, Gallagher and Rosato) will own approximately 29.1%
of
our voting stock. Moreover, this concentration will increase if additional
shares are issued under the employment agreements to be entered into with the
selling members or upon conversion of the convertible promissory notes delivered
to the selling members at closing. These persons have made certain agreements
to
vote for each other’s designees to our board of directors through director
elections in 2008. Accordingly, they will be able to significantly influence
the
election of directors and, therefore, our policies and direction during the
term
of the voting agreement. This concentration of ownership and the voting
agreement could have the effect of delaying or preventing a change in our
control or discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material adverse effect on the market price
of
our common stock or prevent our stockholders from realizing a premium over
the
market price for their shares of common stock.
After
the acquisition, actual or potential conflicts of interest are likely to develop
between us and the selling members.
The
selling members will, after the closing of the acquisition, continue to own
significant businesses other than TSS/Vortech and that are not owned or
controlled by TSS/Vortech. As described below under “Certain Relationships and
Related Transactions”, we will have an ongoing business relationship with
certain of these businesses of the selling members. This will likely create
actual or potential conflicts of interest between the selling members, who
will
be executive officers and members of our board of directors and thus in a
position to influence corporate decisions, and us.
If
we are unable to obtain a listing of our securities on NASDAQ or any stock
exchange, it may be more difficult for our stockholders to sell their
securities.
Our
units, common stock and warrants are currently traded in the over-the-counter
market and quoted on the OTCBB. We intend to apply for listing on NASDAQ.
Generally, NASDAQ requires that a company applying for listing on the NASDAQ
Capital Market have stockholders’ equity of not less than $5.0 million or a
market value of listed securities of $50 million or net income from continuing
operations of not less than $750,000, at least 1.0 million publicly held shares,
and a minimum bid price of $4.00 with over 300 round lot stockholders. There
is
no assurance that such listing will be obtained and listing is not a condition
to closing the merger. If we are unable to obtain a listing or approval of
trading of our securities on NASDAQ, then it may be more difficult for
stockholders to sell their securities.
If
third parties bring claims against us or if TSS/Vortech has breached any
of its
representations, warranties or covenants set forth in the purchase agreement,
we
may not be adequately indemnified for any losses arising
therefrom.
Although
the purchase agreement provides that the selling members will indemnify us
for
losses arising from a breach of the representations, warranties and covenants
by
TSS/Vortech or the selling members set forth in the purchase agreement, such
indemnification is limited, in general terms, to an aggregate amount of
$5 million and claims may be asserted against the selling members only if a
claim exceeds $8,000 and the aggregate amount of all claims exceeds $175,000.
In
addition, with some exceptions, the survival period for claims under the
purchase agreement is limited to the 18-month period following the closing
of
the acquisition. We will be prevented from seeking indemnification for most
claims above the aggregate threshold or arising after the applicable survival
period.
-26-
Risks
Related to Our Business and Operations Following the
Acquisition
TSS/Vortech
derives a significant portion of its revenues from a limited number of
customers.
TSS/Vortech
has derived, and we believe TSS/Vortech will continue to derive, a significant
portion of its revenues from a limited number of customers. To the extent
that
any significant customer uses less of TSS/Vortech’s services or terminates its
relationship with TSS/Vortech, TSS/Vortech’s revenues could decline
significantly, which would have an adverse effect on TSS/Vortech’s financial
condition and results of operations. For the years ended December 31, 2005,
2004 and 2003, TSS/Vortech had one customer that comprised approximately
78%,
49.1% and 20.3%, respectively of its revenues. TSS/Vortech expects that it
will
recognize substantially less revenue from this customer after the first quarter
of 2007. TSS/Vortech’s 10 largest customers accounted for approximately 94.6% of
its total revenues for the year ended December 31, 2005.
TSS/Vortech’s
backlog is declining and may not be replaced.
TSS/Vortech’s
backlog is comprised of the uncompleted portion of services to be performed
under job-specific contracts. TSS/Vortech’s backlog as June 30, 2006 was $22.4
million, down approximately $17.3 million from its backlog of $39.7 million
as
of December 31, 2005 and down $30.4 million from its backlog of $52.8 million
as
of December 31, 2004. Approximately 64% of TSS/Vortech’s backlog as of June 30,
2006 was represented by six separate contracts with its major customer. The
projects subject to these contracts are expected to be substantially completed
by March 2007. Although TSS/Vortech is currently transitioning from a business
heavily reliant upon a single, long-term project to a business based on a
more
diversified customer base, there can be no assurances that TSS/Vortech will
be
able to make this transition on a basis timely enough to replace the backlog
and
revenue currently provided from TSS/Vortech’s existing projects for its major
customer or at all. If TSS/Vortech cannot timely make this transition,
TSS/Vortech’s backlog could decline more than TSS/Vortech anticipates and its
revenue, operations, cash flows and liquidity could all be significantly
and
adversely affected. In addition, TSS/Vortech is in part implementing this
transition by hiring additional sales and business development personnel
and
undertaking other business development efforts, which has increased its costs
but may not result in significantly increased revenues.
Failure
to properly manage projects may result in costs or
claims.
TSS/Vortech’s
engagements often involve relatively large scale, highly complex projects.
The
quality of TSS/Vortech’s performance on such projects depends in large part upon
its ability to manage the relationship with its customers, and to effectively
manage the project and deploy appropriate resources, including third-party
contractors and its own personnel, in a timely manner. Any defects or errors
or
failure to meet customers’ expectations could result in claims for substantial
damages against TSS/Vortech. In addition, TSS/Vortech cannot be certain that
the
insurance coverage it carries to cover such claims will be adequate to protect
TSS/Vortech from the full impact of such claims. Moreover, in certain instances,
TSS/Vortech guarantees customers that it will complete a project by a scheduled
date or that the project will achieve certain performance standards. If the
project experiences a performance problem, TSS/Vortech may not be able to
recover the additional costs it will incur, which could exceed revenues realized
from a project. Finally, if TSS/Vortech underestimates the resources or time
TSS/Vortech needs to complete a project with capped or fixed fees, its operating
results could be seriously harmed.
Most
of TSS/Vortech’s contracts may be canceled on short notice, so TSS/Vortech’s
revenue is not guaranteed.
Most
of
TSS/Vortech’s contracts are cancelable on short notice, even if TSS/Vortech is
not in default under the contract. Many of its contracts, including its service
agreements, are periodically open to public bid. TSS/Vortech may not be the
successful bidder on its existing contracts that are re-bid. TSS/Vortech also
provides an increasing portion of its services on a non-recurring,
project-by-project basis. TSS/Vortech could experience a reduction in its
revenue, profitability and liquidity if:
|
·
|
its
customers cancel a significant number of
contracts;
|
|
·
|
TSS/Vortech
fails to win a significant number of its existing contracts upon
re-bid;
or
|
|
·
|
TSS/Vortech
completes the required work under a significant number of its
non-recurring projects and cannot replace them with similar
projects.
|
-27-
Future
acquisitions by us would subject us to additional business, operating and
industry risks, the impact of which cannot presently be evaluated, and could
adversely impact our capital structure.
We
plan
to pursue other acquisition opportunities following the closing of the
TSS/Vortech acquisition in an effort to take advantage of the platform we
expect
TSS/Vortech to constitute. Although we are often engaged in preliminary
discussions with acquisition candidates, as of the date of this proxy statement
we have no commitments or agreements (including agreements in principle,
letters
of intent and non-binding term sheets) to enter into any acquisition. Following
the acquisition of TSS/Vortech, we will not be limited to any particular
industry or type of business that we may acquire. Accordingly, there is no
current basis for you to evaluate the possible merits or risks of the particular
business or assets that we may acquire, or of the industry in which such
business operates. In addition, the financing of any acquisition completed
by us
after the TSS/Vortech acquisition could adversely impact our capital structure
as any such financing would likely include the issuance of additional equity
securities and/or the borrowing of additional funds.
TSS/Vortech
operates in a highly competitive industry, which could reduce its growth
opportunities, revenue and operating results.
The
mission critical IT industry in which TSS/Vortech operates is highly
competitive. TSS/Vortech often competes with other IT consulting and integration
companies, including several that are large domestic companies that may have
financial, technical and marketing resources that exceed its own. Its
competitors may develop the expertise, experience and resources to provide
services that are equal or superior in both price and quality to TSS/Vortech’s
services, and TSS/Vortech may not be able to maintain or enhance its competitive
position. Although TSS/Vortech’s customers currently outsource a significant
portion of these services to TSS/Vortech and its competitors, TSS/Vortech can
offer no assurance that its existing or prospective customers will continue
to
outsource specialty contracting services to TSS/Vortech in the
future.
TSS/Vortech
may not accurately estimate the costs associated with its services provided
under fixed-price contracts, which could impair its financial
performance.
A
portion
of TSS/Vortech’s revenue is derived from fixed price contracts. Under these
contracts, TSS/Vortech sets the price of its services and assumes the risk
that
the costs associated with its performance may be greater than it anticipated.
TSS/Vortech’s profitability is therefore dependent upon its ability to
accurately estimate the costs associated with its services. These costs may
be
affected by a variety of factors, such as lower than anticipated productivity,
conditions at the work sites differing materially from what was anticipated
at
the time TSS/Vortech bid on the contract, and higher than expected costs of
materials and labor. Certain agreements or projects could have lower margins
than anticipated or losses if actual costs for contracts exceed TSS/Vortech’s
estimates, which could reduce TSS/Vortech’s profitability and
liquidity.
TSS/Vortech
accounts for a majority of its projects on the percentage-of-completion method,
and if actual results vary from the assumptions made in estimating
percentage-of-completion, TSS/Vortech’s revenue and income could be
reduced.
TSS/Vortech
generally recognizes revenue on projects on the percentage-of-completion method.
Under the percentage-of-completion method, TSS/Vortech records revenue as work
on the contract progresses. The cumulative amount of revenue recorded on a
contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date bear to estimated total contract costs.
The
percentage-of-completion method therefore relies on estimates of total expected
contract costs. Contract revenue and total cost estimates are reviewed and
revised periodically as the work progresses. Adjustments are reflected in
contract revenue in the fiscal period when such estimates are revised. Estimates
are based on management’s reasonable assumptions and experience, but are only
estimates. Variation between actual results and estimates on a large project
or
on a number of smaller projects could be material. TSS/Vortech immediately
recognizes the full amount of the estimated loss on a contract when its
estimates indicate such a loss. Any such loss would reduce TSS/Vortech’s revenue
and income.
-28-
TSS/Vortech’s
failure to attract and retain qualified employees may adversely affect its
business.
TSS/Vortech’s
continued success depends to a substantial degree on its ability to recruit
and
retain the technically skilled personnel it needs to serve its customers
effectively. TSS/Vortech’s business involves the development of tailored
solutions for its customers, a process that relies heavily upon the expertise
and services of employees. Accordingly, TSS/Vortech’s employees are its most
valuable resource. Competition for skilled personnel, especially those with
security clearance, is intense in TSS/Vortech’s industry. Recruiting and
training these personnel requires substantial resources. TSS/Vortech’s failure
to attract and retain qualified personnel could increase its costs of performing
its contractual obligations, reduce its ability to efficiently satisfy its
customers’ needs, limit its ability to win new business and constrain its future
growth.
An
economic downturn or reduced homeland security related capital expenditures
could result in a decrease in demand for TSS/Vortech’s
services.
If
federal, state or local government or private enterprise spending on homeland
security related capital expenditures decreases, the demand for services like
those provided by TSS/Vortech would likely decrease. This decrease could reduce
TSS/Vortech’s opportunity for growth, increase its marketing and sales costs,
and decrease the prices it can charge for its services, which could reduce
TSS/Vortech’s revenue and operating results.
TSS/Vortech
may be unable to obtain sufficient bonding capacity to support certain service
offerings.
Some
of
TSS/Vortech’s contracts require performance and surety bonds. Bonding capacity
for construction projects has become increasingly difficult to obtain, and
bonding companies are denying or restricting coverage to an increasing number
of
contractors. Companies that have been successful in renewing or obtaining
coverage have sometimes been required to post additional collateral to secure
the same amount of bonds which reduces availability under TSS/Vortech’s credit
facility. TSS/Vortech may not be able to maintain a sufficient level of bonding
capacity in the future, which could preclude TSS/Vortech from being able to
bid
for certain contracts and successfully contract with certain customers. In
addition, even if TSS/Vortech are able to successfully renew or obtain
performance or payment bonds in the future, TSS/Vortech may be required to
post
letters of credit in connection with the bonds.
TSS/Vortech
may choose, or be required, to pay its subcontractors even if its customers
do
not pay, or delay paying, TSS/Vortech for the related
services.
TSS/Vortech
uses subcontractors to perform portions of its services and to manage work
flow.
In some cases, TSS/Vortech pays its subcontractors before its customers pay
TSS/Vortech for the related services. If TSS/Vortech chooses, or is required,
to
pay its subcontractors for work performed for customers who fail to pay, or
delay paying TSS/Vortech for the related work, TSS/Vortech could experience
a
decrease in profitability and liquidity.
A
portion of TSS/Vortech’s business depends upon obtaining and maintaining
required security clearances, and its failure to do so could result in
termination of certain of its contracts or cause it to be unable to bid or
rebid
on certain contracts.
Some
U.S.
government projects require TSS/Vortech’s employees to maintain various levels
of security clearances, and TSS/Vortech may be required to maintain certain
facility security clearances complying with U.S. government
requirements.
Obtaining
and maintaining security clearances for employees involves a lengthy process,
and it is difficult to identify, recruit and retain employees who already hold
security clearances. If TSS/Vortech’s employees are unable to obtain or retain
security clearances or if such employees who hold security clearances terminate
their employment with TSS/Vortech, the customer whose work requires cleared
employees could terminate the contract or decide not to renew it upon its
expiration. To the extent TSS/Vortech is not able to engage employees with
the
required security clearances for a particular contract, TSS/Vortech may not
be
able bid on or win new contracts, or effectively re-bid on expiring contracts,
which could adversely affect TSS/Vortech’s business.
-29-
In
addition, TSS/Vortech expects that some of the contracts on which it will bid
will require it to demonstrate its ability to obtain facility security
clearances and perform work with employees who hold specified types of security
clearances. A facility security clearance is an administrative determination
that a particular facility is eligible for access to classified information
or
an award of a classified contract. Although contracts may be awarded prior
to
the issuance of a facility security clearance, in such cases the contractor
is
processed for facility security clearance at the appropriate level and must
meet
the eligibility requirements for access to classified information. A contractor
or prospective contractor must meet certain eligibility requirements before
it
can be processed for facility security clearance. TSS/Vortech’s ability to
obtain and maintain facility security clearances has a direct impact on its
ability to compete for and perform U.S. government projects the performance
of
which requires access to classified information. In addition, to the extent
that
any acquisition or merger contemplated by TSS/Vortech might adversely impact
its
eligibility for facility security clearance, the U.S. government could revoke
TSS/Vortech’s facility security clearance if TSS/Vortech was unable to
adequately address concerns regarding potential unauthorized access to
classified information.
TSS/Vortech’s
failure to comply with the regulations of the U.S. Occupational Safety and
Health Administration and other state and local agencies that oversee safety
compliance could reduce its revenue, profitability and
liquidity.
The
Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes
certain employer responsibilities, including maintenance of a workplace free
of
recognized hazards likely to cause death or serious injury, compliance with
standards promulgated by the Occupational Safety and Health Administration
and
various record keeping, disclosure and procedural requirements. Various
standards, including standards for notices of hazards, safety in excavation
and
demolition work, may apply to TSS/Vortech’s operations. TSS/Vortech has
incurred, and will continue to incur, capital and operating expenditures and
other costs in the ordinary course of its business in complying with OSHA and
other state and local laws and regulations.
TSS/Vortech
is dependent upon key personnel whose loss may have an adverse impact on
TSS/Vortech’s business.
TSS/Vortech
depends on the expertise, experience and continued services of its senior
management employees, especially Mr. Rosato, its Chief Executive Officer, and
Mr. Gallagher, its President. Messrs. Rosato and Gallagher have acquired
specialized knowledge and skills with respect to TSS/Vortech and its operations
and most decisions concerning the business of TSS/Vortech will be made or
significantly influenced by them. The loss of Mr. Rosato, Mr. Gallagher or
other
senior management employees of TSS/Vortech, or an inability to attract or retain
other key individuals, could materially adversely affect TSS/Vortech’s business.
If Mr. Rosato, Mr. Gallagher or other senior management were to become
unavailable following the acquisition, we could face substantial difficulty
in
hiring qualified successors and could experience a loss in productivity while
any successor obtains the necessary training and experience. TSS/Vortech will
seek to compensate and incentivize key executives, as well as other employees,
through competitive salaries and bonus plans, but there can be no assurance
that
these programs will allow TSS/Vortech to retain key employees or hire new key
employees.
TSS/Vortech’s
quarterly revenue, operating results and profitability will
vary.
TSS/Vortech’s
quarterly revenue, operating results and profitability may fluctuate
significantly and unpredictably in the future. In particular, the changes in
contract mix that we anticipate will occur as TSS/Vortech completes existing
projects for our major customer may affect quarterly results.
Factors
that may contribute to the variability of TSS/Vortech’s quarterly revenue,
operating results or profitability include:
· fluctuations
in revenue earned on contracts;
|
·
|
commencement,
completion and termination of contracts during any particular quarter,
especially contracts relating to TSS/Vortech’s major
customer;
|
|
·
|
declines
in TSS/Vortech’s backlog that are not
replaced;
|
-30-
|
·
|
additions
and departures of key personnel;
|
|
·
|
strategic
decisions by TSS/Vortech and its competitors, such as acquisitions,
divestitures, spin-offs, joint ventures, strategic investments
and changes
in business strategy;
|
|
·
|
contract
mix and the extent of use of subcontractors;
and
|
|
·
|
any
seasonality of TSS/Vortech’s
business.
|
Therefore,
period-to-period comparisons of TSS/Vortech’s operating results may not be a
good indication of TSS/Vortech’s future performance. TSS/Vortech’s quarterly
operating results may not meet the expectations of securities analysts or
investors, which in turn may have an adverse affect on the market price of
our
common stock.
If
TSS/Vortech is unable to engage appropriate subcontractors or if TSS/Vortech’s
subcontractors fail to perform their contractual obligations, its performance
as
a prime contractor and its ability to obtain future business could be materially
and adversely impacted.
TSS/Vortech’s
performance of contracts may involve the issuance of subcontracts to other
companies upon which it relies to perform all or a portion of the work
TSS/Vortech is obligated to deliver to its customers. The inability of
TSS/Vortech to find and engage appropriate subcontractors or a failure by one
or
more of TSS/Vortech’s subcontractors to satisfactorily deliver on a timely basis
the agreed-upon supplies and/or perform the agreed-upon services may materially
and adversely affect its ability to perform its obligations as a prime
contractor.
In
extreme cases, a subcontractor’s performance deficiency could result in the
customer terminating TSS/Vortech’s contract for default. A default termination
could expose us to liability for excess costs of reprocurement by the customer
and have a material adverse effect on TSS/Vortech’s ability to compete for
future contracts and task orders.
If
TSS/Vortech is unable to manage TSS/Vortech’s growth, TSS/Vortech’s business may
be adversely affected.
Sustaining
TSS/Vortech’s growth may place significant demands on TSS/Vortech’s management,
as well as on TSS/Vortech’s administrative, operational and financial resources.
If TSS/Vortech sustains significant growth, TSS/Vortech must improve its
operational, financial and management information systems and expand, motivate
and manage its workforce. If TSS/Vortech is unable to do so, or if new systems
that TSS/Vortech implements to assist in managing any future growth do not
produce the expected benefits, TSS/Vortech’s business, prospects, financial
condition or operating results could be adversely affected.
Risks
Related to Our Capital Structure and Our Experience as a Public
Company
Because
we do not currently intend to pay dividends on our common stock, stockholders
will benefit from an investment in our common stock only if it appreciates
in
value.
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in the operations and
expansion of our business. As a result, we do not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of our
board
of directors and will depend on factors our board of directors deems relevant,
including among others, our results of operations, financial condition and
cash
requirements, business prospects, and the terms of our credit facilities
and
other financing arrangements. Accordingly, realization of a gain on
stockholders’ investments will depend on the appreciation of the price of our
common stock. There is no guarantee that our common stock will appreciate
in
value or even maintain the price at which stockholders purchased their
shares.
-31-
If
our initial stockholders and the selling members exercise their registration
rights, or if our existing warrant holders exercise their warrants or Sunrise
Securities Corp. exercises an option it holds, it may have an adverse effect
on
the market price of our common stock.
Our
initial stockholders are entitled to demand that we register the resale
of their
shares of common stock in certain circumstances. If our initial stockholders
exercise their registration rights with respect to all of their shares
of common
stock, then there will be an additional 1,750,000 shares of common stock
eligible for trading in the public market. We have also granted registration
rights to the selling members, who will receive at least 2,560,744 shares
of our
common stock upon closing of the acquisition pursuant to the purchase
agreement.
In addition, there are outstanding warrants to purchase an aggregate
of
15,600,000 shares of common stock at a price of $5.00 per share and we
have sold
to Sunrise Securities Corp., the representative of the underwriters in
our
initial public offering, an option to purchase up to a total of 700,000
units,
each comprised of one share of our common stock and two warrants. Each
warrant
covered by the unit purchase option granted to Sunrise Securities Corp.
entitles
the holder to purchase one share of our common stock at a price of $6.25
per
share. The purchase option and its underlying securities were registered
in the
registration statement declared effective for our initial public offering
and,
in addition, the option grants to holders demand and “piggy back” registration
rights. The presence of this additional number of shares of common stock
eligible for trading in the public market may have an adverse effect
on the
market price of our common stock.
If
we are unable to maintain a current prospectus relating to the common
stock
underlying our warrants, our warrants may be
worthless.
Our
warrants will be exercisable and we will not be obligated to issue shares
of
common stock unless, at the time a holder seeks to exercise such warrant,
a
prospectus relating to the common stock issuable upon exercise of the
warrant is
current and the common stock has been registered or qualified or deemed
to be
exempt under the securities laws of the state of residence of the holder
of the
warrants. Under the terms of the warrant agreement between Continental
Stock
Transfer & Trust Company, as warrant agent, and us, we have agreed to use
our reasonable best efforts to maintain a current prospectus relating
to the
common stock issuable upon exercise of our warrants until the expiration
of our
warrants. However, we cannot assure warrant holders that we will be able
to do
so. The warrant agreement does not provide that we are required to net-cash
settle the warrants if we are unable to maintain a current prospectus. If
the prospectus relating to the common stock issuable upon exercise of
the
warrants is not current, or if the common stock is not qualified or exempt
from
qualification in the jurisdictions in which the holders of the warrants
reside,
our warrants may not be exercisable before they expire. Thus, our warrants
may
be deprived of any value, the market for our warrants may be limited
or
non-existent and the warrants may expire worthless.
The
warrant agreement governing our warrants permits us to redeem the warrants
after
they become exercisable, and it is possible that we could redeem the
warrants at
a time when a prospectus is not current, resulting in the warrant holder
receiving less than fair value of the warrant or the underlying common
stock.
Under
section 6 of the warrant agreement governing our outstanding warrants,
we have
the right to redeem outstanding warrants, at any time after they become
exercisable and prior to their expiration, at the price of $0.01 per
warrant,
provided that the last sales price of our common stock has been at least
$8.50
per share on each of 20 trading days within any 30 trading day period
ending on
the third business day prior to the date on which notice of redemption
is
given. Section 6 of the warrant agreement does not require, as a condition
to giving notice of redemption, that we have in effect a current prospectus
relating to the common stock issuable upon exercise of our warrants. Thus,
it is possible that we could issue a notice of redemption of the warrants
at a
time when holders of our warrants were unable to exercise their warrants
and
thereafter immediately resell the underlying common stock under a current
prospectus. Under such circumstances, rather than face redemption at
a nominal
price per warrant, warrant holders could be forced to sell the warrants
or the
underlying common stock for less than fair value.
Our
securities are quoted on the Over-the-Counter Bulletin Board, a NASD-sponsored
and operated inter-dealer automated quotation system for equity securities
not
included in any stock exchange. Quotation of our securities on the
Over-the-Counter Bulletin Board will limit the liquidity and price of our
securities more than if our securities were quoted or listed on Nasdaq. Although
we intend to apply for listing of our common stock on Nasdaq, we cannot assure
you that we will satisfy the applicable listing requirements.
-32-
Under
Delaware law, our dissolution requires the approval of the holders of a majority
of our outstanding stock, without which we will not be able to dissolve and
liquidate and distribute our assets to our public
stockholders.
Pursuant
to Delaware law, our dissolution requires the affirmative vote of stockholders
owning a majority of our then outstanding common stock. Soliciting the
vote of
our stockholders will require the preparation of preliminary and definitive
proxy statements, which will need to be filed with the Securities and Exchange
Commission and could be subject to their review. This process could take
a
substantial amount of time, ranging from 40 days to several months.
As
a
result, the distribution of our assets to the public stockholders could
be
subject to a considerable delay. Furthermore, we may need to postpone the
stockholders’ meeting, resolicit our stockholders or amend our plan of
dissolution and liquidation to obtain the required stockholder approval,
all of
which would further delay the distribution of our assets and result in
increased
costs. If we are not able to obtain approval from a majority of our
stockholders, we will not be able to dissolve and liquidate and we will
not be
able to distribute funds from our trust account to holders of our common
stock
sold in our initial public offering and these funds will not be available
for
any other corporate purpose. In the event we seek stockholder approval
for a
plan of dissolution and liquidation and do not obtain such approval, we
will
nonetheless continue to pursue stockholder approval for our dissolution.
However, we cannot predict whether our stockholders will approve our dissolution
in a timely manner or will ever approve our dissolution. As a result, we
cannot
provide our initial stockholders with assurances of a specific timeframe
for the
dissolution and distribution.
Our
stockholders may be held liable for claims by third parties against us
to the
extent of distributions received by them.
Under
the
Delaware General Corporation Law, stockholders may be held liable for claims
by
third parties against a corporation to the extent of distributions received
by
them in a dissolution. If we complied with certain procedures set forth
in
Section 280 of the Delaware General Corporation Law intended to ensure
that we
make reasonable provision for all claims against us, including a 60-day
notice
period during which any third-party claims can be brought against us, a
90-day
period during which we may reject any claims brought, and an additional
150-day
waiting period before any liquidating distributions are made to stockholders,
any liability of a stockholder with respect to a liquidating distribution
would
be limited to the lesser of such stockholder’s pro rata share of the claim or
the amount distributed to the stockholder, and any liability of the stockholder
would be barred after the third anniversary of the dissolution. However,
it is
our intention to make liquidating distributions to our stockholders as
soon as
reasonably possible after dissolution and, therefore, we do not intend
to comply
with those procedures. As such, our stockholders could potentially be liable
for
any claims to the extent of distributions received by them in a dissolution
and
any such liability of our stockholders will likely extend beyond the third
anniversary of such dissolution. Accordingly, we cannot assure you that
third
parties will not seek to recover from our public stockholders amounts owed
to
them by us.
If
third parties bring claims against us, the proceeds held in the trust account
could be reduced and the per share liquidation price received by stockholders
could be less than the $5.65 per share available at September 30,
2006.
Our
placing of funds in the trust account may not protect those funds from
third
party claims against us. Pursuant to Sections 280 and 281 of the Delaware
General Corporation Law, upon our dissolution we will be required to adopt
a
plan that will provide for our payment, based on facts known to us at such
time,
of all existing claims, all pending claims and all claims that may be
potentially brought against us within the subsequent 10 years. Although
we
intend to pay those amounts from our funds not held in trust, we cannot
assure
you those funds will be sufficient to cover such claims and obligations.
Although we have sought to have vendors, prospective target businesses
or other
entities with which we do business execute valid and enforceable agreements
waiving any right, title, interest or claim of any kind in or to any monies
held
in the trust account for the benefit of our public stockholders, not all
have
executed such agreements. Those parties who have not entered into such
agreements may have claims they will attempt to assert, and those who have
may
claim that the waiver is unenforceable or assert claims based on fraudulent
inducement, breach of fiduciary responsibility or other similar
claims.
-33-
As
of
June 30, 2006, we had liabilities of approximately $574,000. Creditors
with
claims in the amount of approximately $37,000 have executed agreements
with us
waiving their rights, if any, to any funds held in the trust account. We
have not received a waiver letter from Continental Stock Transfer and Trust
Company, our escrow agent and warrant agent, the State of Delaware and
certain
miscellaneous service providers, with aggregate claims in the amount of
approximately $6,000. As a result of obtaining the waiver letters, we believe
the claims that could be made against the trust account are limited. To
the
extent that creditors, even those who have executed a waiver of claims
against
the trust account, or TSS/Vortech bring a claim and attempt to have it
satisfied
out of the trust account, the proceeds available to our stockholders from
the
trust account could be reduced.
Messrs.
McMillen and Weiss have agreed, pursuant to an agreement with us and Sunrise
Securities Corp., the representative of the underwriters of our initial
public
offering, that, if we liquidate prior to the consummation of a business
combination, they may be personally liable to ensure that the proceeds
of the
trust account are not reduced by the claims of vendors or other entities
that
are owed money by us for services rendered or products sold to us or the
claims
of prospective target businesses. We cannot assure you, however, that they
will
be able to satisfy those obligations.
Additionally,
if we are forced to file a bankruptcy case or an involuntary bankruptcy
case is
filed against us which is not dismissed, the proceeds held in the trust
account
could be subject to applicable bankruptcy law, and may be included in our
bankruptcy estate and subject to the claims of third parties with priority
over
the claims of our stockholders. To the extent any bankruptcy claims deplete
the
trust account, we cannot assure you we will be able to return to our public
stockholders the $5.65 per share available at September 30, 2006.
Our
working capital will be reduced if FAAC stockholders exercise their right
to
convert their shares into cash. This would reduce our cash reserve after
the
acquisition.
Pursuant
to our certificate of incorporation, holders of shares issued in our initial
public offering may vote against the merger and demand that we convert
their
shares into a pro rata share of the trust account where a substantial portion
of
the net proceeds of the initial public offering are held. We and TSS/Vortech
will not consummate the acquisition if holders of 1,560,000 or more shares
of
common stock issued in our initial public offering exercise these conversion
rights. To the extent the acquisition is consummated and holders have demanded
to so convert their shares, there will be a corresponding reduction in
the
amount of funds available to the combined company following the acquisition.
As
of ___________, 2006, the record date, assuming the acquisition proposal
is
adopted, the maximum amount of funds that could be disbursed to our stockholders
upon the exercise of their conversion rights is approximately $___________,
or
approximately 20% of the funds then held in the trust account. Any payment
upon
exercise of conversion rights will reduce our cash after the acquisition,
which
may limit our ability to implement our business plan.
We
have not had operations, and TSS/Vortech has never operated as a public company.
Fulfilling our obligations incident to being a public company after acquiring
TSS/Vortech will be expensive and time consuming.
Both
we,
as a company without operations, and TSS/Vortech, as a private company, have
maintained relatively small finance and accounting staffs. Neither we nor
TSS/Vortech currently has an internal audit group. Although we have maintained
disclosure controls and procedures and internal control over financial reporting
as required under the federal securities laws with respect to our very limited
activities, we have not been required to maintain and establish such disclosure
controls and procedures and internal control as will be required with respect
to
a business such as TSS/Vortech with substantial operations. Under the
Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC,
as
well as the rules of NASDAQ, we will need to implement additional corporate
governance practices and adhere to a variety of reporting requirements and
complex accounting rules. Compliance with these obligations will require
significant management time, place significant additional demands on our finance
and accounting staff and on our financial, accounting and information systems,
and increase our insurance, legal and financial compliance costs.
We
also
need to hire a chief financial officer and may need to hire additional
accounting and financial staff with appropriate public company experience and
technical accounting knowledge.
-34-
Section
404 of the Sarbanes-Oxley Act of 2002 will require
us to document and test our internal controls over financial reporting for
fiscal 2007 and beyond and will require an independent registered public
accounting firm to report on our assessment as to the effectiveness of these
controls. Any delays or difficulty in satisfying these requirements could
adversely affect our future results of operations and our stock
price.
Section
404 of the Sarbanes-Oxley Act of 2002 will require us to document and test
the
effectiveness of our internal controls over financial reporting in accordance
with an established internal control framework and to report on our conclusion
as to the effectiveness of our internal controls. It will also require an
independent registered public accounting firm to test our internal controls
over
financial reporting and report on the effectiveness of such controls for our
fiscal year ending December 31, 2007 and subsequent years. An independent
registered public accounting firm will also be required to test, evaluate and
report on the completeness of our assessment. It may cost us more than we expect
to comply with these control- and procedure-related requirements.
We
may in
the future discover areas of our internal controls that need improvement,
particularly with respect to TSS/Vortech or other businesses that we may acquire
in the future. We cannot be certain that any remedial measures we take will
ensure that we implement and maintain adequate internal controls over our
financial processes and reporting in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their
implementation could harm our operating results or cause us to fail to meet
our
reporting obligations. If we are unable to conclude that we have effective
internal controls over financial reporting, or if our independent auditors
are
unable to provide us with an unqualified report regarding the effectiveness
of
our internal controls over financial reporting as of December 31, 2007 and
in
future periods as required by Section 404, investors could lose confidence
in
the reliability of our financial statements, which could result in a decrease
in
the value of our common stock. Failure to comply with Section 404 could
potentially subject us to sanctions or investigations by the SEC, NASDAQ or
other regulatory authorities.
-35-
THE
SPECIAL MEETING
The
Special Meeting
We
are
furnishing this document to you as part of the solicitation of proxies by our
board of directors for use at the special meeting, and at any adjournment or
postponement thereof, called to consider and vote upon our acquisition of
TSS/Vortech and other proposals. This document provides you with the information
you need to know to be able to vote or instruct your vote to be cast at the
special meeting.
Date,
Time and Place
We
will
hold the special meeting at 10:00 a.m., Eastern Time, on __________ __, 2006,
at
the offices of Squire, Sanders & Dempsey L.L.P. located at 8000 Towers
Crescent Drive, 14th
Floor,
Tysons Corner, Virginia 22182.
Purpose
of the Special Meeting
At
the
special meeting, we are asking holders of our common stock to
approve:
|
·
|
the
acquisition pursuant to the purchase agreement and the other transactions
contemplated by the purchase
agreement;
|
|
·
|
the
amendment removing certain provisions only applicable to us prior
to our
completion of a business
combination;
|
|
·
|
the
incentive compensation plan;
|
|
·
|
the
election of David J. Mitchell to our board of directors;
and
|
|
·
|
a
proposal to adjourn the special meeting to solicit additional
proxies.
|
Board of Directors Recommendation
Our
board
of directors unanimously recommends:
| · |
that
our common stockholders vote “FOR” the approval of the acquisition
pursuant to the purchase agreement and the other transactions contemplated
by the purchase agreement;
|
|
·
|
that
our common stockholders vote “FOR” the approval of the
amendment;
|
|
·
|
that
our common stockholders vote “FOR” the approval of the incentive
compensation plan;
|
|
·
|
that
our common stockholders vote “FOR” the election of David J. Mitchell to
our board of directors; and
|
|
·
|
that
our common stockholders vote “FOR” the proposal to adjourn the special
meeting to solicit additional
proxies.
|
Adoption
by our stockholders of the acquisition is not conditioned on the adoption of
the
amendment proposal, the incentive compensation plan proposal, the nomination
proposal or the adjournment proposal.
Record
Date; Who is Entitled to Vote
The
record date for the special meeting is __________ __, 2006. Record holders
of
our common stock at the close of business on the record date are entitled to
vote or have their votes cast at the special meeting. On the record date, there
were __________ shares of our common stock outstanding.
-36-
Quorum
The
presence, in person or by proxy, of a majority of all the outstanding shares
of
common stock entitled to vote constitutes a quorum at the special
meeting.
Voting
Your Shares
Each
share of our common stock that you own in your name entitles you to one vote.
Your proxy card shows the number of shares of our common stock that you
own.
There
are
two ways to vote your shares of common stock at the special
meeting:
|
·
|
You
can vote by signing and returning the enclosed proxy card. If you
vote by
proxy card, your “proxy,” whose name is listed on the proxy card, will
vote your shares as you instruct on the proxy card. If you abstain
by
returning a proxy and not instructing how your shares should be
voted by
proxy on the acquisition, or if your shares are held in street
name and
you do not instruct your broker or bank how to vote, your shares
will not
be counted as being voted either “for” or “against” approval of the
acquisition, and you will not have the right to convert your shares
into a
pro rata portion of the trust account. Further, such a failure
to vote or
to instruct your broker or bank how to vote your shares will have
the same
effect as voting “against” the amendment. However, if you sign and return
the proxy card but do not give instructions on how to vote your
shares,
your shares will be voted as recommended by our board of directors
“FOR”
the incentive compensation plan, the nomination and the adjournment
proposal.
|
|
·
|
You
can attend the special meeting and vote in person. We will give
you a
ballot when you arrive. However, if your shares are held in the
name of
your broker, bank or another nominee, you must obtain a proxy from
the
broker, bank or other nominee. That is the only way we can be sure
that
the broker, bank or nominee has not already voted your
shares.
|
Our
issued and outstanding warrants do not have voting rights and record holders
of
our warrants will not be entitled to vote at the special meeting.
Who
Can Answer Your Questions About Voting Your Shares
If
you
have questions, you may call Advantage Proxy at (800) 238-3410, ext.
34.
No
Additional Matters May Be Presented at the Special Meeting
This
special meeting has been called only to consider the approval of the acquisition
pursuant to the purchase agreement, the amendment, the incentive compensation
plan, the nomination and the adjournment proposal. Under our by-laws, other
than
procedural matters incident to the conduct of the meeting, no other matters
may
be considered at the special meeting, if they are not included in the notice
of
the meeting.
In
addition, representatives of our accountants are not expected to be present
at
the special meeting and accordingly will not make any statement or be available
to respond to any questions.
Revoking
Your Proxy
If
you
give a proxy, you may revoke it at any time before it is exercised by doing
any
one of the following:
|
·
|
You
may send another proxy card with a later
date;
|
|
·
|
You
may notify Mr. Weiss, our Secretary, in writing before the special
meeting
that you have revoked your proxy;
or
|
-37-
|
·
|
You
may attend the special meeting, revoke your proxy, and vote in
person.
|
Vote
Required to Approve the Acquisition
The
acquisition does not require stockholder approval under Delaware law. However,
under our Amended and Restated Certificate of Incorporation, the acquisition
must be approved by a majority of the votes cast at the special meeting, in
person or by proxy, in respect of shares of our common stock issued in our
initial public offering. Thus, votes in respect of shares issued other than
in
the public offering are not counted for this purpose. None of our directors
or
officers purchased shares in our initial public offering or in the
aftermarket.
As
described below under “Abstentions and Broker Non-Votes,” if you fail to appear
at all at the special meeting, in person or by proxy, or if you abstain from
voting, either in person or by proxy voting instruction, your shares will not
be
counted as voting either “for” or “against” the acquisition and will not
constitute a demand for conversion of your shares into a pro rata portion of
the
trust account.
If
your
shares of common stock are held in your bank or broker’s name, you must instruct
your bank or broker how to vote on the acquisition. If you do not give your
broker voting instructions and the broker does not vote your shares, this is
referred to as a “broker non-vote.” Broker non-voting shall be treated as shares
not entitled to vote at the special meeting, and, therefore, shall have no
impact on the approval of the acquisition.
Approval
of the acquisition is not conditioned upon the adoption of the amendment
proposal, the incentive compensation plan proposal, the nomination proposal
and/or the adjournment proposal.
In
addition to the voting requirements described above, if the public stockholders
holding 20% or more of the total number of shares of common stock issued in
our
initial public offering (1,560,000 or more of such shares) demand conversion
of
their shares into their pro rata portion of the trust account, we will not
consummate the acquisition.
No
vote
of the warrant holders is necessary to adopt the acquisition proposal, and
we
are not asking the warrant holders to vote on the acquisition. At the close
of
business on June 30, 2006, there were 9,550,000 shares of our common stock
outstanding, 7,800,000 of which were issued in our initial public
offering.
Conversion
Rights
As
provided in our Amended and Restated Certificate of Incorporation, a public
stockholder who votes against the acquisition may demand that we convert
his or
her shares into cash. This demand must be made on the proxy card at the same
time that the public stockholder votes against the acquisition. If so demanded,
we will convert each share of common stock owned by such stockholder into
a pro
rata portion of the trust account in which $43,964,000 million of the net
proceeds of our initial public offering is held, plus interest earned thereon.
Based on the amount of cash held in the trust account at September 30, 2006,
we
estimate that you will be entitled to convert each share of common stock
that
you hold into approximately $5.65. If you exercise your conversion rights,
then
you will be exchanging your shares of our common stock for cash and will
no
longer own these shares. You will only be entitled to receive cash for these
shares if you continue to hold these shares through the closing date of the
acquisition and then tender your stock certificate. If the acquisition is
not
completed, then these shares will not be converted into cash.
The
acquisition will not be consummated if public stockholders owning 20% or more
of
the total number of the shares issued in our initial public offering (1,560,000
or more of such shares) exercise their conversion rights.
Prior
to
exercising conversion rights, public stockholders should verify the market
price
of our common stock as they may receive higher proceeds from the sale of
their
common stock in the public market than from exercising their conversion rights.
Our shares of common stock are listed on the OTCBB under the symbol
FAAC.
-38-
Voting
Requirement for the Amendment
The
amendment proposal must be approved by the affirmative vote of the majority
of
shares of our common stock outstanding on the record date. No vote of the
warrant holders is necessary to adopt the amendment proposal, and we are
not
asking the warrant holders to vote on the amendment proposal. Adoption of
the
amendment proposal is conditioned upon the adoption of the acquisition proposal,
and if the acquisition is not approved, then the amendment proposal will
not be
presented for approval.
Voting
Requirement for the Incentive Compensation Proposal
The
incentive compensation plan proposal must be approved by the affirmative
vote of
the majority of shares of our common stock present in person or represented
by
proxy at the special meeting and entitled to vote on the incentive compensation
plan proposal. No vote of the warrant holders is necessary to adopt the
incentive compensation plan proposal, and we are not asking the warrant holders
to vote on the incentive compensation plan proposal. Adoption of the incentive
compensation plan proposal is conditioned upon the adoption of the acquisition
proposal, and if the acquisition is not approved, then the incentive
compensation plan proposal will not be presented for approval.
Voting
Requirement for the Nomination
To
be
elected to our board of directors, a nominee must receive the affirmation
vote
of a plurality of the shares of our common stock present in person or
represented by proxy at the special meeting and entitled to vote on the election
of directors. Adoption of the nomination proposal is not conditioned upon
the
adoption of the acquisition proposal.
Voting
Requirement for the Adjournment
The
adjournment proposal must be approved by the affirmative vote of the majority
of
shares of our common stock present in person or represented by proxy at the
special meeting and entitled to vote on the adjournment proposal. No vote
of the
warrant holders is necessary to adopt the adjournment proposal, and we are
not
asking the warrant holders to vote on the adjournment proposal. Adoption
of the
adjournment proposal is not conditioned upon the adoption of the acquisition
proposal.
Failures
to Vote, Abstentions and Broker Non-Votes
With
respect to the acquisition, if you are not present at the meeting, either
by not
appearing in person or failing to return a proxy, or if you abstain from
voting
by appearing in person and not voting or by returning a proxy and failing
to
instruct how your shares should be voted by proxy, your shares will not be
counted as voting either “for” or “against” the acquisition and will not
constitute a demand for conversion of your shares into a pro rata portion
of the
trust account. A failure to be present in person or by proxy, or an abstention,
will have the same effect as a vote “against” the approval of the amendment,
which must be approved by a majority of our outstanding shares. Personally
appearing at the meeting and failing to vote will have the same effect as
a vote
“against” the incentive compensation plan and the adjournment proposals, which
must be approved by a majority of the shares present at the meeting in person
or
by proxy. Neither a failure to vote nor an abstention will have an effect
on the
nomination.
Please
note that if you sign and return a proxy card but do not give instructions
on
how to vote your shares, your shares will be voted as recommended by our
board
of directors “FOR” the amendment, the incentive compensation plan, the
nomination and the adjournment proposal, but will not be voted at all on
the
acquisition proposal.
If
your
broker holds your shares in its name and you do not give the broker voting
instructions, your broker may not vote your shares. If you do not give your
broker voting instructions and the broker does not vote your shares, this
is
referred to as a “broker non-vote.” Broker non-voting shall be treated as shares
either not voted, or not entitled to vote, at the special meeting, and,
therefore, will have no impact on the approval of the acquisition, the incentive
compensation plan, the nomination or the adjournment proposal. However, a
broker
non-vote will have the same effect as a vote “against” the
amendment.
-39-
To
exercise your conversion rights, you must not only vote against the acquisition
but also affirmatively elect to convert your shares by checking the appropriate
box, or directing your broker to check the appropriate box, on the proxy
card
and ensure that the proxy card is delivered prior to the special
meeting.
Solicitation
Costs
We
will
bear all expenses incurred in connection with the solicitation of proxies.
We
will, upon request, reimburse brokerage firms and other nominee holders
for
their reasonable expenses incurred in forwarding the proxy solicitation
materials to the beneficial owners of our shares of common stock. Our officers
and directors may solicit proxies by mail, personal contact, letter, telephone,
facsimile or other electronic means. While our officers and directors will
not
receive any additional compensation for those activities, they may be reimbursed
for their out-pocket-expenses. In addition, we have retained Advantage
Proxy to
aid in the solicitation of proxies. Advantage Proxy will receive a fee
of
approximately $7,500, as well as reimbursement for certain costs and
out-of-pocket expenses incurred by them in connection with their services,
all
of which will be paid by us.
Stock
Ownership
At
the
close of business on the record date, Messrs. McMillen, Weiss, Mitchell
and
Nickles, who collectively comprise all of our directors and executive officers,
and Mr. Asa Hutchinson, together with their affiliates, beneficially owned
and
were entitled to vote 1,700,000 shares of our common stock, or approximately
17.8% of the outstanding shares of our common stock. Such number does not
include 600,000 shares of common stock issuable upon exercise of warrants
held
by our directors, affiliates and executive officers. As of September 30,
2006,
these shares and warrants had a market value of approximately $9,582,000.
All of
our initial stockholders have agreed to vote their shares of common stock
in
accordance with the vote of the majority of the shares of common stock
voted by
our public stockholders. For more information on beneficial ownership of
our
common stock by executive officers, directors and 5% stockholders, see
“Beneficial Ownership of Securities” on page ____.
-40-
APPROVAL
OF THE ACQUISITION AND THE OTHER TRANSACTIONS CONTEMPLATED
BY
THE PURCHASE AGREEMENT
The
following describes the acquisition and the principal terms of the membership
interest purchase agreement, and is subject to, and qualified in its entirety
by
reference to, the membership interest purchase agreement. A copy of the
membership interest purchase agreement is attached as Annex A to this proxy
statement and is incorporated into this proxy statement by
reference.
It
is
possible that, prior to the closing of the acquisition, it may become necessary
to amend the membership interest purchase agreement or related agreements
in
respects that our board of directors deems immaterial. Approval of this proposal
will authorize our board of directors to proceed with the acquisition with
such
amendments. In the event it becomes necessary to amend the membership interest
purchase agreement or related agreements in respects that our board of directors
deems material, we will make public disclosure of such amendments prior to
the
stockholder vote on this proposal. The nature of the disclosure will be
determined based on the facts and circumstances surrounding any such amendment
to the purchase agreement, which is not currently contemplated. Such disclosure
could, for example, take the form of the issuance of a press release and
the
filing of a Form 8-K, or a direct mailing to stockholders.
Our
board
of directors reserves the right to determine, in its sole discretion, not
to
consummate the acquisition even if this proposal is approved by our
stockholders.
General
Description of the Acquisition
On
June
5, 2006, we entered into the membership interest purchase agreement with
VTC,
Vortech, the holders of all of the membership interests of VTC and Vortech
and
Thomas P. Rosato, as members’ representative, on June 26, 2006, we and each of
the other parties entered into an amended and restated membership interest
purchase agreement, and on July 31, 2006 we and each of the other parties
entered into a second amended an restated membership interest purchase agreement
(the “purchase agreement”). Upon completion of the acquisition, we will own all
of the membership interests of VTC and Vortech. Since VTC and Vortech and
all of
their respective members have approved and executed the second amended and
restated membership interest purchase agreement, no further action needs
be
taken by VTC’s and Vortech’s members to approve the acquisition.
Background
of the Acquisition
The
terms
of the purchase agreement are the result of arm-lengths negotiations between
representatives of FAAC and VTC/Vortech. The following is a brief discussion
of
the background of these negotiations, the purchase agreement and related
transactions.
FAAC
was
formed on December 20, 2004 to effect a merger, capital stock exchange,
asset
acquisition or other similar business combination with an operating business.
FAAC completed its initial public offering, or IPO, on July 20, 2005. In
addition, on August 24, 2005, the underwriters for the IPO exercised their
over-allotment option, and together with the IPO raised net proceeds of
$43.2
million. Of these net proceeds, $42.0 million was placed in a trust
account immediately following the IPO and, in accordance with FAAC’s certificate
of incorporation, will be released either upon the consummation of a business
combination or upon the liquidation of FAAC. FAAC must liquidate unless
it has
consummated a business combination by January 20, 2007. As of September
30,
2006, approximately $44.1 million was held in deposit in the trust
account.
We
had
not, prior to the effectiveness of our registration statement, selected
any
acquisition target or contacted, directly or indirectly, any agents of
any
targets. Promptly following the IPO, we contacted several investment bankers,
private equity firms, consulting firms, legal and accounting firms, as
well as
numerous other business relationships. We also engaged Focus Enterprises,
Inc.,
an investment bank, to extend our search capabilities and to provide certain
financial advisory services. Through these efforts, we identified and reviewed
information with respect to approximately 45 target companies. None of
FAAC,
TSS/Vortech or their respective officers, directors, insiders or material
equity
owners is affiliated with Focus Enterprises, Inc.
-41-
In
our
search, we primarily sought target companies and transactions in the homeland
security industry and with at least some of the following
characteristics:
|
·
|
experienced
management willing to remain with the company post-acquisition
and accept
a significant portion of the purchase consideration in shares of
our
common stock;
|
|
·
|
currently
profitable and not reliant for profits upon speculative business
plans;
|
|
·
|
total
purchase consideration representing a multiple of five to eight
times
trailing twelve months adjusted
EBITDA;
|
|
·
|
cash
requirements for the acquisition leave significant cash post-closing
for
operations and additional
acquisitions;
|
|
·
|
target’s
business centered around critical infrastructure protection, a
key and
well funded homeland security
priority;
|
|
·
|
strong
core competencies;
|
|
·
|
personnel
with securities clearances;
|
|
·
|
target’s
business has significant information technology aspects, allowing
us to
use Mr. Weiss’ substantial experience in this area for the benefit of the
business after the acquisition;
|
|
·
|
fragmented
market with good consolidation
opportunities;
|
|
·
|
location
in mainland U.S., ideally close to Washington, D.C.;
and
|
|
·
|
business
has chemical, biological, radiological and nuclear (or CBRNE)
ramifications.
|
The
above
characteristics were based on the criteria assembled in connection with
our
initial public offering but were refined and further developed by Messrs.
McMillen and Weiss in the several week period following our initial public
offering. The above characteristics reflect, in part, the outcome of discussions
by Messrs. McMillen and Weiss with investment bankers, consulting firms
and
other professional service providers and business contacts regarding our
search.
By
January 2006, we had entered into substantial discussions with several
companies, including the type and amount of consideration to be provided
relative to a potential transaction. Five of these companies were provided
with
a preliminary letter of intent or term sheet. After evaluation, none of these
opportunities proved to be satisfactory candidates for an acquisition, primarily
due to one or more of the following concerns: the company’s EBITDA was too low;
the purchase price sought was too high as a multiple of adjusted EBITDA;
the
purchase consideration sought included too much cash; the company’s industry did
not provide adequate consolidation opportunities; and company’s business lacked
significant information technology components.
In
January 2006, FAAC was introduced to TSS/Vortech by Mr. Carl Sardegna,
a member
of the Board of Advisors of Evergreen Capital LLC (“Evergreen”), a consulting
firm that had provided financial and consulting services to TSS/Vortech
for the
preceding three years. Prior to this introduction, none of our directors
or
officers were familiar with TSS/Vortech. On January 13, Mr. McMillen, our
chairman, Mr. Sardegna, and Mr. Richard Kohr, Jr., President of Evergreen,
participated in a conference call to generally discuss the acquisition
strategy
of FAAC and provide background on TSS/Vortech. On January 16, 2006, a mutual
nondisclosure agreement was executed. On January 26, we received a confidential
executive summary prepared by TSS/Vortech. On January 31, Messrs. McMillen
and
Weiss met in Evergreen’s offices with Mr. Thomas Rosato, Chairman of TSS, and
Mr. Gerard Gallagher, CEO and President of TSS. Mr. Kohr and Messrs. Phil
Gelso
and Patrick Huddie, Managing Directors of Evergreen, participated in the
meeting
as well. Both FAAC and TSS described their respective companies and answered
questions for each party. Following the meeting, Messrs. McMillen and Weiss
had
several telephone calls with Mr. Rosato and Mr. Kohr during which they
gave an
oral indication of interest in TSS/Vortech.
On
February 6, Messrs. McMillen and Weiss, Sheldon Goldman, Senior Managing
Director of Goldman Advisors (Goldman), and Messrs. Rosato and Gallagher
held a
dinner meeting. Goldman Advisors is a division of Sunrise Securities Corp.,
the
lead underwriter for our IPO. During this meeting, Messrs. Rosato and Gallagher
described TSS/Vortech’s business and provided additional information regarding
TSS/Vortech and its prospect as well as discussing other related affiliates
controlled by Messrs. Rosato and Gallagher. Messrs. McMillen, Weiss and Sheldon
asked numerous questions regarding the business. FAAC and TSS/Vortech also
discussed the valuation parameters of a potential transaction, entities to
be
included in a transaction and the type of consideration to be
offered.
-42-
On
February 13, Messrs. McMillen and Weiss met with Messrs. Rosato and Gallagher
at
TSS/Vortech’s headquarters in Beltsville, Maryland to review the parameters of a
possible transaction and continued their discussions regarding TSS/Vortech’s
prospects as well as its related affiliates. Subsequent to this meeting,
on
February 17, FAAC sent a preliminary letter of intent to Messrs. Rosato
and
Gallagher proposing the purchase of the equity interests of VTC, L.L.C.
and
Vortech, LLC and, in addition, CTS LLC and S3 Integration LLC, each of
which is
majority owned by and/or substantially controlled by Messrs. Rosato and
Gallagher. This preliminary letter of intent proposed total consideration
of
$52,000,000, comprised primarily of $8,000,000 in cash and shares of our
common
stock.
On
February 20, Messrs. McMillen, Weiss and Mr. Nickles, our director, met with
Messrs. Rosato and Gallagher to brief Mr. Nickles on TSS/Vortech’s business. On
February 24, Mr. Weiss and Mr. Rosato had a telephonic conversation whereby
Mr.
Rosato indicated to Mr. Weiss that TSS/Vortech was going to accept a competing
offer for the business.
On
February 27, Messrs McMillen, Weiss, Rosato, Gallagher and Kohr met to
review a
revision of the preliminary letter of intent. A revised preliminary letter
of
intent was submitted to Messrs. Rosato and Gallagher on February 28, 2006
that
excluded CTS LLC from the proposed transaction, reduced the total purchase
consideration to $40,000,000, increased the cash portion of the transaction
to
$23,000,000 and included a $5,000,000 convertible promissory note. The
balance
of the consideration under the revised preliminary letter of intent was
to
consist primarily of our common stock. We excluded CTS LLC from the proposed
transaction because its business differed significantly from the business
of
TSS/Vortech. The letter of intent also contemplated an earn-out, payable
in
shares of our common stock, of up to $10,000,000 in additional consideration,
subject to forfeiture by each of Messrs. Rosato and Gallagher, respectively,
if
he should cease to be employed by us for any reason other than termination
for
cause. The components of total purchase consideration changed, in part,
because
Messrs. Rosato and Gallagher had indicated that the competing offer included
a
larger cash component than our original offer and that they viewed a larger
cash
component as favorable. In response to the revised preliminary letter of
intent,
Messrs. Rosato and Gallagher informed us that the revised letter of intent
set
forth terms sufficiently attractive for them to continue negotiations in
lieu of
accepting the competing offer.
On
March
1, 2006, we held a telephonic meeting of our board of directors to review
FAAC’s
discussions with TSS/Vortech and its related affiliates and to discuss
our
revised offer. Messrs. McMillen, Weiss, Nickles and Mitchell, constituting
all
of our directors, were present at the meeting. Mr. Hutchinson, our special
advisor, and representatives of Goldman Advisors were also present by
invitation. Prior to the meeting, a revised letter of intent as well as
financial, operational and descriptive information about TSS/Vortech was
circulated to each member of our board of directors. During the meeting,
Messrs. McMillen and Weiss described the potential transaction with TSS/Vortech
and its affiliates in detail at this meeting. After the meeting, on March
1,
2006, we entered into a letter of intent with TSS/Vortech. The executed
letter
of intent provided that we would acquire the equity interests of VTC, L.L.C.
and
Vortech, LLC for total consideration of $38,500,000, comprised of $19,000,000
in
cash, up to $161,000 in assumed debt, $8,000,000 in convertible debt and
the
balance, up to $11,500,000, in shares of our common stock. The letter of
intent
also contemplated an earn-out, that was, as previously proposed, payable
in
shares of our common stock, of up to $10,000,000 in additional consideration,
subject to forfeiture by each of Messrs. Rosato and Gallagher, respectively,
if
he should cease to be employed by us for any reason other than termination
for
cause. The letter of intent excluded S3 Integration LLC from the acquisition
because that company was owned only in part by Messrs. Rosato and Gallagher,
and
we and Messrs. Rosato and Gallagher concluded that including the company
in the
acquisition would create undesired negotiating and structuring complications.
Immediately
after the letter of intent was executed, we delivered to TSS/Vortech a due
diligence request list. We also hired Goldman Advisors to assist us with
due
diligence. Our attorneys began to compile and to review the due diligence
materials from TSS/Vortech. Simultaneously, we worked with our counsel to
prepare a first draft of the membership interest purchase agreement. We also
retained Business Valuation Center to render an opinion that the consideration
to be paid in the merger is fair to our stockholders.
-43-
On
March
15 and 16, Messrs. McMillen, Weiss, Goldman and other representatives from
Goldman and our legal counsel spent the two days at TSS/Vortech headquarters
to
continue their due diligence. During those two days, we met with key senior
managers of TSS/Vortech.
At
our
direction, our counsel delivered a first draft of the membership interest
purchase agreement on April 26, 2006. After the delivery of the first draft
of
the membership interest purchase agreement, we were engaged in ongoing
negotiations of the membership interest purchase agreement and related
agreements.
Throughout
our preliminary discussions with the selling members, we continued exploratory
discussions with intermediaries such as investment bankers and business brokers
and potential acquisition targets. However, as the pace of our discussions
with
the selling members quickened, our focus began to narrow on members, with
the
result that the level of our activities with respect to other potential
acquisition candidates decreased.
During
May, we completed additional detailed diligence, including meetings between
Mr.
Weiss and representatives of three major customers of TSS/Vortech. We viewed
these customer meetings as successful because representatives for each
of the
three customers commented favorably on the quality of the business relationship
with TSS/Vortech, the quality of the work that had been and was being delivered,
the ability of TSS/Vortech to meet schedule commitments and the quality
of
TSS/Vortech’s personnel. With the completion of these key elements of the
diligence process, we were prepared to proceed with a definitive acquisition
agreement.
Our
board
of directors met in person (except for one board member, who attended
telephonically) on May 26, 2006 to discuss the proposed acquisition and held
a
telephonic conference on May 30, 2006 during which they voted unanimously
to
approve the acquisition. We completed negotiations with the selling members
on
June 5, 2006 and executed the membership interest purchase agreement and
related
agreements on that date. On June 6, 2006, we publicly announced our agreement
with the companies through a joint press release.
On
June
12, 2006, Messrs. McMillen, Weiss, Rosato and Gallagher met with representatives
of Sunrise Securities Corp. to discuss the acquisition. We discussed the
market
for the services provided by TSS/Vortech, as evidenced by a positive article
in
Business
Week
on June
12, 2006. We then discussed with Messrs. Rosato and Gallagher amending
the terms
of the acquisition to reduce the cash consideration to be paid in exchange
for
increasing other components of the consideration to be paid. The representatives
of Sunrise Securities Corp. stated their belief that such changes would
be
viewed favorably by our stockholders. A conference call was conducted between
June 15, 2006 with the same participants to discuss various alternatives
for
amending the terms of the acquisition. On June 19, 2006, Messrs. McMillen,
Weiss, Rosato, Kohr, Goldman and other representatives of Goldman Advisors
met
in New York and substantially finalized negotiations for amended acquisition
terms. On June 22, 2006, our board of directors met telephonically, received
a
summary of the negotiations from Mr. Weiss and voted unanimously to approve
the
revised terms of the acquisition. We completed negotiations with the selling
members on June 26, 2006 and executed the amended and restated membership
interest purchase agreement on that date. The amended and restated membership
interest purchase agreement decreased the cash component of the purchase
consideration from $19,000,000 to $11,000,000, increased the convertible
debt
from $8,000,000 to $10,000,000, and increased the stock component from
approximately $11,500,000 in shares of our common stock to approximately
$17,500,000 in shares of our common stock. On June 27, 2006, we publicly
announced the amended and restated agreement through a joint press release.
On
July 31, 2006, after further discussions with the selling members, we and
the
other parties to the purchase agreement entered into a second amended and
restated membership interest purchase agreement. The second amended and
restated
membership interest purchase agreement primarily changed the purchase agreement
by removing the earn-out portion of the acquisition consideration, which
had
been conditioned upon continued employment by each selling member, and
adding a
substantially identical bonus provision to the employment agreements to
be
entered into by each of Messrs. Rosato and Gallagher. This change was not
intended to change the economic arrangements of the parties but was motivated
principally by the desire to conform the transaction documentation more
closely
to the underlying economic arrangements.
Factors
Considered by Our Board of Directors in Approving the
Acquisition
In
approving the membership interest purchase agreement, our board of directors,
at
the time comprised of Messrs. McMillen, Weiss, Nickles and Mitchell, relied
on
financial and other information relating to the companies. Our board of
directors considered a wide variety of factors in connection with its evaluation
of the acquisition. In light of the complexity of those factors, our board
of
directors did not consider it practical to, nor did it attempt to, quantify
or
otherwise assign relative weights to the specific factors it considered in
reaching its decision. In addition, individual members of our board of directors
may have given different weight to different factors.
-44-
Our
board
of directors considered the factors below, in addition to the Risk Factors
described starting on page __ above, in reaching its conclusion to approve
the
acquisition and the membership interest purchase agreement.
FAAC’s
management, including members of our board of directors, has long and diverse
experience both in operational management and investment analysis and, in
its
opinion, is suitably qualified to conduct the due diligence and other
investigations and analyses required in connection with FAAC’s search for a
business to acquire. Mr. McMillen, our Chairman, has over 18 years of experience
in finance and mergers and acquisitions and has served as chairman or chief
executive officer of companies in the homeland security industry since 2003.
Mr.
Weiss, our Chief Executive Officer, has over 35 years of experience in the
information technology and security marketplace. More detailed descriptions
of
the experience of Messrs. McMillen and Weiss are included under “Directors and
Executive Officers of Fortress America Acquisition Corporation Following
the
Acquisition”.
In
considering the merger, the FAAC board of directors gave considerable weight
to
the following factors:
TSS/Vortech’s
record of growth and expansion and high potential for future
growth
Criteria
important to FAAC’s board of directors in identifying an acquisition target were
that the company have established business operations, was generating current
revenues, and has what the board believes to be a potential to experience
rapid
growth. FAAC’s board of directors believes that TSS/Vortech has in place the
infrastructure for strong business operations to achieve growth both organically
and through acquisitions. In particular, the board believes that TSS/Vortech’s
recent investments in sales and marketing resources and activities should
allow
TSS/Vortech to increase its revenue without increasing overhead costs
proportionately. The board’s belief in TSS/Vortech’s growth potential is based
on TSS/Vortech’s historical growth rate as well as TSS/Vortech’s customer and
sales activity growth. TSS/Vortech has grown net revenues from $12.3 million
in
2003 to $58.6 million is 2005, an annualized growth rate of 118%. Furthermore,
TSS/Vortech intends to continue its growth both organically and through
additional acquisitions, and FAAC’s significant cash resources could be used for
such purpose. For a description of TSS/Vortech’s post-merger plans for
additional acquisitions, please see the section entitled “Business of
TSS/Vortech-Acquisitions.”
TSS/Vortech
provides a strong homeland security platform
Our
board
of directors believes that TSS/Vortech provides a solid U.S. homeland security
platform focused on protection of the country’s critical infrastructure from
which we can grow both organically and through acquisitions for the following
reasons:
|
·
|
TSS/Vortech’s
business is centered around critical infrastructure protection,
a large,
well funded and growing portion of the homeland security
industry;
|
|
·
|
TSS/Vortech
offers the specialized expertise and experience in designing, building
and
maintaining critical IT infrastructure and systems that companies
and
building owners and managers are increasingly
demanding;
|
|
·
|
TSS/Vortech
has a reputation for quality service and a high customer satisfaction
rate; and
|
|
·
|
TSS/Vortech’s
business has significant information technology aspects, allowing
us to
use Mr. Weiss’ substantial experience in this
area.
|
The
experience of TSS/Vortech’s management
Another
important criteria to FAAC’s board of directors in identifying an acquisition
target was that the company have a seasoned management team with specialized
knowledge of the markets within which it operates and the ability to lead
a
company in a rapidly changing environment. FAAC’s board of directors believes
that TSS/Vortech’s management has significant experience in the mission-critical
facilities industry. Mr. Thomas Rosato and Mr. Gerard Gallagher have more
than 30 years and 25 years, respectively, of experience in the mission-critical
facilities marketplace. More than 15 of its operating managers have over
15
years of working experience with TSS/Vortech, working with Mr. Rosato and
Mr.
Gallagher, or otherwise in the mission-critical facilities
industry.
-45-
Reasonable
Purchase Price
In
approving the membership purchase agreement with TSS/Vortech and the purchase
price contemplated by the agreement, the board of directors relied on its
views
of standards generally accepted by the financial community, such as actual
and
potential sales, earnings, cash flow and book value as reflected in our due
diligence of TSS/Vortech as reflected in the factors discussed above and
below.
In
connection with its deliberations the board considered the EBITDA (earnings
before interest, taxes, depreciation and amortization) of TSS/Vortech as
adjusted to remove from the calculation of EBITDA certain negotiated items
most
of which were either non-recurring or, for other reasons, would not be expected
to be reflected in the performance of TSS/Vortech after the closing of the
acquisition. These calculations suggested that the purchase price of $38.5
million is approximately 5.7 times the 2005 adjusted EBITDA of TSS/Vortech.
Based on the board’s experience, publicly available general information
concerning merger and acquisition multiples, the views of management, and
the
preliminary analysis, discussed below, of Business Valuation Center that,
based on conditions and considerations described in its analysis, the
TSS/Vortech acquisition is fair to FAAC’s stockholders from a financial point of
view, our board of directors believed this multiple was reasonable.
The
board
was aware that adjusted EBITDA is not a completely representative measure
of
either TSS/Vortech’s historical performance or, necessarily, its future
potential. The board of directors was aware that, for example, the calculation
of adjusted EBITDA does not reflect all operating costs that we will incur
following the closing; is different than EBITDA as defined and used by many
other businesses; and will be different from the definition of EBITDA likely
to
be used in our future debt agreements. Thus, adjusted EBITDA is not necessarily
an indicator of comparative value or the level of debt we will be able to
take
on following the closing of the acquisition.
Favorable
industry dynamics
The
board
determined that positive long-term capital spending trends exist in
TSS/Vortech’s markets, such as the growing demand for mission-critical
facilities, in part from companies that previously provided such services
internally, and world events. Based on the growth in demand from the U.S.
government and businesses for mission-critical services, our board of directors
believes that the market in which TSS/Vortech operates is strong and growing.
The U.S. federal government and business demands for mission-critical facilities
has grown and continues to remain at high levels. According to InterUnity
Group,
a market research firm, U.S. government and business mission-critical
information technology will grow from $47.8 billion in 2007 to $84.3 billion
in
2011, for a compound annual growth rate of 15.3%.
Competitive
position and acceptance of its services
TSS/Vortech’s
reputation in its industry and among its customers, as supported by the positive
customer and reference checks reported to the board, and its work on high
profile projects were considered by the board to be favorable factors in
concluding that its competitive position was strong.
High
barriers to entry
Entry
into the mission-critical facilities industry requires a cadre of highly
experienced personnel, which is not readily available to a potential entrant
without the expenditure of significant time and money. In addition to the
requisite experience and technical skill, a substantial portion of these
personnel must also hold security clearances to compete for many homeland
security or other government business. Approximately one-third of TSS/Vortech’s
workforce, including senior management, holds security
clearances.
Regulatory
environment of the industry
The
board
reviewed the regulatory environment of TSS/Vortech’s business and concluded that
no unusually burdensome regulatory requirements were involved and that
TSS/Vortech had satisfactory compliance procedures in place.
-46-
Costs
associated with effecting the business combination
The
board
determined that the costs associated with effecting the merger with TSS/Vortech
would be of the same order of magnitude as would be encountered with most
other
business combinations. A favorable factor was that TSS/Vortech’s financial
statements were audited (in accordance with practices applicable to private
companies) by a reputable and experienced accounting firm and that TSS/Vortech
had satisfactory procedures in place to obtain and prepare the financial
information required for the preparation of the proxy statement.
Potential
negative factors
Our
board
of directors also considered the following potentially negative factors,
among
others, in its deliberations concerning the acquisition:
Potential
changes in the government spending priorities could have an adverse effect
on
TSS/Vortech’s business.
Our
board
of directors considered the fact that changes in the U.S. government’s spending
priorities could adversely affect the business operations of TSS/Vortech.
Among
other things, our board of directors recognizes that the war on terror will
likely receive priority allocations of available government spending during
periods when the U.S. is experiencing significant budget deficits. However,
our
board of directors also believes that the U.S. government has no choice but
to
continue to spend on core mission-critical facility services, and was attracted
to TSS/Vortech because it provides services to intelligence and law enforcement
agencies with opportunities to potentially increase TSS/Vortech’s services to
such agencies.
The
risk that our public stockholders would vote against the acquisition and
exercise their conversion rights.
Our
board
of directors considered the risk that our public stockholders would vote
against
the acquisition and demand conversion their shares of our common stock into
cash
upon consummation of the acquisition, thereby depleting the amount of cash
available to the combined company following the acquisition. Our board of
directors deemed this risk to be no worse with regard to TSS/Vortech than
it
would be for other target companies and believes that TSS/Vortech will still
be
able to achieve growth even if the maximum number of public stockholders
exercised their conversion rights and the combined company received only
80% of
the funds deposited in the trust account.
Certain
of our officers and directors may have different interests in the merger
than
the public stockholders.
Our
board
of directors considered the fact that certain of our officers and directors
may
have interests in the acquisition that are different from, or are in addition
to, the interests of our public stockholders generally, including the matters
described under “Interests of Our Directors and Officers in the Acquisition”
below. However, this fact would exist with respect to the acquisition of
any
target company.
After
deliberation, our board of directors determined that these potentially negative
factors were outweighed by the potential benefits of the acquisition, including
the opportunity for our stockholders to share in TSS/Vortech’s future possible
growth and anticipated profitability.
Satisfaction
of Fair Market Value Requirement
Under
our
underwriting agreement with Sunrise Securities Corp., as the representative
of
the underwriters in our initial public offering, the initial target business
that we acquire must have a fair market value equal to at least 80% of our
net
assets at the time of the acquisition. As of June 30, 2006, our net assets
were approximately $43,757,000. Therefore, the fair market value of our initial
target business must be equal to at least approximately $35,006,000. In
approving the acquisition, our board of directors determined that the fair
market value of the companies exceeds the fair market value requirement.
In
general terms, this determination was based upon our board members’ views of
standards generally accepted by the financial community, such as actual and
potential sales, earnings, cash flow and book value, as reflected in our
due
diligence investigation of the companies and as discussed above. This conclusion
was also based on the preliminary analysis, discussed below, of Business
Valuation Center that, based on conditions and considerations described in
its
analysis, the TSS/Vortech acquisition is fair to FAAC’s stockholders from a
financial point of view.
-47-
If
the
acquisition proposal and the proposal to amend and restate our Amended and
Restated Certificate of Incorporation are adopted, our Certificate of
Incorporation will no longer include any requirements with respect to the
completion of a business combination.
Fairness
Opinion
Prior
to
its approval of the transaction, our board of directors retained Business
Valuation Center, Inc., or BVC, to render an opinion as to whether the
consideration to be paid by FAAC in the acquisition is fair to our stockholders
from a financial point of view. BVC delivered to us on May 24, 2006, its
preliminary analysis that , as of that date and based upon and subject to
the
assumptions, factors, qualifications and limitations set forth in its
preliminary analysis, the consideration to be paid by FAAC in the acquisition
is
fair to our stockholders from a financial point of view. BVC delivered its
opinion on July 31, 2006 in connection with the negotiation and execution
of the
Second Amended and Restated Membership Interest Purchase Agreement that,
subject
to the assumptions, factors, qualifications and limitations set forth in
the
written opinion, the consideration to be paid by FAAC in the acquisition
is fair
to our stockholders from a financial point of view. A copy of BVC’s
opinion is attached to this proxy statement as Annex F and is incorporated
into this proxy statement by reference. The description of the BVC opinion
set
forth below is qualified in its entirety by reference to the full text of
the
BVC opinion and associated valuation analysis set forth in Annex F.
None
of
FAAC, TSS/Vortech or their respective officers, directors, insiders or
material
equity owners is affiliated with BVC.
Valuation
Overview
Based
upon a review of historical and projected financial data for TSS/Vortech
and
certain other qualitative data, BVC used several valuation methodologies
and
analyses to determine ranges of values. BVC used comparable public company,
precedent private company acquisition and discounted cash flow analyses to
determine ranges of values to derive ranges of equity value for TSS/Vortech.
BVC
calculated a fair value of TSS/Vortech as of the valuation date of December
31,
2005 as being reasonably represented in the range of $41.4 million to $58.2
million.
While
BVC
rendered its opinion and provided certain analyses to our board of directors,
BVC was not requested to and did not make any recommendation to our board
of
directors or management as to the specific form or amount of the consideration
to be paid by FAAC in the acquisition, which was determined through negotiations
between FAAC and the selling members. BVC’s written opinion, which was directed
to our board of directors, addresses only the fairness, from a financial
point
of view, of the consideration to be paid by FAAC in the acquisition, does
not
address FAAC’s underlying business decision to participate in the acquisition
and does not constitute a recommendation to any FAAC stockholder as to how
any
stockholder should vote with respect to the acquisition.
In
connection with rendering its opinion, BVC reviewed, among other
things:
|
1.
|
the
companies audited financial statements for the fiscal years ended
December
31, 2005, December 2004 and December
2003;
|
|
2.
|
financial
projections prepared by the companies’
management;
|
-48-
|
3.
|
the
March 1, 2006 letter of intent describing the terms and conditions
of the
acquisition;
|
|
4.
|
the
value range associated with the acquisition consideration to be
paid by
FAAC;
|
|
5.
|
our
public filings with Securities and Exchange Commission (including
our
annual report to stockholders on Form 10-K for the fiscal year
ended
December 31, 2005 and quarterly report to shareholders on Form
10-Q for
the quarter ended March 31, 2006, which our management has identified
as
being the most current financial statements then available) and
certain
publicly available information regarding the trading activity
and
marketplace for our stock;
|
|
6.
|
the
unaudited financial statements of the companies for the first quarter
2006;
|
|
7.
|
the
historical and present financial performance of both FAAC and the
companies;
|
|
8.
|
an
analysis of the project future cash flows of the companies and
related
discounted cash flow models;
|
|
9.
|
a
valuation analysis of public companies which operate in similar
industry
segments to the companies’ and have comparable operating and financial
characteristics;
|
|
10.
|
customer
contract work in process reports prepared by the companies’ management and
related contract backlog
information;
|
|
11.
|
an
analysis prepared by the companies and FAAC reflecting adjustments
to
normalize earnings before interest, taxes, depreciation and amortization
for non-recurring expenses identified in the income statement for
the year
ending December 31, 2005;
|
|
12.
|
results
of in-depth interviews with the officers and senior management
of both
FAAC and the companies regarding, FAAC’s and the companies’ respective
operations, including historical and forecasted financial performance;
and
|
|
13.
|
other
reviews and analyses as BVC deemed appropriate and
necessary.
|
BVC
advised our board of directors that, in evaluating the fairness of the
consideration to be paid by FAAC, BVC performed a variety of financial analyses
with respect to the companies. The following is a summary of the material
analyses contained in the presentation.
Consideration
BVC
assumed for purposes of its analysis that the consideration paid by FAAC
in the
acquisition will be $38.5 million based on the following: a cash payment
of
$11.0 million, the assumption of up to $161,000 of the companies’ debt, FAAC
common stock equal to $17.5 million less the amount of the assumed debt and
the
value of the FAAC stock grant shares (defined as 576,559 shares at an average
share value of $5.46, or $3,148,012), the stock grant shares totaling 576,559
shares of FAAC common stock and which will be designated by the selling members
to be distributed to certain employees of TSS/Vortech as consideration for
the
execution of employment agreements, and two convertible notes aggregating
$10.0
million.
Analysis
of comparables to the Companies
BVC
compared financial information and valuation ratios relating to the companies
to
corresponding data and ratios from five small capitalization publicly traded
companies BVC deemed comparable to the companies. This group was:
· Dycom
Industries, Inc.
|
·
|
MasTec,
Inc.
|
-49-
|
·
|
Stantec,
Inc.
|
|
·
|
The
Goldfield Corporation
|
|
·
|
Wireless
Facilities Inc.
|
BVC
also
compared financial information and valuation ratios relating to the companies
to
corresponding data and ratios from eight large capitalization publicly traded
companies BVC deemed potentially comparable to the companies. This group
was:
|
·
|
Chicago
Bridge & Iron Company
|
|
·
|
Fluor
Corporation
|
|
·
|
Foster
Wheeler Ltd.
|
|
·
|
Jacobs
Engineering Group, Inc.
|
|
·
|
Quanta
Service, Inc.
|
|
·
|
The
Shaw Group, Inc.
|
|
·
|
URS
Corporation
|
|
·
|
Washington
Group International, Inc.
|
No
company utilized in the comparable company comparison analysis is identical
to
the companies. In evaluating the peer groups, BVC made judgments and assumptions
with regard to industry performance, general business, economic, market and
financial conditions and other matters. These other matters may include,
but are
not limited to, the impact of competition on the business of the companies
and
the industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the companies or in the
industry or financial markets in general.
BVC
calculated certain financial ratios of the comparable companies based on
the
most recent publicly available information, including multiples of: (1)
enterprise value, or EV (which is defined as an entity’s market value of equity,
plus the book value of its existing debt and preferred stock, less cash and
cash
equivalents), to revenue; and (2) EV to latest twelve months earnings before
interest, taxes, depreciation and amortization, or EBITDA. BVC calculated
these
multiples for the latest twelve months for which information was publicly
available. A summary of results is shown below:
|
Comparable
Small Public Companies
|
|||||||||||||
|
Low
|
Mean
|
Median
|
High
|
||||||||||
|
Enterprise
value to latest twelve months revenue
|
0.49x
|
0.95x
|
0.84x
|
1.67x
|
|||||||||
|
Enterprise
value to latest twelve months EBITDA
|
4.73x
|
9.05x
|
9.66x
|
11.38x
|
|||||||||
|
Comparable
Large Public Companies
|
|||||||||||||
|
Low
|
Mean
|
Median
|
High
|
||||||||||
|
Enterprise
value to latest twelve months revenue
|
0.42x
|
0.71x
|
0.61x
|
1.28x
|
|||||||||
|
Enterprise
value to latest twelve months EBITDA
|
13.49x
|
16.05x
|
15.03x
|
26.439x
|
|||||||||
For
its
analysis of the companies, BVC derived EV indications by applying selected
revenue and EBITDA multiples to estimated operating results provided by the
companies and FAAC management for the twelve month period ended December
31,
2005. Based on the above, the resulting indication of equity value (EV as
adjusted for cash of $1,737,075 and debt of $233,460) was approximately $45.0
million using the applicable small public company EV ratios and approximately
$53.9 million using the applicable large public company EV ratios.
-50-
Precedent
Merger and Acquisition Analysis
BVC
reviewed eleven merger and acquisition transactions that it deemed comparable
to
the acquisition. It selected these transactions by searching SEC filings,
public
company disclosures, press releases, industry and popular press reports,
databases and other sources and by applying the following criteria:
|
·
|
transactions
involving private companies with primary SIC codes similar to that
of the
companies;
|
|
·
|
transactions
involving private companies comparable to the companies that are
identified above; and
|
|
·
|
transactions
in which the company being acquired had a business that BVC deemed
similar
to the companies.
|
The
transactions reviewed by BVC fell into three distinct categories:
|
·
|
public
disclosure of private transactions;
|
|
·
|
public
company acquisitions; and
|
|
·
|
BVC
proprietary transactions.
|
The
following are lists of the comparable transactions BVC used in its
analysis:
|
Private
Transactions
|
||
|
Date
|
||
|
Announced
|
Acquirer
|
Target
|
|
12/5/2005
|
Arpeggio
Acquisition Corp.
|
Hill
International, Inc.
|
|
9/15/2005
|
Stantec,
Inc.
|
Keith
Cos., Inc.
|
|
1/6/2004
|
Wireless
Facilities, Inc.
|
High
Technology Solutions, Inc.
|
|
12/10/2003
|
CH2M
Hill Cos. Ltd.
|
Lockwood
Greene Engineers, Inc.
|
|
8/8/2003
|
NDA
|
Clearblue
Technologies, Inc.
|
|
3/10/2003
|
Tetra
Tech, Inc.
|
Foster
Wheeler Environmental Corp.
|
|
7/2/2003
|
Tetra
Tech, Inc.
|
Ardaman
& Associates
|
|
8/22/2002
|
URS
Corp.
|
Lear
Siegler Services, Inc.
|
|
4/2/2002
|
Tetra
Tech, Inc.
|
Hartman
& Associates
|
|
2/7/2001
|
Chicago
Bridge & Iron Co.
|
Pitt
Des Moines, Inc.
|
|
12/29/2000
|
Chicago
Bridge & Iron Co.
|
Howe
Baker International, Inc.
|
|
4/26/2000
|
GPU,
Inc.
|
MYR
Group, Inc.
|
BVC
calculated for each of the transactions the ratio of the EV to latest twelve
month revenue and the EV to latest twelve month EBITDA. The median enterprise
value of these 12 transactions was $89.73 million. A summary of results is
shown
below:
|
PRIVATE
COMPANY TRANSACTIONS
|
Mean
|
Median
|
|||
|
Enterprise
value to latest twelve months revenue
|
0.75x
|
0.67x
|
|||
|
Enterprise
value to latest twelve months EBITDA
|
11.16x
|
10.72x
|
Based
on
the above, the resulting indication of equity value (EV as adjusted for cash
of
$1,737,075 and debt of $233,460) was approximately $58.2 million using the
applicable private company transactions EV ratios.
-51-
For
its
market comparables analysis of public and private guideline companies, BVC
derived EV indications by applying selected revenue and EBITDA multiples
to
estimated operating results provided by the companies and FAAC management
for
the twelve month period ended December 31, 2005. Based on the above, the
resulting indications of equity value ranged from approximately $45.0 million
to
$58.2 million with an average equity value of approximately $52.4 million
and a
median equity value of $53.9 million.
Discounted
Cash Flow Analysis
In
its
analysis of the companies, BVC used a discounted cash flow analysis in which
it
calculated the present value of the projected future cash flows of the companies
based on projections provided by the companies and FAAC management. BVC
estimated a range of enterprise values for the companies based on the net
present value of its implied future annual cash flows and a terminal value
for
the companies in 2010 that was calculated based upon a capitalization rate
applied to debt free net cash flow. BVC applied discount rates of 13.2% and
15.4%. Based on this analysis, the implied equity value ranged from a low
of
$41.4 million to a high of $50.4 million.
Other
Considerations
The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and is therefore not readily susceptible to partial analysis
or
summary description. In reaching its conclusion as to the fairness of the
consideration to be paid by FAAC and in its presentation to the board of
directors of FAAC, BVC did not rely on any single analysis or factor described
above, assign relative weights to the analyses or factors considered by it,
or
make any conclusion as to how the results of any given analysis, taken alone,
supported its opinion. BVC believes that its analyses and summary set
forth herein must be considered as a whole and that selection of portions
of its
analyses and of the factors considered by it, without considering all of
the
analyses and factors, would create an incomplete, misleading and/or inaccurate
view of the processes underlying the conclusions set forth in the BVC
opinion.
The
analyses of BVC are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested
by the
analyses. No companies or transaction used in any analysis for purposes of
comparison is identical to the companies. Accordingly, an analysis of the
results of the comparisons is not mathematical; rather, it involves complex
considerations and judgments about differences in the companies to which
the
companies were compared and other factors that could affect the public trading
value of such companies.
BVC’s
opinion was based on the business, economic, market and other conditions
as they
existed as of May 31, 2006, and on the financial statements, forecasts and
projections previously provided to BVC. For purposes of its opinion, BVC
relied
upon and assumed the accuracy, completeness and fairness of the financial
statements and other information provided to it by FAAC and the companies
or
otherwise made available to it and did not assume responsibility for the
independent verification of that information. BVC relied upon the assurances
of
the management of FAAC and the companies that the information provided to
it by
FAAC and the companies was prepared on a reasonable basis in accordance with
industry practice, and, with respect to financial planning, reflects the
best
currently available estimates and judgment of FAAC and the companies management
and that they are not aware of any information or facts that would make the
information provided to BVC incomplete , misleading and/or inaccurate.
BVC expressed no opinion as to such financial planning or the assumptions
on
which it was based. BVC relied on assumptions of FAAC and the companies
management regarding management’s estimates.
For
purposes of its opinion, BVC assumed that the portion of the revenues of
TSS/Vortech derived from its major customer would be replaced over time
by
multiple revenue sources consisting of reduced but significant revenue
from
continuing contracts with the major customer, future contracts arising
from the
ongoing business relationship of TSS/Vortech with the major customer, expanded
business relationships with existing customers of TSS/Vortech and revenue
from
new customers of TSS/Vortech originated in connection with its new business
diversification and development efforts.
For
purposes of its opinion, BVC further assumed that all governmental, regulatory,
and other consents and approvals necessary for the consummation of the
transaction will be obtained and that no delay, limitations, restrictions
or
conditions will be imposed that would have an adverse effect on the expected
benefits of the transaction to FAAC .
-52-
In
arriving at its opinion, BVC did not perform any appraisals or valuations
of any
specific assets or liabilities of the companies, and was not furnished with
any
such appraisals or valuations. BVC expressed no opinion as to the liquidation
value of any entity. BVC expressed no opinion as to the price at which shares
of
FAAC common stock have traded or at which the shares of FAAC may trade at
any
future time. The opinion is based on information available to BVC and the
facts
and circumstances as they existed and were subject to evaluation on the date
of
the opinion. Events occurring after that date could materially affect the
assumptions used in preparing the opinion. BVC has not undertaken to and
is not
obligated to affirm or revise its opinion or otherwise comment on any events
occurring after the date it was given.
BVC
expressed no view with respect to the tax treatment that will be required
to be
applied to the proposed acquisition. BVC relied on advice of outside counsel
of
FAAC and the independent accountants to FAAC and the companies, and on the
assumptions of FAAC and the companies’ management, as to all legal, tax and
financial reporting matters with respect to FAAC, the companies and the
membership interest purchase agreement .
BVC
was
not requested to opine as to, and the opinion does not address, the basic
business decision to proceed with or effect the proposed acquisition. BVC
expressed no opinion as to whether any alternative transaction might produce
superior benefits to FAAC. BVC’s opinion relates solely to the aggregate
consideration payable by FAAC.
FAAC
retained BVC based upon BVC experience in the valuation of businesses in
connection with transactions such as the proposed acquisition.
BVC
has
no material prior relationship with FAAC or its affiliates. However, BVC
, as a
customary part of its investment banking business, evaluates businesses and
their securities in connection with mergers and acquisitions, private placements
and valuations for estate, corporate and other purposes. In addition, FAAC
also
engaged BVC to help allocate the purchase price of the acquisition across
asset
classes for accounting purposes. Under the terms of BVC’s engagements with FAA
C, FAAC agreed to pay an aggregate fee of $80,000 for its valuation and asset
allocation services. No portion of BVC’s fee is contingent upon the conclusions
reached in its opinion.
U.S.
Federal Income Tax Consequences of the Acquisition
The
following discusses the U.S. federal income tax consequences of our acquisition
of TSS/Vortech. This discussion is based on the U.S. Internal Revenue Code
of
1986, as amended, or the Code. The statements set forth in this section as
to
tax consequences of the transaction to our common stockholders are those
of
FAAC. We do not intend to obtain an opinion of counsel with respect to such
matters. Accordingly, you should consult your personal tax advisor as to
the tax
consequences of the transaction.
Our
common stockholders who do not exercise their conversion rights will continue
to
hold their common stock and as a result will not recognize any gain or loss
from
the acquisition.
Common
stockholders who exercise their conversion rights will recognize gain or
loss to
the extent that the amount received by such common stockholders upon conversion
is greater than or less than, respectively, such stockholder’s tax basis in
their shares. A stockholder’s tax basis in the shares generally will equal the
cost of the shares. A stockholder that purchased our units will have to allocate
the cost between the shares and the warrants of the units based on their
relative fair market values at the time of the purchase. Assuming the shares
are
held as a capital asset, the gain or loss will be capital gain or loss and
will
be long-term capital gain or loss if such stockholder’s holding period in the
shares is longer than one year.
-53-
Regulatory
Matters
The
acquisition and the transactions contemplated by the purchase agreement are
not
subject to any federal, state or provincial regulatory requirement or
approval.
Consequences
If Acquisition Proposal Is Not Approved
If
the
acquisition proposal is not approved by the stockholders, we will not acquire
TSS/Vortech. However, our trust account in which a substantial portion of
the
net proceeds of our initial public offering are held will be liquidated if
we do
not consummate a business combination by January 20, 2007. In any liquidation,
the net proceeds of our initial public offering held in the trust account,
plus
any interest earned thereon, will be distributed pro rata to our public
stockholders.
Required
Vote
The
acquisition does not require stockholder approval under Delaware law. However,
under our Amended and Restated Certificate of Incorporation, the acquisition
must be approved by a majority of the votes cast at the special meeting,
in
person or by proxy, in respect of shares of our common stock issued in our
initial public offering or purchased in the aftermarket. Thus, votes in respect
of shares issued other than in the public offering are not counted for this
purpose. None of our directors or officers purchased shares in our initial
public offering or in the aftermarket.
Additionally,
notwithstanding the approval of the acquisition, we will not proceed with
the
acquisition if public stockholders owning 20% or more of the shares sold
in our
initial public offering (1,560,000 or more of such shares) exercise their
conversion rights.
Approval
of the acquisition is not conditioned upon the adoption of the amendment
proposal, the incentive compensation plan proposal, the nomination proposal
or
the adjournment proposal.
Recommendation
AFTER
CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE
STOCKHOLDERS VOTE “FOR” APPROVAL OF THE ACQUISITION, SUBSTANTIALLY ON THE TERMS
SET FORTH IN THE PURCHASE AGREEMENT, AND THE OTHER TRANSACTIONS CONTEMPLATED
BY
THE PURCHASE AGREEMENT.
Interest
of Our Directors and Officers in the Acquisition
In
considering the recommendation of our board of directors to vote for the
proposal to adopt the acquisition, you should be aware that certain members
of
the our board of directors, and their affiliates and associates, have agreements
or arrangements that provide them with interests in the acquisition that
differ
from, or are in addition to, those of stockholders generally. In
particular:
|
·
|
If
the acquisition is not approved and we fail to consummate an
alternative
transaction within the time allotted pursuant to our Amended
and Restated
Certificate of Incorporation and we are therefore required to
liquidate,
the shares of common stock beneficially owned by our executive
officers
and directors, and their affiliates and associates, that were
acquired
prior to our initial public offering may be worthless because
no portion
of the net proceeds of our initial public offering that may be
distributed
upon our liquidation will be allocated to such shares. These
shares
collectively have a market value of approximately $9,282,000
based on our
share price of $5.46 as of September 30, 2006. However, the 1,700,000
shares acquired prior to our initial public offering by these
individuals
cannot be sold prior to July 13, 2008, during which time the
value of the
shares may increase or decrease. Similarly, the warrants to purchase
our
common stock held by our executive officers and directors, and
their
affiliates and associates, with an aggregate market value of
$300,000 as
of September 30, 2006, may become worthless if the acquisition
is not
approved and we fail to consummate an alternative transaction
within the
time allotted pursuant to its certificate of
incorporation.
|
-54-
|
·
|
After
the completion of the acquisition, it is expected that the directors
will
continue to serve on our board of directors and will be compensated
for
such services in such manner, and in such amounts, as our board
of
directors may determine to be appropriate. The directors include
our
current senior executives, who will take a substantially reduced
role with
us, will be actively engaged in other business matters outside
of FAAC,
and will only work on FAAC-related matters on a part-time basis.
See the
description of these agreements under “Directors and Executive Officers of
Fortress America Acquisition Corporation Following the Acquisition
-
Employment Agreements” and “- Consulting Agreement with Washington Capital
Advisors, LLC” below.
|
Our
board
of directors was aware of these agreements and arrangements during its
deliberations on the merits of the acquisition and in determining to recommend
to our stockholders that they vote for the adoption of the acquisition
proposal.
-55-
THE
PURCHASE AGREEMENT
The
following description summarizes the material provisions of the membership
interest purchase agreement. Stockholders should read carefully the membership
interest purchase agreement, which is attached as Annex A to this proxy
statement.
The
membership interest purchase agreement has been included to provide you with
information regarding its terms. It is not intended to provide any other
factual
information about us. Such information can be found elsewhere in this proxy
statement and in the other public filings we make with the Securities and
Exchange Commission, or SEC, which are available without charge at
www.sec.gov.
The
membership interest purchase agreement contains representations and warranties
which we, on the one hand, and VTC, Vortech and their respective members,
on the
other hand, have made to one another and are for the benefit of such parties
only, and may not be relied upon by any other person. The assertions embodied
in
the representations and warranties contained in the membership interest purchase
agreement are qualified by information in disclosure schedules to the membership
interest purchase agreement. While we do not believe that the disclosure
schedules contain information the securities laws require us to publicly
disclose, the disclosure schedules contain information that modifies, qualifies
and creates exceptions to the representations and warranties set forth in
the
membership interest purchase agreement. Accordingly, you should not rely
on the
representations and warranties as characterizations of the actual state of
facts, since the representations and warranties are subject in important
respects to the underlying disclosure schedules. The disclosure schedules
contain nonpublic information. Information concerning the subject matter
of the
representations and warranties may have changed since the date of the membership
interest purchase agreement, and subsequent information may or may not be
fully
reflected in our public disclosures. Information concerning the subject matter
of the representations and warranties contained in the membership interest
purchase agreement may have changed since the date of the membership interest
purchase agreement.
General;
Structure of the Acquisition
On
June
5, 2006, we entered into the membership interest purchase agreement with
VTC,
Vortech and their respective members and Thomas P. Rosato as the members’
representative, on June 26, 2006, we and each of the other parties entered
into
an amended and restated membership interest purchase agreement, and on July
31,
2006 we and each of the other parties entered into a second amended and restated
membership interest purchase agreement (the “purchase agreement”). Upon
completion of the acquisition, we will own all of the issued and outstanding
membership interests in each of VTC and Vortech. VTC, Vortech and their
respective members have approved the membership interest purchase agreement
and,
therefore, no further action need be taken by the members to approve the
acquisition.
Purchase
Price - Payment
The
purchase price payable on the closing date for all the membership interests
in
VTC and Vortech consists of up to $38.5 million (subject to certain working
capital adjustments), payable as follows:
|
·
|
$11.0
million in cash (referred to herein as the cash consideration)
payable at
closing, subject to a working capital adjustment and the escrow
provisions
described below;
|
|
·
|
the
assumption of up to $161,000 of the VTC’s and Vortech’s
debt;
|
|
·
|
up
to 3,205,128 shares of our common stock (valued at $5.46 per share),
as
reduced by the amount of any debt assumed by FAAC;
and
|
|
·
|
$10.0
million in two convertible, interest-bearing promissory notes
of $5.0
million each.
|
None
of
the shares issuable in the acquisition or under the employment agreements
will
be registered, but the shares issued to the selling members will be the subject
of a registration rights agreement entered into at the closing of the
acquisition. See “Registration Rights Agreement”.
-56-
Of
the
3,205,128 shares of our common stock to be issued at closing, 576,559 shares
will be issued to certain employees of the companies under restricted stock
grants, up to 67,825 shares will be issued to Evergreen Capital LLC as
partial
payment of certain consulting fees and the remaining 2,628,569 shares (as
reduced for the assumption of up to $161,000 of debt and any shares issued
to
Evergreen Capital LLC) will be issued to the selling members of VTC and
Vortech
as consideration for their respective membership interests in the companies.
All
of the shares of our common stock issued to the selling members will be
subject
to a lock-up agreement restricting the sale or transfer of those share
through
July 13, 2008 and will be held in escrows maintained by an escrow agent
(up to
2,555,309 shares to be held in a general indemnity escrow and 73,260 shares
to
be held in a balance sheet escrow). The 576,559 shares of our stock to
be issued
to certain employees as restricted stock grants will be subject to forfeiture
if
the receiving employee terminates his employment within three years of
the
closing of the acquisition, in which event the forfeited shares will be
delivered to the selling members.
Each
convertible promissory note bears interest at six percent per year and has
a
term of five years. Interest only is payable during the first two years of
each
note with principal payments commencing on the second anniversary of the
note
and continuing throughout the balance of the term of the note in equal quarterly
installments of $416,667. At any time after the sixth month following the
closing of the acquisition, the notes are convertible by the selling members
into shares of our common stock at a conversion price of $7.50 per share.
At any
time after the sixth month following the closing of the acquisition, the
notes
are automatically convertible if the average closing price of our common
stock
for 20 consecutive trading days equals or exceeds $7.50 per share.
In
addition, at the closing of the acquisition, we will enter into employment
agreements with each of the selling members. Under these agreements, each
selling member will be entitled to initial annual base compensation of $425,000,
an annual bonus of up to 50% of his base compensation, and if during the
period
from the closing of the acquisition through July 13, 2008 the market price
of
our common stock reaches certain thresholds, up to $5.0 million in shares
of our
common stock. For a more detailed discussion of the employment agreements,
please see “Directors and Executive Officers of Fortress America Acquisition
Corporation Following the Acquisition - Employment Agreements” on page
__.
Escrow
Amounts
At
the
closing of the acquisition, portions of the stock otherwise payable to the
selling members will be are being deposited into escrow accounts with an
escrow
agent as follows:
|
·
|
2,487,484
shares of our common stock to secure the selling members’ indemnification
obligations; and
|
|
·
|
73,260
shares of our common stock to secure post-closing adjustments to
the
purchase price in our favor.
|
See
“Escrow Agreements” on page ____.
Working
Capital - Purchase Price Adjustment
At
the
closing of the acquisition, the share consideration will be increased to
the
extent that the companies’ net working capital on the closing date exceeds $1.0
million, and will be decreased to the extent that their net working capital
is
less than $1.0 million. Net working capital is defined in the purchase agreement
as the amount by which the companies’ current assets (excluding cash and
including accounts receivable, notes receivable, prepaid expenses, inventory
and
other current assets) exceeds their current liabilities (excluding certain
types
of indebtedness).
-57-
For
purposes of the closing, the companies’ net working capital preliminarily shall
be determined to be as shown on a balance sheet and a calculation of the
companies’ net working capital to be prepared by the companies and provided to
FAAC prior to closing. Following the closing, the preliminary closing balance
sheet and calculation of net working capital shall be reviewed by Grant Thornton
LLP (or equivalent firm selected by FAAC). To the extent that the post closing
review of the closing balance sheet and calculation of closing net working
capital results in suggested changes, the purchase agreement provides a
mechanism by which disputes with respect to any such adjustments are to be
handled. Post closing adjustments that reduce the companies’ closing net working
capital below the preliminary closing net working capital amount will result
in
cash being paid to FAAC from the closing balance sheet escrow established
under
the purchase agreement, to the extent of the escrow (with any amounts remaining
in the balance sheet escrow payable to the selling members) and with any
adjustment in excess of amount in the balance sheet escrow paid from the
balance
sheet escrow to the extent of the balance sheet escrow and then by the selling
members (and if the selling members do not pay, then from the general indemnity
escrow). Post closing adjustments that increase the companies’ closing net
working capital above the preliminary closing net working capital will result
in
additional cash being paid by FAAC to the selling members (and all amounts
in
the balance sheet escrow being paid to the selling members). There is no
limit
to the amount by which the cash consideration may be adjusted upward or downward
to reflect the amount by which closing net working capital is greater or
less
than $1.0 million. The $1.0 million closing net working capital amount was
negotiated in good faith by FAAC and the companies and represents what FAAC
and
the companies agree is the normalized net working capital of the companies
based
on their current operations. Since the $1.0 million closing net working capital
amount was negotiated and is normalized, it is not anticipated that (i) the
closing net working capital will be substantially below the $1.0 million
amount,
(ii) the closing cash will be significantly adjusted downward for a shortfall
in
closing net working capital, or (iii) any downward adjustment in the purchase
price for a shortfall in closing net working capital will affect the FAAC’s
board’s determination that the companies are worth at least 80% of FAAC’s net
assets. See “Approval of the Acquisition and the Other Transactions Contemplated
by the Purchase Agreement - Satisfaction of Fair Market Value Requirement” on
page .
Closing
of the Acquisition
The
closing of the acquisition will take place on the third business day following
the satisfaction of the conditions described below under “Conditions to the
Completion of the Acquisition,” unless we agree to another date.
Representations
and Warranties
The
membership interest purchase agreement contains a number of representations
and
warranties that the companies and the selling members made to us and which
we
made to the selling members. The representations and warranties made by the
companies and the selling members relate to:
|
·
|
proper
corporate organization and power of the
companies;
|
|
·
|
authority
of each to the companies to execute the purchase agreement and
related
documents and enforceability of the membership interest purchase
agreement
against TSS, Vortech and the
members;
|
|
·
|
absence
of conflicts or violations under organizational documents of TSS
and
Vortech, certain agreements and applicable laws or
decrees;
|
|
·
|
absence
of required consents or approvals related to the execution and
delivery of
the purchase agreement and related
documents;
|
|
·
|
financial
information and absence of undisclosed
liabilities;
|
|
·
|
related
party transactions;
|
|
·
|
absence
of indebtedness between TSS and Vortech and their respective officers,
directors, shareholders and
employees;
|
|
·
|
absence
of material adverse charges or events since December 31,
2005;
|
|
·
|
absence
of certain third-party business relationships (cooperative business
arrangements, letters of intent, non-competition agreements and
non-disclosure agreements);
|
|
·
|
capital
structure of TSS and Vortech;
|
-58-
|
·
|
title
to membership interests in TSS and
Vortech;
|
|
·
|
Articles
of Organization, Operating Agreements and entity records for each
of TSS
and Vortech;
|
|
·
|
sufficiency
of, title to and condition of assets of TSS and
Vortech;
|
|
·
|
description
of real property and leasehold interests of the companies and
liens;
|
|
·
|
description
of personal property of the companies and security
interests;
|
|
·
|
intellectual
property rights and matters of TSS and
Vortech;
|
|
·
|
status
of contracts (other than government
contracts);
|
|
·
|
government
contracts;
|
|
·
|
retention
of customers;
|
|
·
|
contract
backlog;
|
|
·
|
compliance
of TSS and Vortech with applicable
laws;
|
|
·
|
environmental
matters;
|
|
·
|
licenses
and permits;
|
|
·
|
absence
of certain business practices (Foreign Corrupt Practices
Act);
|
|
·
|
litigation;
|
|
·
|
personnel
matters;
|
|
·
|
labor
matters;
|
|
·
|
ERISA;
|
|
·
|
tax
matters;
|
|
·
|
insurance;
|
|
·
|
bank
accounts of the companies;
|
|
·
|
powers
of attorney;
|
|
·
|
absence
of brokers or finders;
|
|
·
|
sufficiency
of security clearances;
|
|
·
|
absence
of various transactions since December 31, 2005;
and
|
|
·
|
completeness
of disclosure.
|
The
representations and warranties made by us relate to:
|
·
|
proper
organization and power of FAAC;
|
|
·
|
authority
and enforceability;
|
|
·
|
absence
of conflicts or violations under organizational documents, certain
agreements and applicable laws or
decrees;
|
|
·
|
absence
of consents and approvals;
|
-59-
|
·
|
authorization
of ability to pay portion of purchase price in shares of common
stock;
|
|
·
|
capitalization
of FAAC;
|
|
·
|
compliance
of FAAC with securities laws;
|
|
·
|
litigation;
|
|
·
|
absence
of brokers or finders; and
|
|
·
|
completeness
of disclosure.
|
Materiality
and Material Adverse Effect
Several
of the representations and warranties of the companies and the selling members
are qualified by materiality or material adverse effect.
Interim
Operations Relating to the Companies
The
selling members have agreed to cause the companies, prior to completion of
the
acquisition, to conduct its business in the ordinary course and to use
reasonable efforts to preserve current relationships with customers, employees
and suppliers.
No
Solicitation
The
Companies and the selling members have agreed, from the date of the membership
interest purchase agreement and until the closing of the acquisition, or
if
earlier, the termination of the membership interest purchase agreement, not
to,
directly or indirectly through any officer, director, employee, representative
or agent, solicit, initiate, entertain or encourage any proposal or offer
from,
or engage in any negotiations with any person other than us, or agree to,
approve or recommend, any proposal for a business combination other than
with
us.
Access
to Information
The
selling members will cause the companies to afford us and our representatives,
prior to completion of the acquisition, reasonable access during normal business
hours to all of the companies’ offices, facilities, books and records of the
companies.
Reasonable
Efforts; Notification
We
have
agreed with the selling members and the companies to use best efforts to
take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate the acquisition and the
transactions contemplated by the membership interest purchase agreement at
the
earliest possible date.
Indemnification
The
selling members have agreed to hold us and our representatives, successors
and
permitted assigns harmless for any damages, whether as a result of any third
party or otherwise, and which arise from or in connection with any breach
by
either of the companies and/or the selling members of any representations,
warranties, covenants or obligations under the membership interest purchase
agreement and certain tax liabilities. We have agreed to hold harmless members
for any breach of our representations, warranties or covenants under the
membership interest purchase agreement, certain tax liabilities and post-closing
liabilities of the companies (except for liabilities for which the selling
members are indemnifying us). Subject to certain exceptions, claims made
against
the selling members may be asserted only if a claim exceeds $8,000 and the
aggregate amount of all claims exceeds $175,000. In addition to the general
indemnity escrow, the selling members in certain instances have personal
liability for indemnification claims; provided that the aggregate
indemnification liability of the selling members shall not exceed $5 million.
The representations and warranties of the parties under the membership interest
purchase agreement will survive the closing until eighteen months following
the
closing of the acquisition; however, certain representations and warranties
will
survive for a longer period. Claims may be made against us only once the
aggregate amount of claims exceeds $100,000.
-60-
In
addition to the general indemnification described above, the selling members
have agreed to indemnify us for certain costs related to the termination
of
certain related party transactions; for the amount of certain medical claims
and
administrative costs incurred by us to the extent such amounts exceed reserves
and are not covered by insurance; and for any costs or liability associated
with
certain threatened litigation.
Fees
and Expenses
Except
as
provided in the membership interest purchase agreement, each of the selling
members, on the one hand, and we, on the other, shall be responsible for
their
own fees and expenses (including, without limitation, legal and accounting
fees
and expenses) in connection with the membership interest purchase agreement
and
the transactions contemplated thereby. The fees and expenses of the escrow
agent
shall be paid out of the funds to be escrowed, provided that the selling
members, on the one hand, and we, on the other hand, will split equally any
fees
and expenses in excess of the funds to be escrowed.
Public
Announcements
We
have
agreed with the companies and the selling members that no public statement
will
be made prior to closing about the acquisition, the membership interest purchase
agreement or any transactions contemplated by the membership interest purchase
agreement, and, following closing, that no public statement shall be made
without the prior consent of the other parties.
Conditions
to the Completion of the Acquisition
Each
of
our and the selling members’ obligations to effect the acquisition is subject to
the satisfaction or waiver of specified conditions before completion of the
acquisition, including the following:
Conditions
to All Parties’ Obligations
The
obligations of all parties to the acquisition are subject to the following
conditions:
|
·
|
no
order or injunction enjoining the
acquisition;
|
|
·
|
no
statute, rule, order or decree shall have been enacted or promulgated
that
would prohibit the acquisition or limit the ownership of the
companies;
|
|
·
|
receipt
of certain consents;
|
|
·
|
entering
into the escrow agreements;
and
|
|
·
|
no
litigation regarding the acquisition shall be pending or
threatened.
|
Conditions
to Our Obligations
Our
obligations to effect the acquisition are further subject to the following
conditions:
|
·
|
representations
and warranties of the companies and the selling members shall be
true and
correct in all material respects;
|
|
·
|
the
companies and the selling members shall have performed all of their
respective obligations under the membership interest purchase
agreement;
|
-61-
|
·
|
no
material adverse change in the business, operations, property,
contracts,
customer relations or condition, financial or otherwise, of the
companies;
|
|
·
|
delivery
of certain documents as required in the membership interest purchase
agreement;
|
|
·
|
certain
actions are taken as set forth in the disclosure schedules to the
membership interest purchase
agreement;
|
|
·
|
approval
of the acquisition by our
stockholders;
|
|
·
|
termination
of the companies Phantom Membership Interest Plan and the delivery
of
signed releases from all
participants;
|
|
·
|
all
indebtedness of the companies shall be paid in
full;
|
|
·
|
all
costs of the selling members and the companies relating to the
acquisition
shall be paid in full;
|
|
·
|
“comfort
letters” shall have been delivered to us in customary form from McGladrey
& Pullen;
|
|
·
|
we
shall have received a release from Evergreen Capital LLC stating
that
certain consulting fees owed as a result of the acquisition have
been
paid;
|
|
·
|
we
shall have received Employment Agreements signed by each of Thomas
P.
Rosato and Gerard J. Gallagher;
|
|
·
|
we
shall have received Employment Agreements signed by not less than
50% of
certain designated “key employee;”
|
|
·
|
we
shall have received certain documentation signed by the selling
members
relating to their receipt of our stock as partial consideration
for the
sale of the membership interests;
|
|
·
|
we
shall have received the Voting Agreement signed by the selling
members;
|
|
·
|
certain
identified contracts with parties related to the companies and/or
the
selling members are terminated and the delivery to us of signed
termination agreements, in form satisfactory to us, terminating
those
related party contracts; and
|
|
·
|
we
shall have received and approved both a fully signed lease between
VTC and
TPR Realty Group Re III, L.L.C. for the new headquarters for VTC
and an
appraisal indicating that the economic terms of the new headquarters
lease
are at or below market.
|
Conditions
to Obligations of the Selling Members
The
obligation of the selling members to effect the acquisition is further subject
to the following conditions:
|
·
|
our
representations and warranties shall be true and correct in all
material
respects;
|
|
·
|
we
shall have performed all of our obligations under the membership
interest
purchase agreement;
|
|
·
|
the
selling members shall have received certain documents as required
in the
membership interest purchase
agreement;
|
|
·
|
the
selling members shall have received documents implementing the
Voting
Agreement; and
|
|
·
|
Certain
transfers of property required by the membership interest purchase
agreement shall have occurred.
|
-62-
Termination
The
membership interest purchase agreement may be terminated prior to the closing
of
the acquisition, as follows:
|
·
|
at
any time, by mutual written
agreement;
|
|
·
|
at
any time after January 20, 2007, by either the selling members
or us if
the closing shall not have occurred for any reason other than a
breach of
the membership interest purchase agreement by the terminating
party;
|
|
·
|
by
us, if there is a material breach of any agreement, representation
or
warranty by the selling members under the membership interest purchase
agreement that renders the satisfaction of any condition to our
obligations impossible and such breach is not waived by
us;
|
|
·
|
by
the selling members, if there is a material breach by us of any
agreement,
representation or warranty under the membership interest purchase
agreement that renders the satisfaction of any condition to the
obligations of the selling members impossible and such breach is
not
waived by the selling members; and
|
|
·
|
by
either us or the selling members if a court of competent jurisdiction
permanently restrains or prohibits the
acquisition.
|
Effect
of Termination
In
the
event the membership interest purchase agreement is terminated:
|
·
|
we
are obligated to return all documents and work papers obtained
from the
companies or the selling members;
|
|
·
|
all
filings with any government agencies shall be withdrawn, to the
extent
practicable;
|
|
·
|
certain
confidentiality obligations will survive closings;
and
|
|
·
|
no
party shall be relieved of any liability for willful breach of
the
membership interest purchase
agreement.
|
Assignment
Subject
to certain exceptions, the membership interest purchase agreement may not
be
assigned by any party without prior written consent of the other
party.
Amendment
The
membership interest purchase agreement may not be amended or modified except
by
an instrument in writing signed on behalf of the party against whom enforcement
of such change is sought.
-63-
ESCROW
AGREEMENTS
Pursuant
to the membership interest purchase agreement, on the closing date of the
acquisition the parties involved in the acquisition will enter into two separate
escrow agreements (referred to in this proxy statement as the “escrow
agreements”) with the escrow agent to secure certain post-closing obligations of
the selling members. The following descriptions summarize the material
provisions of each escrow agreement. Stockholders should read carefully each
escrow agreement, attached to this proxy statement as Annex B-1 and B-2
respectively.
Balance
Sheet Escrow Agreement
On
the
closing date of the acquisition, we will enter into a Balance Sheet Escrow
Agreement with the selling members, represented by Thomas P. Rosato as the
selling members’ representative, and the escrow agent. On the closing date, we
will deposit with the escrow agent 73,260 shares of our common stock to secure
any post-closing adjustments in the purchase price in our favor. The Balance
Sheet Escrow Agreement is attached to this proxy statement as Annex
B-1.
General
Indemnity Escrow Agreement
On
the
closing date of the acquisition, we will enter into a General Indemnity Escrow
Agreement with members, represented by Thomas P. Rosato as the selling members’
representative, and the escrow agent. On the closing date, we will deposit
with
the escrow agent 2,560,744 shares of our common stock to secure certain
indemnification obligations of the selling members under the membership interest
purchase agreement. The General Indemnity Escrow Agreement is attached to
this
proxy statement as Annex B-2.
REGISTRATION
RIGHTS AGREEMENT
Upon
the
closing of the acquisition pursuant to the purchase agreement, we will enter
into a registration rights agreement with the selling members. The following
description of the registration rights agreement describes the material terms
of
the registration rights agreement but does not purport to describe all the
terms
of the agreement. The complete text of the registration rights agreement
is
attached as Exhibit C to this proxy statement and is incorporated by reference
into this proxy statement. We encourage all stockholders to read the
registration rights agreement in its entirety.
General
Pursuant
to the purchase agreement, the selling members will receive 2,560,744 shares
of
our common stock (referred to in this proxy statement, together with other
shares issued to the selling members, as the “registerable securities”). We
agreed to provide the selling members certain registration rights in relation
to
the registerable securities.
Demand
Registration Rights
The
holdings of a majority-in-interest of the registerable securities may make
a
written demand for registration under the Securities Act of all or part of
their
registerable securities. Additionally, if elected by a majority-in-interest
of
the demanding stockholders, the registration shall be made pursuant to an
underwritten offering. We shall not be obligated to effect more than an
aggregate of two demand registrations under the registration rights
agreement.
Piggy-back
Registration Rights
If
at any
time after the date of the registration rights agreement we propose to file
a
registration statement under the Securities Act of 1933, as amended, with
respect to an offering of equity securities, either for our own account or
for
the account of any of our stockholders, then the selling members shall have
the
right to include their shares of common stock in the registration statement,
subject to specific limitations as set forth in the registration rights
agreement.
-64-
Form
S-3 Registration Rights
The
selling members shall have the right at any time to require on an unlimited
number of occasions that we register any or all of their shares of our common
stock on a “Form S-3” or any similar short-form registration which is available
to us at the time. In addition to any other limitations set forth in the
registration rights agreement, the aggregate offering to the public must
be at
least $0.5 million.
Indemnification
We
have
agreed to indemnify the selling members from and against liabilities arising
out
of or based upon any untrue statement of a material fact, or any omission
to
state a material fact necessary to make statements in the registration statement
not misleading, or any violation by us of the Securities Act of 1933, as
amended, except if such statement or omission was made by us in reliance
upon
and in conformity with information furnished to us in writing by a selling
member for use in a registration statement. The selling members have agreed
to
indemnify us from and against liabilities arising out of or based upon an
untrue
statement of a material fact contained in any registration statement, or
any
omission to state a material fact necessary to make statement in the
registration statement not misleading, if the statement or omission was made
by
us in reliance upon and in conformity with information furnished in writing
to
us by the selling members for use in a registration statement.
LOCK-UP
AGREEMENT
Upon
the
closing of the acquisition pursuant to the purchase agreement, we will enter
into a lock-up agreement with the selling members. The following description
of
the lock-up agreement describes the material terms of the lock-up agreement
but
does not purport to describe all the terms of the agreement. The complete
text
of the lock-up agreement is attached as Annex B-3 to this proxy statement
and is
incorporated by reference into this proxy statement. We encourage all
stockholders to read the lock-up agreement in its entirety.
Under
the
terms of the lock-up agreement, the selling members agree that they will
not
sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant
any
option to purchase or otherwise dispose of or agree to dispose of, directly
or
indirectly, or file (or participate in the filing of) a registration statement
with the Securities Exchange Commission or enter into any arrangement that
transfers to another any of the economic consequences of ownership of the
registerable securities until July 13, 2008. Our founding stockholders
previously agreed to a substantially similar lock-up agreement.
-65-
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed consolidated balance sheet combines
our
historical balance sheets and those of TSS/Vortech as of June 30, 2006,
giving
effect to the transactions described in the purchase agreement as if they
had
occurred on June 30, 2006. The following unaudited pro forma condensed
consolidated statements of operations combine (i) our historical statement
of
operations for the six months ended June 30, 2006 with those of TSS/Vortech
and
(ii) our historical statement of operations for the 12 months ended December
31, 2005 with those of TSS/Vortech, in each case giving effect to the
acquisition as if it had occurred on January 1, 2005.
The
unaudited pro forma condensed balance sheet has been prepared using two
different levels of approval of the transaction by the FAAC stockholders,
as
follows:
|
·
|
Assuming
Maximum Approval: This presentation assumes 100% of FAAC stockholders
approve the acquisition; and
|
|
·
|
Assuming
Minimum Approval: This presentation assumes that only 80.01% of
FAAC
stockholders approve the
acquisition.
|
Under
the
purchase method of accounting, the preliminary purchase price has been
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 TSS/Vortech. As such management
estimates that a substantial portion of the excess purchase price will
be
allocated to non-amortizable intangible assets. These estimates are subject
to
change upon the finalization of the valuation of certain assets and liabilities
and may be adjusted in accordance with the provisions of Statement of Financial
Accounting Standard (“SFAS”) No. 141, Business
Combinations
.
We
are
providing this information to aid you in your analysis of the financial aspects
of the acquisition. The unaudited pro forma condensed consolidated financial
statements described above should be read in conjunction with our historical
financial statements and those of TSS/Vortech and the related notes thereto.
The
pro forma adjustments are preliminary and the unaudited pro forma information
is
not necessarily indicative of the financial position or results of operations
that may have actually occurred had the acquisition taken place on the dates
noted, or our future financial position or operating results.
-66-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Condensed Consolidated Balance Sheet
|
||||||||
|
June
30, 2006
|
||||||||
|
Assuming
Maximum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Assets
|
|
|||||||
|
Cash
|
$217,732
|
$2,927,721
|
$43,557,243
|
a
|
$32,592,445
|
|||
|
(10,836,658)
|
b
|
|||||||
|
(2,134,866)
|
b
|
|||||||
|
(35,304)
|
b
|
|||||||
|
(128,038)
|
b
|
|||||||
|
(975,385)
|
b
|
|||||||
|
Investments
held in Trust Fund
|
43,557,243
|
(43,557,243)
|
a
|
0
|
||||
|
Accounts
receivable
|
12,299,033
|
|
12,299,033
|
|||||
|
Costs
in excess of billings
|
656,569
|
656,569
|
||||||
|
Prepaid
expenses
|
11,250
|
276,090
|
287,340
|
|||||
|
Due
from affiliated entities
|
|
74,682
|
|
74,682
|
||||
|
Total
current assets
|
43,786,225
|
16,234,095
|
(14,146,958)
|
45,910,069
|
||||
|
Deferred
acquisition costs
|
75,000
|
(75,000)
|
b
|
0
|
||||
|
Deferred
tax asset
|
314,315
|
314,315
|
||||||
|
Property
and equipment - net
|
478,379
|
478,379
|
||||||
|
Customer
relationships
|
21,000,000
|
b
|
21,000,000
|
|||||
|
Other
assets - Goodwill
|
72,986
|
16,976,737
|
b
|
16,976,737
|
||||
|
|
|
(72,986)
|
b
|
|
||||
|
Total
assets
|
$44,175,540
|
$16,785,460
|
$23,718,500
|
$84,679,500
|
||||
|
Liabilities
and
|
||||||||
|
stockholders'
equity
|
||||||||
|
Accounts
payable and
|
||||||||
|
accrued
expenses
|
$43,084
|
$11,089,046
|
$11,132,130
|
|||||
|
Income
taxes payable
|
212,606
|
212,606
|
||||||
|
Deferred
interest on investments
|
318,497
|
(318,497)
|
c1
|
0
|
||||
|
Billings
in excess of costs
|
|
2,010,183
|
|
2,010,183
|
||||
|
Total
current liabilities
|
574,187
|
13,099,229
|
(318,497)
|
13,354,919
|
||||
|
Notes
payable - including
|
||||||||
|
current
portion
|
196,304
|
10,000,000
|
b
|
10,161,000
|
||||
|
(35,304)
|
b
|
|||||||
|
Deferred
compensation
|
|
153,538
|
(153,538)
|
b
|
0
|
|||
|
Total
liabilities
|
574,187
|
13,449,071
|
9,492,661
|
23,515,919
|
||||
|
Common
stock subject
|
||||||||
|
to
possible conversion
|
8,388,604
|
(8,388,604)
|
c1
|
0
|
||||
-67-
|
Stockholders'/members'
equity
|
||||||||
|
Common
Stock,
|
||||||||
|
$.0001
par value
|
955
|
318
|
b
|
1,273
|
||||
|
Additional
paid in capital
|
34,819,062
|
17,243,413
|
b
|
60,451,079
|
||||
|
8,388,604
|
c1
|
|||||||
|
Members'
equity
|
3,336,389
|
(3,336,389)
|
b
|
0
|
||||
|
Income
accumulated during
|
||||||||
|
the
development stage
|
392,732
|
|
318,497
|
c1
|
711,229
|
|||
|
Total
stockholders' equity
|
35,212,749
|
3,336,389
|
22,614,443
|
61,163,581
|
||||
|
Total
liabilities and
|
||||||||
|
stockholders'
equity
|
$44,175,540
|
$16,785,460
|
$23,718,500
|
$84,679,500
|
See
notes
to unaudited pro form condensed consolidated financial statements.
-68-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Condensed Consolidated Balance Sheet
|
||||||||
|
June
30, 2006
|
||||||||
|
Assuming
Minimum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Assets
|
|
|||||||
|
Cash
|
$217,732
|
$2,927,721
|
$43,557,243
|
a
|
$23,885,344
|
|||
|
(10,811,158)
|
b
|
|||||||
|
(2,134,866)
|
b
|
|||||||
|
(35,304)
|
b
|
|||||||
|
(153,538)
|
b
|
|||||||
|
(8,388,604)
|
c2
|
|||||||
|
(318,497)
|
c2
|
|||||||
|
(975,385)
|
b
|
|||||||
|
Investments
held in Trust Fund
|
43,557,243
|
(43,557,243)
|
a
|
0
|
||||
|
Accounts
receivable
|
12,299,033
|
12,299,033
|
||||||
|
Costs
in excess of billings
|
656,569
|
656,569
|
||||||
|
Prepaid
expenses
|
11,250
|
276,090
|
287,340
|
|||||
|
Due
from affiliated entities
|
|
74,682
|
|
74,682
|
||||
|
Total
current assets
|
43,786,225
|
16,234,095
|
(22,854,059)
|
37,202,968
|
||||
|
Deferred
acquisition costs
|
75,000
|
(75,000)
|
b
|
0
|
||||
|
Deferred
tax asset
|
314,315
|
314,315
|
||||||
|
Property
and equipment - net
|
478,379
|
478,379
|
||||||
|
Customer
relationships
|
21,000,000
|
b
|
21,000,000
|
|||||
|
Other
assets - Goodwill
|
72,986
|
16,976,737
|
b
|
16,976,737
|
||||
|
|
|
(72,986)
|
b
|
|
||||
|
Total
assets
|
$44,175,540
|
$16,785,460
|
$15,011,399
|
$75,972,399
|
||||
|
Liabilities
and
|
||||||||
|
stockholders'
equity
|
||||||||
|
Accounts
payable and
|
||||||||
|
accrued
expenses
|
$43,084
|
$11,089,046
|
$11,132,130
|
|||||
|
Income
taxes payable
|
212,606
|
212,606
|
||||||
|
Deferred
interest on investments
|
318,497
|
(318,497)
|
c2
|
0
|
||||
|
Billings
in excess of costs
|
|
2,010,183
|
|
2,010,183
|
||||
|
Total
current liabilities
|
574,187
|
13,099,229
|
(318,497)
|
13,354,919
|
||||
|
Notes
payable - including
|
||||||||
|
current
portion
|
196,304
|
10,000,000
|
b
|
10,161,000
|
||||
|
(35,304)
|
b
|
|||||||
|
Deferred
compensation
|
|
153,538
|
(153,538)
|
b
|
0
|
|||
|
Total
liabilities
|
574,187
|
13,449,071
|
9,492,661
|
23,515,919
|
||||
-69-
|
Common
stock subject
|
||||||||
|
to
possible conversion
|
8,388,604
|
(8,388,604)
|
c2
|
0
|
||||
|
|
||||||||
|
Stockholders'/members'
equity
|
||||||||
|
Common
Stock,
|
||||||||
|
$.0001
par value
|
955
|
318
|
b
|
1,118
|
||||
|
(155)
|
c2
|
|||||||
|
Additional
paid in capital
|
34,819,062
|
17,243,413
|
b
|
52,062,630
|
||||
|
155
|
c2
|
|||||||
|
Members'
equity
|
3,336,389
|
(3,336,389)
|
b
|
0
|
||||
|
Income
accumulated during
|
||||||||
|
the
development stage
|
392,732
|
|
|
392,732
|
||||
|
Total
stockholders' equity
|
35,212,749
|
3,336,389
|
13,907,342
|
52,456,480
|
||||
|
Total
liabilities and
|
||||||||
|
stockholders'
equity
|
$44,175,540
|
$16,785,460
|
$15,011,399
|
$75,972,399
|
See
notes
to unaudited pro form condensed consolidated financial statements.
-70-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Pro Forma Condensed Consolidated Statement of
Operations
|
||||||||
|
Six
Months ended June 30, 2006
|
||||||||
|
Assuming
Maximum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Sales
|
$34,726,161
|
$34,726,161
|
||||||
|
Cost
of sales
|
|
(28,719,264)
|
|
(28,719,264)
|
||||
|
Gross
profit
|
6,006,897
|
6,006,897
|
||||||
|
Selling,
general and
|
||||||||
|
administrative
expenses
|
(3,207,944)
|
(1,043,372)
|
d1
|
(4,251,316)
|
||||
|
Depreciation
and amortization
|
(126,000)
|
(1,050,000)
|
f
|
(1,176,000)
|
||||
|
Formation
and operating costs
|
(375,122)
|
|
|
(375,122)
|
||||
|
Operating
income
|
(375,122)
|
2,672,953
|
(2,093,372)
|
204,459
|
||||
|
Interest
expense
|
(9,698)
|
(300,000)
|
g
|
(309,698)
|
||||
|
Interest
income
|
772,465
|
190,593
|
c1
|
712,663
|
||||
|
|
|
(250,395)
|
h
|
|
||||
|
Net
income (loss) before taxes
|
397,343
|
2,663,255
|
(2,453,174)
|
607,424
|
||||
|
State
and federal income taxes
|
(135,097)
|
0
|
(107,873)
|
i
|
(242,970)
|
|||
|
Net
income
|
$262,246
|
$2,663,255
|
($2,561,047)
|
$364,454
|
||||
|
Weighted
average number
|
||||||||
|
of
shares outstanding:
|
||||||||
|
Basic
|
9,550,000
|
j
|
12,725,641
|
|||||
|
Diluted
|
9,550,000
|
j
|
13,987,406
|
|||||
|
Net
income per share
|
||||||||
|
Basic
|
$0.03
|
$0.03*
|
||||||
|
Diluted
|
$0.03
|
$0.03*
|
||||||
*Includes
charges of $0.02 per share related to stock-based compensation expense under
the
purchase agreement.
See
notes
to unaudited pro form condensed consolidated financial statements.
-71-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Pro Forma Condensed Consolidated Statement of
Operations
|
||||||||
|
Six
Months ended June 30, 2006
|
||||||||
|
Assuming
Minimum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Sales
|
$34,726,161
|
$34,726,161
|
||||||
|
Cost
of sales
|
|
(28,719,264)
|
|
(28,719,264)
|
||||
|
Gross
profit
|
6,006,897
|
6,006,897
|
||||||
|
Selling,
general and
|
||||||||
|
administrative
expenses
|
(3,207,944)
|
(1,043,372)
|
d1
|
(4,251,316)
|
||||
|
Depreciation
and amortization
|
(126,000)
|
(1,050,000)
|
f
|
(1,176,000)
|
||||
|
Formation
and operating costs
|
(375,122)
|
|
|
(375,122)
|
||||
|
Operating
income
|
(375,122)
|
2,672,953
|
(2,093,372)
|
204,459
|
||||
|
Interest
expense
|
(9,698)
|
(300,000)
|
g
|
(309,698)
|
||||
|
Interest
income
|
772,465
|
|
(200,841)
|
h
|
571,624
|
|||
|
Net
income before taxes
|
397,343
|
2,663,255
|
(2,594,213)
|
466,385
|
||||
|
State
and federal income taxes
|
(135,097)
|
0
|
(51,457)
|
i
|
(186,554)
|
|||
|
Net
income
|
$262,246
|
$2,663,255
|
($2,645,670)
|
$279,831
|
||||
|
Weighted
average number
|
||||||||
|
of
shares outstanding:
|
||||||||
|
Basic
|
9,550,000
|
j
|
11,166,421
|
|||||
|
Diluted
|
9,550,000
|
j
|
12,428,186
|
|||||
|
Net
income per share
|
||||||||
|
Basic
|
$0.03
|
$0.03*
|
||||||
|
Diluted
|
$0.03
|
$0.02*
|
||||||
*Includes
charges of $0.02 per share related to stock-based compensation expense under
the
purchase agreement.
See
notes
to unaudited pro form condensed consolidated financial statements.
-72-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Pro Forma Condensed Consolidated Statement of
Operations
|
||||||||
|
Twelve
Months ended December 31, 2005
|
||||||||
|
Assuming
Maximum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Sales
|
$58,632,293
|
$58,632,293
|
||||||
|
Cost
of sales
|
|
(50,056,924)
|
3,436,095
|
e
|
(46,620,829)
|
|||
|
Gross
profit
|
8,575,369
|
3,436,095
|
12,011,464
|
|||||
|
Selling,
general and
|
||||||||
|
administrative
expenses
|
(5,420,618)
|
(1,673,096)
|
d2
|
(7,093,714)
|
||||
|
Depreciation
and amortization
|
(227,279)
|
(2,100,000)
|
f
|
(2,327,279)
|
||||
|
Formation
and operating costs
|
(319,694)
|
|
|
(319,694)
|
||||
|
Operating
income
|
(319,694)
|
2,927,472
|
(337,001)
|
2,270,777
|
||||
|
Interest
expense
|
(35,184)
|
(600,000)
|
g
|
(635,184)
|
||||
|
Interest
income
|
525,430
|
127,904
|
c1
|
483,467
|
||||
|
|
|
(169,867)
|
h
|
|
||||
|
Net
income before taxes
|
205,736
|
2,892,288
|
(978,964)
|
2,119,060
|
||||
|
State
and federal income taxes
|
(74,194)
|
|
(773,430)
|
i
|
(847,624)
|
|||
|
Net
income
|
$131,542
|
$2,892,288
|
($1,752,394)
|
$1,271,436
|
||||
|
Weighted
average number
|
||||||||
|
of
shares outstanding:
|
||||||||
|
Basic
|
5,107,534
|
j
|
12,725,641
|
|||||
|
|
||||||||
|
Diluted
|
5,107,534
|
j
|
13,091,266
|
|||||
|
Net
income per share
|
||||||||
|
Basic
|
$0.03
|
$0.10*
|
||||||
|
Diluted
|
$0.03
|
$0.10*
|
||||||
*Includes
charges of $0.05 per share related to stock-based compensation expense under
the
purchase agreement.
See
notes
to unaudited pro form condensed consolidated financial
statements.
-73-
|
Fortress
America Acquisition Corporation
|
||||||||
|
Unaudited
Pro Forma Condensed Consolidated Statement of
Operations
|
||||||||
|
Twelve
Months ended December 31, 2005
|
||||||||
|
Assuming
Minimum Approval
|
||||||||
|
TSS/
|
Pro
Forma
|
Pro
Forma
|
||||||
|
FAAC
|
Vortech
|
Adjustments
|
Combined
|
|||||
|
Sales
|
$58,632,293
|
$58,632,293
|
||||||
|
Cost
of sales
|
|
(50,056,924)
|
3,436,095
|
e
|
(46,620,829)
|
|||
|
Gross
profit
|
8,575,369
|
3,436,095
|
12,011,464
|
|||||
|
Selling,
general and
|
||||||||
|
administrative
expenses
|
(5,420,618)
|
(1,673,096)
|
d2
|
(7,093,714)
|
||||
|
Depreciation
and amortization
|
(227,279)
|
(2,100,000)
|
f
|
(2,327,279)
|
||||
|
Formation
and operating costs
|
(319,694)
|
|
|
(319,694)
|
||||
|
Operating
income
|
(319,694)
|
2,927,472
|
(337,001)
|
2,270,777
|
||||
|
Interest
expense
|
(35,184)
|
(600,000)
|
g
|
(635,184)
|
||||
|
Interest
income
|
525,430
|
|
(136,612)
|
h
|
388,818
|
|||
|
Net
income before taxes
|
205,736
|
2,892,288
|
(1,073,613)
|
2,024,411
|
||||
|
State
and federal income taxes
|
(74,194)
|
|
(735,570)
|
i
|
(809,764)
|
|||
|
Net
income
|
$131,542
|
$2,892,288
|
($1,809,183)
|
$1,214,647
|
||||
|
Weighted
average number
|
||||||||
|
of
shares outstanding:
|
||||||||
|
Basic
|
5,107,534
|
j
|
11,166,421
|
|||||
|
Diluted
|
5,107,534
|
j
|
11,532,046
|
|||||
|
Net
income per share
|
||||||||
|
Basic
|
$0.03
|
$0.11*
|
||||||
|
Diluted
|
$0.03
|
$0.11*
|
||||||
*Includes
charges of $0.06 per share related to stock-based compensation expense under
the
purchase agreement.
See
notes
to unaudited pro form condensed consolidated financial
statements.
-74-
NOTES
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
a.
|
To
record release of funds held in trust
fund.
|
|
b.
|
To
record the purchase of all of the members' equity of TSS/Vortech
and the
allocation of the purchase price to assets acquired and liabilities
assumed as follows:
|
|
Calculation
of allocable purchase price:
|
|||
|
Cash
|
11,000,000
|
||
|
Convertible
promissory notes
|
10,000,000
|
*
|
|
|
Stock
|
17,404,731
|
**
|
|
|
Purchase
price
|
38,404,731
|
||
|
Adjustments
to purchase price:
|
|||
|
Less:
|
|||
|
$35,304
to pay off debt not assumed
|
(35,304)
|
||
|
$153,538
to eliminate deferred
|
|||
|
compensation
liability
|
(153,538)
|
||
|
Adjustment
to stock related to
|
|||
|
assumption
of debt
|
(161,000)
|
**
|
|
|
Plus:
|
|||
|
Payment
for working capital adjustment
|
2,134,866
|
||
|
Estimated
direct costs of acquisition
|
1,050,385
|
||
|
Total
allocable purchase price
|
41,240,140
|
||
|
Estimated
allocation of purchase price:
|
|||
|
TSS
net tangible assets acquired (book value)
|
3,336,389
|
||
|
Fair
value adjustments to assets acquired:
|
|||
|
TSS
goodwill
|
(72,986)
|
||
|
Fair
value of tangible assets acquired
|
3,263,403
|
||
|
Intangible
assets:
|
|||
|
Customer
relationships
|
21,000,000
|
||
|
Goodwill
|
16,976,737
|
||
|
Total
allocable purchase price
|
41,240,140
|
*
Each
convertible promissory note bears interest at six percent per year and has
a
term of five years. At any time after the sixth month following the closing
of
the acquisition, the notes are convertible by the selling members into shares
of
our common stock at a conversion price of $7.50 per share. At any time after
the
sixth month following the closing of the acquisition, the notes are
automatically convertible if the average closing price of our common stock
for
20 consecutive trading days equals or exceeds $7.50 per share.
**
The
stock portion of the acquisition ($17,243,731) consists of 3,175,641 shares
at a
price per share of $5.43, which was the average closing price of a share
of FAAC
common stock on the OTC market for a period consisting of ten consecutive
trading days prior to public announcement by FAAC of the contemplated purchase
of the members' equity of TSS/Vortech and ten consecutive trading days
after the
announcement. The 3,175,641 shares were calculated assuming that the shares
otherwise issuable in the acquisition will be reduced by the assumption
of the
maximum permissible amount of debt ($161,000).
c1.
Assuming maximum approval, to reclassify common stock subject to possible
conversion as permanent equity ($8,388,604) and to record related deferred
interest as income ($127,904 for the twelve months ended December 31, 2005
and
$190,593 for the six months ended June 30, 2006).
c2.
Assuming minimum approval, to record refund of funds ($8,388,604) to dissenting
shareholders along with related deferred interest ($318,497), and to reclassify
common stock ($155) as additional paid in capital.
-75-
d1.
Adjustments to selling, general and administrative expenses for the six
month
period ended June 30, 2006 are as follows:
|
Increased
base salaries and bonuses payable to selling members under
employment
agreements entered into in conjunction with the
acquisition:
|
318,704
|
|
Salary
to be paid to a director under an employment agreement entered
into in
conjunction with the acquisition:
|
100,000
|
|
Consulting
payments to be made to Washington Capital Advisors, LLC under
a consulting
agreement entered into in conjunction with the
acquisition:
|
100,000
|
|
Increased
compensation expense related to 576,559 shares granted to key
employees
under restricted share grants issued in conjunction with the
acquisition:
|
524,668
|
|
Total
selling, general and administrative expense adjustments for
the six month
period ended June 30, 2006:
|
1,043,372
|
d2.
Adjustments to selling, general and administrative expenses for the twelve
month
period ended December 31, 2005 are as follows:
|
Increased
base salaries and bonuses payable to selling members under
employment
agreements entered into in conjunction with the
acquisition:
|
691,400
|
|
Salary
to be paid to a director under an employment agreement entered
into in
conjunction with the acquisition:
|
200,000
|
|
Consulting
payments to be made to Washington Capital Advisors, LLC under
a consulting
agreement entered into in conjunction with the
acquisition:
|
200,000
|
|
Increased
compensation expense related to 576,559 shares granted to key
employees
under restricted share grants issued in conjunction with the
acquisition:
|
1,049,337
|
|
To
reverse bonus compensation paid to key employees in excess
of the maximum
amount of bonuses available to be paid under the bonus plan
adopted in
conjunction with the acquisition:
|
(297,641)
|
|
To
reverse amounts paid as management fees to selling
members:
|
(170,000)
|
|
Total
selling, general and administrative expense adjustments for
the twelve
month period ended December 31, 2006:
|
1,673,096
|
e.
To
reverse amounts paid as consulting fees ($3,436,095) to selling members
in 2005.
The selling members have entered into employment agreements in conjunction
with
the acquisition which set forth their salaries and bonuses.
f.
To
record increased amortization of customer relationships ($2,100,000 for
the
twelve months ended December 31, 2005 and $1,050,000 for the six months
ended
June 30, 2006). The value assigned to customer relationships ($21,000,000)
will
be recorded as an intangible asset and will be amortized on a straight
line
basis over an estimated useful lifetime of ten years.
g.
To
record increased interest expense on convertible promissory notes issued
in
conjunction with the acquisition ($300,000 for the six months ended June
30,
2006 and $600,000 for the twelve months ended December 31,
2005).
-76-
h.
To
reverse interest income to reflect the payment of $11,000,000 as the cash
portion of the acquisition.
i.
To
record increased state and federal income taxes (6% and 34% of pro forma
combined net income for the period, less amounts recorded by FAAC for the
period).
j.
Pro
forma net income per share was calculated by dividing pro forma net income
by
the weighted average number of shares outstanding as follows:
|
Maximum
|
Minimum
|
|||
|
Approval
|
Approval
|
|||
|
Six
months ended June 30, 2006:
|
||||
|
Basic
- assuming initial public offering as of January 1, 2005
|
9,550,000
|
7,990,780
|
||
|
Shares
issued in conjunction with the Transaction *
|
3,175,641
|
3,175,641
|
||
|
Basic
- total
|
12,725,641
|
11,166,421
|
||
|
Incremental
shares on exercise of warrants**
|
1,261,765
|
1,261,765
|
||
|
Diluted
|
13,987,406
|
12,428,186
|
||
*
The
stock portion of the acquisition ($17,243,731) consists of 3,175,641 shares
at a
price per share of $5.43, which was the average closing price of a share
of FAAC
common stock on the OTC market for a period consisting of ten consecutive
trading days prior to public announcement by FAAC of the contemplated purchase
of the members’ equity of TSS/Vortech and ten consecutive trading days after the
announcement.
**
Assumes exercise price of $5.00 per share, 15,600,000 warrants outstanding
and
an average stock price for the six months ended June 30, 2006 of
$5.44.
|
Maximum
|
Minimum
|
|||
|
Approval
|
Approval
|
|||
|
Twelve
months ended December 31, 2005:
|
||||
|
Basic
- assuming initial public offering as of January 1, 2005
|
9,550,000
|
7,990,780
|
||
|
Shares
issued in conjunction with the acquisition *
|
3,175,641
|
3,175,641
|
||
|
Basic
- total
|
12,725,641
|
11,166,421
|
||
|
Incremental
shares on exercise of warrants**
|
365,625
|
365,625
|
||
|
Diluted
|
13,091,266
|
11,532,046
|
||
*
The
stock portion of the acquisition ($17,243,731) consists of 3,175,641 shares
at a
price per share of $5.43, which was the average closing price of a share
of FAAC
common stock on the OTC market for a period consisting of ten consecutive
trading days prior to public announcement by FAAC of the contemplated purchase
of the members’ equity of TSS/Vortech and ten consecutive trading days after the
announcement.
**
Assumes exercise price of $5.00 per share, 15,600,000 warrants outstanding
and
an average stock price for the period from September 27, 2005 to December
31,
2005 of $5.12.
-77-
APPROVAL
OF THE PROPOSAL TO AMEND AND RESTATE
OUR
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
General
Description of the Amendment Proposal
We
are
proposing to amend and restate our Amended and Restated Certificate of
Incorporation, upon consummation of the acquisition, to change our name from
“Fortress America Acquisition Corporation” to “Fortress International Group,
Inc.” and to eliminate certain provisions which are applicable to us only prior
to our completion of a business combination. If this proposal is approved,
after
the completion of the acquisition, our name will be “Fortress International
Group, Inc.” and Article Fifth of our Amended and Restated Certificate of
Incorporation will be deleted. Additionally, the Second Amended and Restated
Certificate of Incorporation will make certain technical corrections to our
Amended and Restated Certificate of Incorporation. If the acquisition is
not
approved, the amendment proposal will not be presented at the special meeting.
The complete text of the Second Amended and Restated Certificate of
Incorporation is attached as Annex D to this proxy statement and is incorporated
by reference into this proxy statement. We encourage all stockholders to
read
the Second Amended and Restated Certificate of Incorporation in its entirety.
If
the acquisition is not approved, then the amendment will not be presented
for
approval.
Consequences
If the Amendment Proposal Is Not Approved
If
the
amendment proposal is not approved by the stockholders, our name will continue
to be “Fortress America Acquisition Corporation” and our Amended and Restated
Certificate of Incorporation will include provisions that are not applicable
to
us after completion of the acquisition.
Required
Vote
The
amendment proposal must be approved by the affirmative vote of the majority
of
shares of our common stock outstanding on the record date.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE
AMENDMENT PROPOSAL.
-78-
APPROVAL
OF THE 2006 OMNIBUS INCENTIVE
COMPENSATION PLAN
The
2006
Omnibus Incentive Compensation Plan has been approved by our board of directors
and will take effect upon consummation of the acquisition, subject to
stockholder approval.
The
following description of the 2006 Omnibus Incentive Compensation Plan describes
the materials terms of the plan, but does not purport to describe all the
terms
of the plan. The complete text of the 2006 Omnibus Incentive Compensation
Plan
is attached as Annex E to this proxy statement and is incorporated by reference
into this proxy statement. We encourage all stockholders to read the 2006
Omnibus Incentive Compensation Plan in its entirety. If the acquisition is
not
approved, then the incentive compensation plan proposal will not be presented
for approval.
General
Description of the Incentive Compensation Proposal
The
incentive compensation plan reserves 2,100,000 shares of our common stock
(of
which 576,559 shares are to be issued to certain employees of TSS/Vortech
at the
closing) for issuance in accordance with the plan’s terms. The purpose of the
incentive compensation plan is to optimize the profitability and growth of
the
company through incentives consistent with the company’s goals and which align
the personal interests of plan participants with an incentive for individual
performance. The plan is further intended to assist the company in motivating,
attracting and retaining plan participants and allowing them to share in
company
successes.
Summary
of the 2006 Omnibus Incentive Compensation Proposal
Administration.
The
incentive compensation plan will be administered by the compensation committee.
The compensation committee will determine who participates in the plan, the
size
and type of awards under the plan and the conditions applicable to the
awards.
Eligibility.
Those
persons eligible to participate in the incentive compensation plan are
officers
and other key employees of FAAC and our subsidiaries and our non-employee
directors. In the event the acquisition is approved, there will be approximately
four directors, six officers and twenty-five employees eligible to receive
grants under the plan.
Shares
Subject to the Incentive Compensation Plan.
Upon
completion of the acquisition, 576,559 shares of the 2,100,000 shares of
our
common stock reserved for issuance under the incentive compensation plan
will be
issued to certain employees of TSS/Vortech. After those closing date grants,
1,523,441 shares of our common stock, or approximately 12% of the shares
expected to then be outstanding, will be available for future grants under
the
incentive compensation plan.
Stock
Options.
Stock
option awards may be granted in the form of non-statutory stock options or
incentive stock options. Options are exercisable in whole or in such
installments as may be determined by the compensation committee. The
compensation committee establishes the exercise price of stock options, which
exercise price may not be less than the per share fair market value of our
common stock on the date of the grant. The exercise price is payable in cash,
shares of common stock or a combination of cash and common stock.
Stock
options granted in the form of incentive stock options are also subject to
certain additional limitations, as provided in Section 422 of the Internal
Revenue Code of 1986, as amended. Incentive stock options may be made only
to
employees, and the aggregate fair market value of common stock with respect
to
which incentive stock options may become exercisable by an employee in any
calendar year may not exceed $100,000. In addition, incentive stock options
may
not be exercised after ten years from the grant date and any incentive stock
option granted to an employee who owns shares of our common stock possessing
more than 10% of the combined voting power of all classes of our shares must
have an option price that is at least 110% of the fair market value of the
shares and may not be exercisable after five years from the date of
grant.
-79-
Stock
Appreciation Rights.
Stock
appreciation rights are granted pursuant to stock appreciation rights awards
on
terms set by the compensation committee. The compensation committee determines
the grant price for a stock appreciation right, except that unless otherwise
designated by the compensation committee, the strike price of a stock
appreciation right granted as a freestanding award will not be less than
100% of
the fair market value of a share of common stock on the date of grant. Upon
exercise of a stock appreciation right, we will pay the participant an amount
equal to the excess of the aggregate fair market value of our common stock
on
the date of exercise, over the grant price. The compensation committee
determines the term of stock appreciation rights granted under the incentive
compensation plan, but unless otherwise designated by the compensation committee
stock appreciation rights are not exercisable after the expiration of ten
years
from the date of grant. For each award of stock appreciation rights, the
compensation committee will determine the extent to which the award recipient
may exercise the stock appreciation rights after that recipient’s service
relationship with us ceases.
Restricted
Stock Awards.
The
compensation committee may grant restricted stock awards, which will be subject
to such terms, conditions, restrictions or limitations as the compensation
committee may determine are appropriate, including restrictions on
transferability, requirements of continued employment or individual performance,
or our financial performance. During the period in which any shares of common
stock are subject to restrictions, the compensation committee may, in its
discretion, grant to the recipient of the restricted shares the rights of
a
stockholder with respect to such shares, including the right to vote such
shares
and to receive dividends paid on shares of common stock.
Performance
Shares/Units.
The
compensation committee may grant performance shares or units subject to such
terms, conditions, restrictions or limitations as the compensation committee
may
determine are appropriate. Performance units will be assigned an initial
value
established by the compensation committee and performance shares will be
assigned an initial value equal to the per share fair market value of our
common
stock on the date of the grant. The compensation committee will set performance
goals in its discretion and the number and value of the payout for the
performance shares/units will be determined based on the extent to which
those
performance goals are met. Payouts for performance shares/units may be payable
in cash, shares of common stock or a combination of cash and common stock.
The
compensation committee may assign rights to performance shares/units that
entitle the recipient to receive any dividends declared with respect to shares
of common stock earned in connection with grants of performance
shares/units.
Other
Awards.
The
compensation committee may grant other awards to employees or non-employee
directors in amounts and on terms determined by the compensation
committee.
Change
in Control.
In the
event of a change in control of FAAC:
· stock
options and/or stock appreciation rights not otherwise exercisable will become
fully exercisable;
· all
restrictions previously established with respect to restricted stock awards
will
lapse; and
· all
performance shares/units or other awards will be deemed to be fully earned
for
the entire performance period applicable to them.
The
vesting of all of these awards will be accelerated as of the effective date
of
the change in control.
Transferability.
Except
as explicitly set forth in an award agreement, the rights and interests of
a
participant under the incentive compensation plan may not be transferred,
except
by will or the applicable laws of descent and distribution in the event of
the
death of the participant.
Adjustments
upon Changes in Capitalization.
The
number of shares of our common stock as to which awards may be granted under
the
incentive compensation plan and shares of common stock subject to outstanding
awards will be appropriately adjusted to reflect changes in our capitalization,
including stock splits, stock dividends, mergers, reorganizations,
consolidations and recapitalizations.
Amendments.
The
board of directors may suspend or terminate the incentive compensation plan
at
any time. In addition, the incentive compensation plan may be amended from
time
to time in any manner without stockholder approval, except that no modification
or termination of the incentive compensation plan may adversely affect in
any
material way any award previously granted under the incentive compensation
plan
without the written consent of the person holding such award.
-80-
Estimate
of Benefits.
Until
and unless approved by our stockholders, no grants will be made under the
incentive compensation plan. We cannot determine the benefits to be received
by
our directors or officers under the incentive compensation plan or the benefits
that would have been received by our directors and officers in 2005 had the
plan
been in effect in 2005.
Required
Vote
The
incentive compensation plan proposal must be approved by the affirmative
vote of
the majority of shares of our common stock present in person or represented
by
proxy at the special meeting and entitled to vote on the proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE
INCENTIVE COMPENSATION PLAN PROPOSAL.
-81-
APPROVAL
OF THE ELECTION OF A NOMINEE TO OUR BOARD OF DIRECTORS
General
Description of the Nomination Proposal
Our
board
of directors presently is comprised of four directors divided into three
classes
of one or two directors each. Each class will generally serve for a term
of
three years with only one class of directors being directed in each year.
At the
special meeting, one director is to be elected to serve for a three-year
term
expiring in 2009 and until his successor is duly elected and
qualified.
Our
board
of directors has approved the nomination of David J. Mitchell to serve for
a
three-year term expiring in 2009. Unless a stockholder requests that voting
of
the proxy be withheld for a nominee in accordance with the instructions set
forth on the proxy card, it presently is intended that shares represented
by
proxies will be voted for the election of this nominee for the class to which
the nominee was nominated. This nominee has consented to being named in this
proxy statement and to serve if elected.
The
term
of office of our Class I directors, presently consisting of David J. Mitchell,
will expire at the special meeting. The term of office of our Class II
directors, presently consisting of Harvey L. Weiss and Donald L. Nickles,
will
expire in 2007. The term of office of our Class III directors, presenting
consisting of C. Thomas McMillen, will expire in 2008. In addition, we expect
that Thomas P. Rosato and Gerard J. Gallagher will, pursuant to the terms
of the
voting agreement, join our board of directors as a Class III director and
a
Class II director, respectively, promptly following the consummation of the
acquisition.
Required
Vote
For
election as a director, a nominee must receive the affirmative vote of a
plurality of the shares of our common stock present in person or represented
by
proxy at the special meeting and entitled to vote on the election of
directors.
Additional
Information
For
additional information about our board of directors and committees thereof,
please see “Directors and Executive Officers at Fortress America Acquisition
Corporation Following the Acquisition” on page __.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE
ELECTION OF DAVID J. MITCHELL AS CLASS I DIRECTORS.
-82-
APPROVAL
OF PROPOSAL TO ADJOURN THE SPECIAL MEETING
General
Description of the Adjournment Proposal
The
adjournment proposal allows our board of directors to submit a proposal to
adjourn the special meeting to a later date or dates, if necessary, to permit
further solicitation of proxies in the event there are not sufficient votes
at
the time of the special meeting to approve the acquisition.
Consequences
if Adjournment Proposal is Not Approved
If
the
adjournment proposal is not approved by the stockholders, our board of directors
may not be able to adjourn the special meeting to a later date in the event
there are not sufficient votes at the time of the special meeting to approve
the
acquisition.
Required
Vote
Adoption
of the adjournment proposal requires the affirmative vote of a majority of
the
shares of our common stock present in person or by proxy at the special meeting
and entitled to vote on the proposal. No vote of the warrant holders is
necessary to adopt the adjournment proposal, and we are not asking the warrant
holders to vote on the adjournment proposal. Adoption of the adjournment
proposal is not conditioned upon the adoption of the acquisition proposal,
the
nomination proposal or the amendment proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE
ADJOURNMENT PROPOSAL.
-83-
INFORMATION
ABOUT TSS/VORTECH
Overview
TSS/Vortech
provides a single source solution for highly technical mission-critical
facilities such as data centers, operation centers, network facilities, server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. The companies’
services include technology consulting, engineering and design management,
construction management, system installations, operations management, and
facilities management and maintenance. The companies are privately
owned.
During
the past three years, TSS/Vortech’s revenue growth has been driven mainly by
government spending on homeland security initiatives spurred by the events
of
September 11, 2001. These events have also affected businesses, which are
increasing spending on data security and privacy . These homeland security
initiatives include projects that required the hardening, relocation, renovation
and upgrade of mission-critical facilities to protect critical government
information networks and data processing centers against attacks. With
respect
to these critical infrastructure systems, the companies focus on physical
security, network security, redundancies for uninterruptible power supply
systems, electrical switch gear, stand-by power generators, heat rejection
and
cooling systems, fire protection systems, monitoring and control systems,
security systems, as well as the physical environment that houses critical
operations. TSS/Vortech helps its customers plan for, prevent or mitigate
against the consequences of attacks, power outages and natural disasters.
It has
provided its services, directly and indirectly, to both government customers
and
private sector customers.
The
companies have obtained a facility clearance from the U.S. Department of
Defense. This clearance enables the companies to access and service restricted
government projects. In addition to the facility clearance, TSS/Vortech has
successfully cleared over one-third of its employees, allowing them individual
access to restricted projects and facilities. Several additional employees
are
currently in the process for clearance.
Following
the completion of the acquisition, TSS/Vortech expects to use its enhanced
resources to expand geographically through internal growth initiatives as
well
as through potential acquisitions of specialized mission critical engineering
or
IT services firms (primarily in the U.S.).
The
companies were founded in 2002 and operated as divisions of a predecessor
limited liability company, although they trace their history to companies
operated by current owners Thomas Rosato and Gerard Gallagher in the 1980s.
Effective in August 2005, the companies were organized into separate private
commonly owned Maryland limited liability companies that operate as an
integrated business. See Note 1 of the Notes to the Combined Financial
Statements of Vortech, LLC and VTC, LLC for the year ended December 31,
2005.
Mission-Critical
IT Industry
IT
facilities and other high technology environments are much more complex than
standard facilities and require a larger capital investment. Errors and delays
in the planning, design, construction or installation of such facilities
can
involve significant costs. As a result, companies and building owners and
managers are increasingly seeking project managers and construction firms
with
specialized expertise and experience in designing, building and maintaining
critical IT infrastructure and systems.
Market
research indicates growth in overall IT spending and in the mission-critical
business arena in particular. According to a 2006 report by the InterUnity
Group, an industry market research firm based in Concord, Massachusetts,
total
information technology spending by the U.S. Government and the private sector
is
expected to grow from $1.02 trillion in 2007 to $1.24 trillion in 2011. The
mission-critical IT market in particular is growing rapidly. InterUnity Group
estimates that total mission-critical IT spending by the U.S. Government
and the
private sector will grow from $51.5 billion in 2007 to $91.1 billion in 2011,
for an annual compound growth rate of 15.3%. InterUnity Group also estimates
that mission-critical IT spending will grow from 5.0% of total IT spending
in
2007 to 7.4% in 2011.
-84-
TSS/Vortech
intends to pursue opportunities in the growing mission-critical IT market
in
both the government and private sectors through its single source solution
offerings. The companies believe there are significant barriers to entry
for new
competitors in the mission-critical IT market, including customer requirements
for firms with substantial IT project experience, deep and broad professional
and IT construction management offerings and, for homeland defense and
intelligence agency work, facility and security clearances. Through its
facilities integration services, TSS/Vortech has the ability, directly and
through subcontractor relationships, to provide all services and coordinate
the
efforts of all personnel involved in a mission-critical project, to meet
crucial
occupancy deadlines, and to complete all required services with minimal
disruption.
Service
Offerings
The
companies focus on becoming involved in facilities integration projects that
are
in their planning stages. When involved in the initial planning stages of
a
facilities integration project, the companies develop a comprehensive project
Solutions Path that meets rigorous design and scheduling requirements for
the
timely delivery of high technology facilities that are critical to the
customer’s continuous operations. When involved in later project stages,
services are provided on an integrated or individual basis.
Project
Solutions Path
The
companies have developed a five-step project Solutions Path for mission-critical
environments. The integrated Solutions Path provides a simple, yet
comprehensive, process for program roll-out, and also serves to align project
requirements with TSS/Vortech’s capabilities. This Solutions Path incorporates
each major phase of a design and construction project, from initial planning
and
programming, through maintenance and service of equipment. Descriptions of
the
five phases shown in the Solutions Path are provided below.
Planning
and Programming
. This
phase represents the initiation of project development and typically includes
establishing project goals and a preliminary budget and schedules; setting
technical parameters and requirements; and determining project team members
and
the overall level of effort required of the team. When developing
mission-critical facilities, the planning and programming phase is often
considered the most important, because this is where the project receives
its
initial emphasis, motivation and direction.
Various
services are performed during the planning and programming phase, with selection
depending upon project mission and scope. Typical planning and programming
services include requirements analyses; site selections and comparisons;
facility and system reliability assessments and audits; space planning; computer
hardware planning and configurations; security risk assessment; disaster
avoidance and recovery planning; and project budgeting and
scheduling.
-85-
Design
and Engineering
. During
this second phase of the Solutions Path, design and engineering experts on
the
TSS/Vortech team apply vital, real-life experience in the engineering of
critical environmental, power, communications and security systems. This
expertise is the source of precise engineering solutions that directly impact
the unique function, reliability and cost of the customer’s specialized
facility.
Design
and engineering service offerings typically include critical power and
mechanical load calculations; schematic design of electrical, mechanical,
communications, fire protection and security systems; mechanical design and
engineering; high and medium voltage electrical design and engineering;
communications and security systems design and engineering; physical
vulnerability assessments; force protection design and bomb blast analyses;
fire
protection system design and engineering; facility systems equipment selection;
and facility commissioning and testing.
Construction
Management
.
Activities during this phase include detailed preparations required for a
successful construction process. Work performed during the construction
management phase includes project management; value engineering and design
management; bid negotiation; subcontractor pre-qualification and negotiation;
long-lead equipment procurement; issuance of equipment and construction
contracts; and refinement of project budget and schedule.
Installation
Management:
The
fourth phase of the Solution Path model involves the on-site construction
work.
During this phase, TSS/Vortech project managers mobilize the required expertise
for the project, utilizing in-house superintendents and quality control and
safety professionals, as well as qualified subcontractors and support personnel,
some of which have historically been provided by affiliated entities. See
“Certain Relationships and Related Party Transactions-Relating to TSS/Vortech”
beginning on page __ . TSS/Vortech project managers supervise work by project
team members, including all aspects of: architecture and construction; electric
power systems; heat rejection and cooling; energy management and controls;
cooling tower systems; security systems; voice, data and network cabling;
fire
and life safety systems; and process piping and plumbing systems. The
TSS/Vortech project managers remain responsible for all aspects of the project
until project completion and satisfactory turn over to the
customer.
The
installation portion of the project is typically the longest duration when
compared to other project phases. In addition, this portion has the largest
number of outside influences that can impact project goals and objectives,
such
as weather, non-performance of sub-contractors, equipment deliveries, unexpected
project changes from the owner, and influence from local authorities and
utility
providers. Therefore, experience, skill and mission focus are critical during
the project installation period.
Facilities
Maintenance and Service:
TSS/Vortech provides a comprehensive maintenance and service contract designed
to insure that the multiple systems critical to sustaining on-line applications
in technologically intensive facilities remain operational and functional.
Typical services during the facilities maintenance and service phase include
overall management of facility maintenance program; on-site staffing of
technical engineering positions (including, electricians, HVAC mechanics,
control technicians and voice/data technicians); and management of non-technical
subcontracted services (landscaping, janitorial, pest control, snow removal,
carpentry, painting and general maintenance services). TSS/Vortech seeks
to provide on-site maintenance services, not only to gain additional project
revenue, but also to obtain on-hands involvement in any new facility planning,
design and construction initiatives that the customer undertakes.
Strategy
TSS/Vortech’s
strategies for growth include the following:
|
·
|
Focus
on the Solutions Path.
The companies’ past experience in selling project-related services has
demonstrated the importance of focusing on selling consulting business
at
the top of the Solutions Path. Focusing on the top of the Solutions
Path
offers the following advantages applicable to government, government
related and commercial customers:
|
-86-
|
Ø
|
Develops
a customer relationship at the initiation of a project, therefore
maximizing the sales opportunity
|
|
Ø
|
Because
consulting engagements are less expansive than project-wide engagements,
purchase authority often resides at lower levels of management,
which
increases probability of closure
|
|
Ø
|
Limits
exposure to competition since the fee is relatively low and services
are
in specialized areas where we can demonstrate our technical depth
and
expertise in mission critical facilities to the
customer
|
|
Ø
|
Increases
the probability of conversion (selling subsequent phases) because
the
customer is comfortable with performance and price of initial
services
|
|
Ø
|
Positions
TSS/Vortech on the “customer’s side of the table”, which teams TSS/Vortech
and the customer on a consolidated mission and distinguishes the
companies
from typical contractors and firms associated with equipment
suppliers
|
|
·
|
Growing
Professional Sales Staff
.
To drive growth in revenues TSS/Vortech intends to continue to
expand its
sales staff to include account executives for existing and future
regional
sales offices. TSS/Vortech is currently pursuing account executives
and
additional sales staff and has developed an educational program
built
around its project execution model. Each sales professional will
be
responsible to achieve specific objectives and will be managed
closely.
|
|
·
|
Maintaining
and Enhancing Key Alliances.
Maintaining key alliances is also crucial to sales development
and growth
and often provides TSS/Vortech with introductions to the customers
of our
alliance partners. These alliances reside with IT consulting firms,
specialty mission critical engineering firms, application service
providers and internet service providers. Key alliance opportunities
also
reside in other firms within the market sector such as equipment
manufacturers, product suppliers, property management firms, developers,
IT system integrators, and firmware providers. In addition, we
seek to
maintain alliances and enter into teaming or partnering relationships
with
minority contracting firms and hub zone companies. These firms
are natural
alliance partners and can provide us with valuable entrees into
government
contracting relationships. In turn, we can provide these contractors
and
hub zone companies with valuable mission critical design, engineering,
contracting experience to which they might not otherwise have
access.
|
|
·
|
Geographic
Expansion and Strategic Acquisitions
.
TSS/Vortech believes that expanding its presence in additional
markets
through establishing regional offices is a key to its future success.
TSS/Vortech established its IT consulting services business through
an
acquisition in the Washington, D.C. area in early 2005, has recently
established regional sales offices in San Francisco and Atlanta,
and has
targeted additional growth opportunities in other major U.S. markets
based on sales potential and strategic geographic location. TSS/Vortech’s
acquisition of the technology consulting firm has expanded its
customer
base, allowed it to offer a broader scope of services and supported
its
current growth in technology consulting projects. Following the
Fortress
acquisition, the companies intend to pursue strategic acquisitions
that
cost-effectively add new customers, regional coverage, specific
federal
agency contracting experience, or complementary expertise to accelerate
their access to existing or new
markets.
|
|
·
|
Establishing
a National Operations Center.
A
significant part of TSS/Vortech’s strategy for growth in its facilities
management services business is to establish and maintain a National
Operations Center (“NOC”) to service customers on a nationwide basis. A
NOC is a central location for monitoring the customer’s critical
infrastructure systems, addressing alarm conditions within these
systems,
and controlling certain systems via remote interface. Following
the
acquisition, a portion of available cash will be used to build
or purchase
a NOC, hire and train staff, and market the NOC to large companies
with
sophisticated IT needs including government customers, such as
those with
Tier 3 and 4 facilities, and to companies with multiple mission
critical
locations.
|
|
·
|
Marketing
Initiatives.
The companies intend to expand their current localized marketing
campaign
to a regional and national level. This will involve intensifying
the
marketing of TSS/Vortech’s consulting and engineering services to private
sector end users, major government contractors, and existing and
potential
alliance partners on regional and national basis through a focused
marketing program involving:
|
-87-
|
Ø
|
Selected
media advertising
|
|
Ø
|
Trade
show attendance
|
|
Ø
|
Conducting
technical seminars in local target
markets
|
|
Ø
|
Producing
a marketing campaign for distribution at a national
level
|
Competition
The
mission-critical IT solutions market is large, fragmented and highly
competitive. TSS/Vortech competes for contracts based on its strong customer
relationships, successful past performance record, significant technical
expertise, specialized knowledge and broad service offerings. TSS/Vortech
often
competes against divisions of both the large design contractors and construction
contractors, as well as against numerous small to medium sized specialized
information technology consulting firms. Some of these competitors are large,
well-established companies that have broader geographic scope and greater
financial and other resources than TSS/Vortech. These larger, more established,
competitors include EYP Mission Critical Facilities, Inc., Holder Construction
Company, Whiting Turner and Clark Construction. Although these large
construction and engineering companies have greater financial and other
resources, TSS/Vortech does not believe they offer as complete a line of
mission
critical IT services as TSS/Vortech offers. TSS/Vortech expects competition
in
the mission-critical IT technology services sector to increase in the
future.
Contracts
and Customers
TSS/Vortech’s
customers include U.S. government and homeland defense agencies and private
sector businesses that in some cases are the end user of the facility or
in
other cases, such as the case with our major Real Estate Investment Trust,
or
REIT, customer, are providing a facility to a government end user. We categorize
contracts where a government agency is the ultimate end user of the facility
as
government-related contracts.
The
price
provisions of the contracts TSS/Vortech undertakes can be grouped into three
broad categories: fixed-price, guaranteed maximum price and time and materials.
The majority of TSS/Vortech’s contracts are of the guaranteed maximum price
type.
In
a
fixed-price contract, TSS/Vortech must fully absorb cost overruns,
notwithstanding the difficulty of estimating all of the costs it will incur
in
performing these contracts and in projecting the ultimate level of revenues
that
it may achieve. TSS/Vortech’s failure to anticipate technical problems, estimate
costs accurately or control costs during performance of a fixed-price contract
may reduce the profitability of a fixed-price contract or cause a
loss.
In
a
guaranteed maximum price contract, TSS/Vortech shares its cost information
with
the customer and earns a negotiated fee; in addition, a contingency fee is
included for changes and errors in pricing. As the project progresses to
the
point where both the customer and TSS/Vortech are comfortable with final
pricing
of the project, a maximum price is agreed to with savings reverting back
to the
customer. Due to the fact that the risk is shared with the customer on these
projects, the profit margins are less than those earned on other contract
types.
In
a time
and material contracts, TSS/Vortech is reimbursed for labor at fixed hourly
rates, and for materials used at an agreed upon mark up on cost. Profit margins
are dependent upon TSS/Vortech paying labor rates and benefits less than
the
billable rate negotiated with the customer.
For
the
year ended December 31, 2005, revenues from guaranteed maximum price contracts
represented approximately 76% of TSS/Vortech’s revenues. Most government
contracts, including TSS/Vortech’s contracts with the federal government, are
subject to termination by the government, to government audits and to continued
appropriations.
TSS/Vortech
is not subject to any significant regulation by state, federal or foreign
governments.
A
discussion of TSS/Vortech’s historical contract base and backlog, as well
as information on revenues by customer and contract type, can be found under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations of TSS/Vortech”.
-88-
Sales
and Marketing
The
marketing approach employed by the companies emphasizes expertise in IT
hardware
systems and facilities programming and planning, which enables involvement
at
the critical early stages in projects where a full range of services are
needed.
This marketing approach utilizes the Solutions Path and allows the customer
to
contract for comprehensive facilities integration services or to contract
separately for each individual project phase. TSS/Vortech’s marketing program
seeks to capitalize on its standing in its industry, including its existing
relationships and its reputation based on its performance on completed
projects.
TSS/Vortech also seeks to enhance its name recognition through the use
of trade
shows, technical seminars, direct mailings, and the media.
To
drive
growth in revenues, TSS/Vortech has expanded its sales staff to include regional
account executives and intends to continue to hire and train sales professionals
responsible for defined geographic regions in the U.S. The companies have
developed an educational program for account executives and other sales staff
built around their project execution model. TSS/Vortech is pursing this regional
expansion with emphasis placed on geographic areas that have the greatest
amount
of local mission critical project potential. In conjunction with these efforts,
TSS/Vortech is expanding its marketing program from a local to a
regional/national level to support its expanded sales efforts and increase
name
recognition and market penetration
The
process for acquiring business may require the companies to participate in
a
competitive request-for-proposal process, with the primary difference among
potential customers being that the process for direct government and government
related customers is significantly more formal and complex than for private
sector customers as a result of government procurement rules and regulations
that govern the contracting process.
Facilities
TSS/Vortech’s
current headquarters is located at 11850 Baltimore Avenue, in Beltsville,
Maryland, a suburb of Washington, D.C. The facility consists of approximately
14,800 square feet, and is occupied under a sublease with a related party
at a
cost of approximately $163,000 per year, which terminates on October 31,
2008. See “Certain Relationships and Related Party Transactions-Relating to
TSS/Vortech” on page ___ . TSS/Vortech also leases a facility in Columbia,
Maryland, under which it occupies approximately 2,600 square feet at an
annual
rent of $50,064. This lease is currently on a month to month basis, and
TSS/Vortech expects to exit this space at the end of October 2006. TSS/Vortech
intends to enter into a five year lease for approximately 14,500 square
feet at
annual cost of $355,000 in the fourth quarter of 2006 to consolidate its
administrative staff and technology consulting group. The Vortech division
will
remain in the existing leased facility and reduce its square footage to
10,000
square feet in January 2007 under the existing lease at an annual cost
of
$110,000 per year. These changes will provide TSS/Vortech with a total
of 24,500
square feet of space in 2007 versus 17,500 square feet of space currently
occupied at an estimated annual cost in 2007 of $465,000 versus $215,000
in
2006. These lease changes are expected to provide sufficient space to handle
TSS/Vortech’s anticipated growth over the next three years. TSS/Vortech does not
own any real property .
Management
The
companies’ founders and current owners, Thomas Rosato and Gerard Gallagher, each
have over 25 years in experience in providing design, installation and
maintenance services to mission-critical facilities. See “Directors and
Executive Officers of Fortress America Acquisition Corporation Following
the
Acquisition.”
Employees
At
June
30, 2006, TSS/Vortech had 115 personnel, including 114 full-time employees
and
one part-time employee, as well as one independent contractor. TSS/Vortech’s
future success will depend significantly on its ability to attract, retain
and
motivate qualified personnel. TSS/Vortech is not a party to any collective
bargaining agreement and it has not experienced any strikes or work stoppages.
TSS/Vortech considers its relationship with its employees to be
satisfactory.
-89-
Legal
Proceedings
TSS/Vortech
is not presently subject to any material litigation and TSS/Vortech is not
aware
of any threatened material litigation. TSS/Vortech is a party to routine
litigation and administration proceedings that arise from time to time in
the
ordinary course of business, none of which, individually or in the aggregate,
is
expected to have a material effect on TSS/Vortech.
-90-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF TSS/VORTECH
Some
of
the statements contained in Management’s Discussion and Analysis of Financial
Condition and Results of Operations of TSS/Vortech, other than purely
historical
information, including estimates, projections, statements relating to
TSS/Vortech’s business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the United States Private Securities Reform
Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. TSS/Vortech identifies these
forward-looking statements by the words “believes,” “project,” “expects”,
“anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
expressions. Forward-looking statements are based on TSS/Vortech management’s
current expectations and are subject to risks, uncertainty and changes
in
circumstances, which may cause actual results, performance or achievements
to
differ materially from anticipated results, performance or achievements.
All
statements contained herein that are not clearly historical in nature
are
forward looking. The forward-looking statements include statements regarding
the
cash requirements, the amount of backlog, TSS/Vortech’s strategies to diversify
its customer base and opportunities and ability to expand sales and develop
its
engineering, design and project management services, TSS/Vortech’s expected
continuation of revenues from contracts with its major customer, expectations
regarding government spending, future demand for its services and other
statements that are predictions of or indicate future events, trends,
plans or
objectives are also forward looking statements.
Executive
Overview
TSS/Vortech
is in the midst of a transition from a company that has been heavily
reliant on
a single long term project to a company with a more diversified base
of
customers and revenue sources. Historically, the majority of TSS/Vortech’s
revenue and cash flows has come from a series of contracts with its major
customer, a real estate investment trust that is providing critical space
to a
U.S. government agency. This relationship was established in late 2003
and, most
recently, these contracts accounted for $23.1 million, or 66.5%, of
TSS/Vortech’s revenue during the six months ended June 30, 2006. See “Risk
Factors ─ Risks Related to Our Business and Operations Following the
Acquisition.” The work under these contracts is winding down, and TSS/Vortech
currently expects that it will not recognize significant revenue under
these
contracts after the first quarter of 2007, although it is possible that
additional change orders and other modification work under the contracts
will
continue later into 2007. TSS/Vortech continues to maintain a strong
relationship with its major customer and is working with the customer
on
opportunities to provide consulting, engineering and construction management
in
connection with other projects.
TSS/Vortech
has anticipated the eventual completion of the contracts and the significant
reduction in revenue and cash flows that would occur if it is not successful
in
developing significant new business on a timely basis. As a result, in
early
2005, TSS/Vortech began implementing an aggressive marketing and sales
strategy
to develop new sources of work, focusing on the top end of its Solutions
Path.
The key to this strategy is developing technology consulting relationships
through increased sales efforts and the addition of sales offices and
technical
sales personnel as described elsewhere herein. (See “Information About
TSS/Vortech” on pages __ through __). These focused new business development
efforts have resulted in the generation of a four-fold increase in outstanding
new consulting proposals during the six months ended June 30, 2006 compared
to
the same period in 2005. In addition, TSS/Vortech is increasing its backlog
of
technology consulting projects, which stands at $.0.8 million at June
30, 2006.
Backlog on projects for customers other than the companies’ major REIT customer
increased from $6.1 million, or 15.4% of total backlog, to $8.1 million,
or
36.1% of total backlog, at December 31, 2005 and June 30, 2006, respectively.
Also as a result of these efforts, through the first half of 2006, TSS/Vortech
has generated $5.5 million in revenue from new customers and has expanded
its
customer base by 66 customers.
In
order
to maintain revenue in future years at levels equal to or greater than
those
achieved in 2005 and at the current estimated run rate for calendar 2006,
TSS/Vortech will need to generate approximately $18.0 million in new
business
per quarter beginning in the second quarter of 2007. TSS/Vortech has
not yet
reached the level of new business development necessary to be in a position
to
replace the runoff of revenue from its major project, although it has
made
significant progress as illustrated by its increased technology consulting
backlog and outstanding proposal volume discussed above. TSS/Vortech
believes,
based on its progress to date, that it is on track to develop the additional
customers required in order to replace the revenue from the runoff of
its major
customer by mid-2007. However, there are a number of risks and uncertainties
associated with the companies’ transition and, therefore, TSS/Vortech cannot
assure you that its strategy will be successful or that it will not experience
decreased revenues in the future. See “Risks Related to Our Business and
Operations Following the Acquisition” on pages ___ and
___.
-91-
Our
Business
TSS/Vortech
provides a single source solution for highly technical mission-critical
facilities such as data centers, operation centers, network facilities, server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. The companies’
services include technology consulting, engineering and design management,
construction management, system installations, operations management and
facilities management and maintenance.
TSS/Vortech’s
revenue growth has mainly been driven by government spending on homeland
security initiatives spurred by the events of September 11, 2001. These events
have also affected private companies, which are increasing spending on data
security and privacy. During the past three years, TSS/Vortech has derived
a
majority of its revenues from a series of contracts with its major customer,
a
REIT that provides mission critical space to a U.S. intelligence agency.
See
“─Contract Base and Backlog” below. TSS/Vortech’s management began a number of
initiatives in early 2005 to diversify and expand its customer base and its
penetration into the private sector and other government customers. These
initiatives are described under “Information About TSS/Vortech.”
TSS/Vortech’s
revenue is driven by its ability to attract and retain qualified and productive
employees, identify business opportunities, secure new and renew existing
customer contracts, provide outstanding services to its customers and execute
projects successfully. TSS/Vortech’s operating income is derived from its
ability to generate revenue and collect cash under its contracts in excess
of
cost of earned revenues and selling, general and administrative expenses.
TSS/Vortech’s business has benefited from its facility clearance from the U.S.
Department of Defense, which enables the companies to access and service
restricted government projects, and from the clearances obtained for over
one
third of its employees, allowing them individual access to restricted projects
and facilities.
TSS/Vortech’s
most significant expenses are cost of earned revenues ,
which
consist primarily of direct labor and associated costs for program personnel
and
direct expenses incurred to complete projects, including the cost of materials
and equipment and amounts paid or accrued to subcontractors. TSS/Vortech’s
ability to accurately predict personnel requirements, salaries and other
costs,
as well as to manage personnel levels and utilize its personnel versus
subcontracting the work, can have a significant impact on its cost of earned
revenues. Utilizing TSS/Vortech’s own employees on projects results in higher
gross margins compared to utilizing subcontracted employees for the same
work.
As a result, TSS/Vortech seeks to maximize its internal labor content on
its
contract awards where practicable. Selling, general and administrative expenses
consist primarily of costs associated with TSS/Vortech’s management, facilities,
finance and administrative groups and business development expenses, which
include bid and proposal efforts, and occupancy, travel and other corporate
costs.
Contract
Base and Backlog
In
late
2003, TSS/Vortech established a relationship with its major customer, a
REIT
that is providing mission critical space to a U.S. government agency. This
relationship has grown into a total of nine separate contracts that accounted
for $46.0 million, $10.5 million, $2.5 million and $23.1 million of
TSS/Vortech’s revenues in 2005, 2004, 2003, and the six months ended June 30,
2006, respectively. These amounts represented 78.4%, 49.1%, 20.3% and 66.5%
of
TSS/Vortech’s revenues in 2005, 2004, 2003 and the six months ended June 30,
2006, respectively. TSS/Vortech expects work under these contracts, including
any modifications to these contracts, to be substantially complete by the
first
quarter of 2007. Accordingly, TSS/Vortech expects that it will not recognize
significant revenues under these contracts after the first quarter of
2007.
In
early
2005, TSS/Vortech implemented a strategy to increase its business opportunities
from additional sources. This strategy has primarily involved the acquisition
by
TSS/Vortech of a technology consulting business and an increased focus on
securing technology consulting engagements at the front end of a customer’s
facility enhancement or build out cycle. TSS/Vortech believes that such
engagements will position it well to secure follow on implementation
engagements. TSS/Vortech is implementing this strategy by hiring and supporting
additional sales and business development personnel and through the growth
of
its acquired technology consulting business. These additional personnel have
resulted in an increase of selling, general and administrative
expenses.
-92-
This
increase in sales and business development activity has resulted in an
increase
in TSS/Vortech’s backlog for technology consulting projects from $0 as of
December 31, 2004 to approximately $0.6 million as of December 31, 2005
and
approximately $0.8 million as of June 30, 2006. Consistent with its strategy,
TSS/Vortech believes that these increases in technology consulting backlog
are
significant because they reflect an increase in TSS/Vortech’s ability to sell
significant follow on construction management, facility management and
network
and power projects in 2007 and future periods. The likelihood, timing,
size and
profitability of any such follow on projects are, however, very difficult
for
TSS/Vortech to predict due to the untested nature of its strategy and it
limited
history in pursuing it.
In
large
part due to its increased sales and business development efforts, TSS/Vortech’s
customer base has grown from 68 customers as of December 31, 2003 to 226
customers as of June 30, 2006. For the six months ended June 30, 2006,
TSS/Vortech’s top 10 customers generated 88.1% of its revenue, compared to the
94.6% of its revenues generated by its top 10 customers for the year ended
December 31, 2005.
Backlog.
TSS/Vortech defines backlog as the expected revenue under executed and awarded
contracts less revenue earned to date under the contracts, as determined
based
upon the percentage of completion method of accounting for all of its contracts
except for time and material contracts. TSS/Vortech generally calculates
expected revenue under a contract as the revenue expected from projects or
other
work specified by the contract, subject to any fee caps or other limitations
imposed by the contract. With respect to each government contract, TSS/Vortech
includes in backlog only the value of the contract that has been funded and
does
not include in backlog the amount of an indefinite delivery/indefinite quantity
(“ID/IQ”), or task order, contracts except to the extent a funded task order has
been received.
The
following table sets forth backlog, as of the dates indicated:
(in thousands)
|
December
31,
2003
|
December
31,
2004
|
December
31,
2005
|
June
30,
2006
|
||||||||
|
$
|
20,921
|
$
|
52,816
|
$
|
39,706
|
$
|
22,416
|
||||
As
of
December 31, 2005 and June 30, 2006, the backlog attributable to open
contracts
with TSS/Vortech’s major customer totaled $33.6 million and $14.3 million,
respectively.
Revenues
The
following table shows TSS/Vortech’s revenues by customer type for each of the
last three years ended December 31 and for the six months ended June
30,
2006:
(in
thousands)
|
Year
Ended December 31,
|
Six
Months Ended
June
30,
|
||||||||||||
|
2003
|
2004
|
2005
|
2006
|
||||||||||
|
Government
and government-related (1)
|
$
|
10,136
|
$
|
17,997
|
$
|
52,809
|
$
|
26,400
|
|||||
|
Private
enterprise
|
2,195
|
3,306
|
5,823
|
8,326
|
|||||||||
|
Total
|
$
|
12,331
|
$
|
21,303
|
$
|
58,632
|
$
|
34,726
|
|||||
| (1) |
Includes
contracts with TSS/Vortech’s major customer, contracts that TSS/Vortech
holds directly with a government agency and subcontracts under
which
TSS/Vortech acts as a subcontractor for a prime government
contractor.
|
-93-
During
2005, approximately 73% of TSS/Vortech’s revenues were derived from design build
construction services provided to its customers under either guaranteed maximum
price contracts or fixed price contracts. The majority of these services
are
outsourced to subcontractors performing engineering and construction activities
on the projects and our cost of earned revenues reflects our payments to
subcontractors on these projects. The remaining revenues for 2005 were derived
from services performed by TSS/Vortech’s employees at various stages of the
project under time and material contracts, fixed price contracts or guaranteed
maximum price contracts.
The
level
of construction that is subcontracted, equipment purchases made for the
projects, and other outsourced service purchases TSS/Vortech makes for its
customers may vary from period to period depending on specific contract
arrangements and customer requirements. Since TSS/Vortech usually earns higher
margins from services that its employees provide, compared with subcontracted
efforts and other services such as long lead equipment purchases for customers,
TSS/Vortech seeks to maximize its labor services on all of its engagements
where
practicable.
TSS/Vortech’s
three major contract types are described below:
Fixed
price.
Under
fixed price contracts, TSS/Vortech performs specific tasks for a predetermined
price. Fixed price contracts generally offer a higher profit margin but involve
greater financial risk because TSS/Vortech bears the impact of potential
cost
overruns in return for the full benefit of any cost savings.
Guaranteed
maximum price.
Under
guaranteed maximum price contracts, TSS/Vortech shares its cost information
and
estimates with the customer. A profit fee is negotiated along with the
establishment of a contingency fee for changes and errors in pricing. Once
the
project progresses to the point where both customer and TSS/Vortech are
comfortable with the final pricing of the project, a maximum price is agreed
to
with savings reverting back to the customer. Due to the fact that the risk
is
shared with the customer on these projects, the profit margins are less than
those earned on fixed price contracts.
Time
and materials.
Under
time and material contracts, TSS/Vortech is reimbursed for labor at fixed
hourly
rates, and for materials used at an agreed upon mark up on cost. Profit margins
are dependent upon TSS/Vortech paying labor rates and benefits less than
the
billable rate negotiated with the customer.
The
following table sets forth revenues by contract type for each of the last
three
years ended December 31 and for the six months ended June 30,
2006:
(in
thousands)
|
Year
Ended December 31,
|
Six
Months Ended
June
30,
|
||||||||||||
|
2003
|
2004
|
2005
|
2006
|
||||||||||
|
Fixed
price
|
$
|
2,301
|
$
|
7,131
|
$
|
10,508
|
$
|
8,751
|
|||||
|
Guaranteed
maximum price
|
9,841
|
12,848
|
44,688
|
23,105
|
|||||||||
|
Time
and materials
|
189
|
1,324
|
3,436
|
2,870
|
|||||||||
|
Total
|
$
|
12,331
|
$
|
21,303
|
$
|
58,632
|
$
|
34,726
|
|||||
Expenses
Cost
of earned revenues.
Cost of
earned revenues includes direct costs incurred by TSS/Vortech to deliver
its
facility integration and other services to its customers. The largest portion
of
these costs includes the cost of subcontractors, major mission critical support
equipment, and outside consultants. These costs also include the cost of
employee salaries and wages, including the employee fringe benefits for
employees that are directly serving customers on projects. TSS/Vortech expects
the ratio of direct labor to other direct costs to increase over time as
it
further expands its services in engineering and technology consulting
projects.
-94-
Selling,
general and administrative (“SG&A”) expenses.
SG&A expenses include the cost of salaries for officers, administrative and
sales personnel and non-project related wages. It also includes the cost
of
facilities and infrastructure that are directly attributable to supporting
those
employees. Among the functions that are covered by these costs are corporate
business development, marketing, estimating and proposal generation costs,
finance and accounting, legal, corporate governance, and executive and senior
management.
Interest
expense.
Interest expense is primarily related to interest paid on term debt utilized
to
purchase corporate assets such as computer systems, trucks and leasehold
improvements to facilities.
Income
taxes.
Each of
VTC, L.L.C. and Vortech, LLC is a limited liability company that is taxed
as a
partnership and thus does not pay federal or state income taxes.
Accordingly, no income tax items appear in the financial
statements.
Critical
Accounting Policies and Estimates
The
companies’ accounting policies are more fully described in the Notes to Combined
Financial Statements of Vortech, LLC and VTC, LLC. As disclosed in the Notes
to
Combined Financial Statements, the preparation of financial statements in
conformity with generally accepted accounting principles requires management
to
make estimates and assumptions about future events. These estimates and
assumptions affect the amounts of assets, liabilities, revenues, and expenses
and the disclosure of gain and loss contingencies at the date of the Combined
Financial Statements. The companies’ estimates are subject to change if
different assumptions as to the outcome of future events were made. TSS/Vortech
evaluates its estimates and judgments on an ongoing basis and predicates
those
estimates and judgments on historical experience and various other factors
that
are believed to be reasonable under the circumstances. Management makes
adjustments to its assumptions and judgments when facts and circumstances
dictate. Since future events and their effects cannot be determined with
absolute certainty, actual results may differ from the estimates used by
TSS/Vortech in preparing the accompanying Combined Financial Statements.
Management believes the following critical accounting policies encompass
the
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue
Recognition:
Revenues
from contracts other than time and materials contracts are recognized on
the
percentage of completion method, measured by the percentage of total costs
incurred to date to estimated total costs for each contract. This method
is used
because management considers cost incurred and costs to complete to be
the best
available measure of progress in the contracts. Revenues from time and
materials
contracts are recognized as work is performed.
Contract
costs include all direct materials, subcontract and labor costs and those
indirect costs related to contract performance, such as indirect labor, payroll
taxes and supplies. General and administrative expenses are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are
made
in the period in which losses are determined.
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents revenue recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted
contracts,” represented billings in excess of revenue recognized. As these
long-term contracts extend over one or more years, revisions in cost and
profit
estimates during the course of the contract are reflected in the accounting
period in which the facts which require the revisions are
determined.
Contract
Receivables:
Contract
receivables are carried at original invoice amount less an estimate made
for
doubtful receivables based on a review of all outstanding amounts on a
monthly
basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Recoveries of contract
receivables previously written off are recorded when received. An account
receivable is considered to be past due if any portion of the receivable
balance
is outstanding for more than 30 days. Interest is not recorded on any past
due
balances.
-95-
Income
Taxes:
Each of
the companies is treated as a partnership for federal income tax purposes
and
their respective members are taxed individually on their pro-rata share of
each
company’s earnings. The companies’ net income or loss is allocated among their
respective members in accordance with the companies’ operating agreements. Each
company intends to make distributions to its members subsequent to year-end
sufficient to pay personal income taxes on taxable income, if any, from the
company.
Credit
Risk:
The
companies may from time to time have cash in banking institutions in excess
of
the amount insured by the Federal Deposit Insurance Corporation. The companies
have not experienced any losses in such accounts and believes it is not
exposed
to any significant credit risk on cash. The companies grant credit to their
customers in the normal course of business on an unsecured basis. The companies’
accounts receivable are derived from customers primarily in the metropolitan
Washington, D.C. and Baltimore, Maryland areas and are made on an unsecured
basis.
Estimates:
The
preparation of financial statements 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 financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Estimates are used
when accounting for estimated costs to complete long-term contracts in progress,
allowance for doubtful accounts and depreciation, among others. Estimates
and
assumptions are reviewed periodically and the effects of revisions are reflected
in the financials statements in the period they are determined to be
necessary.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based
Payment” (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for
transactions in which an enterprise exchanges its equity instruments for
employee services. It also addresses transactions in which an enterprise
incurs
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of those equity instruments
in exchange for employee services. For public entities, the cost of employee
services received in exchange for equity instruments, including employee
stock
options, is to be measured on the grant-date fair value of those instruments.
The cost will be recognized as compensation expense over the service period,
which would normally be the vesting period. SFAS No. 123R became effective
on January 1, 2006 for TSS/Vortech. TSS/Vortech adopted SFAS No. 123R
on January 1, 2006 , and its adoption did not materially affect
TSS/Vortech’s results of operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS No. 154”). SFAS No. 154 replaces ABP Opinion
No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements.” SFAS No. 154 requires that a
voluntary change in an accounting principle be applied retrospectively with
all
prior period financial statements presented using the new accounting principle.
SFAS No. 154 also requires that a change in method of depreciating or
amortizing a long-lived non-financial asset be accounted for prospectively
as a
change in estimate and correction of errors in previously issued financial
statements should be termed a restatement. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The implementation of SFAS No. 154 is not
expected to have a material impact on TSS/Vortech’s combined financial
statements.
In
March
2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”),
“Accounting for Conditional Asset Retirement Obligations,” which is an
interpretation of SFAS No. 143, “Accounting for Asset Retirement
Obligations.” FIN No. 47 clarifies terminology within SFAS No. 143 and
requires an entity to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability’s fair value can be
reasonably estimated. A conditional asset retirement is a legal obligation
to
perform an asset retirement activity in which the timing and method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. FIN No. 47 became effective for fiscal years ending
after December 15, 2005. Adopting FIN No. 47 is not expected to have a
material impact on TSS/Vortech’s financial position, results of operations or
cash flows.
-96-
In
July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes,” which is an interpretation of SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present and disclose in
its
financial statements uncertain tax positions that the company has taken or
expects to take on a tax return. Under FIN No. 48, the financial statements
will
reflect expected future tax consequences of such positions presuming the
taxing
authorities’ full knowledge of the position and all relevant facts, but without
considering time values. FIN No. 48 substantially changes the applicable
accounting model and is likely to cause greater volatility in income statements
as more items are recognized discretely within income tax expense. FIN
No. 48 also revises disclosure requirements and introduces a prescriptive,
annual, tabular roll-forward of the unrecognized tax benefits. The new
accounting model for uncertain tax positions is effective for annual periods
beginning after December 15, 2006. Companies need to assess all material
open
positions in all tax jurisdictions as of the adoption date and determine
the
appropriate amount of tax benefits that are recognizable under FIN No. 48.
Any
difference between the amounts previously recognized and the benefit determined
under the new guidance, including changes in accrued interest and penalties,
has
to be recorded on the date of adoption. For certain types of income tax
uncertainties, existing generally accepted accounting principles provide
specific guidance on the accounting for modifications of the recognized benefit.
Any differences in recognized tax benefits on the date of adoption that are
not
subject to specific guidance would be an adjustment to retained earnings
as of
the beginning of the adoption period. TSS/Vortech is currently evaluating
the
impact the adoption of FIN No. 48 will have on its combined financial
statements.
Results
of Operations
The
following table sets forth certain items from TSS/Vortech’s combined statements
of operations as a percentage of revenues for the periods
indicated.
|
Year
Ended December 31,
|
Unaudited
Six Months Ended
June
30,
|
|||||||||||||||
|
2003
|
2004
|
2005
|
2005
|
2006
|
||||||||||||
|
Revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
|
Cost
of earned revenues
|
68.1
|
74.0
|
85.4
|
85.0
|
82.7
|
|||||||||||
|
Gross
margin
|
31.9
|
26.0
|
14.6
|
15.0
|
17.3
|
|||||||||||
|
Selling,
general and administrative expenses
|
17.2
|
21.2
|
9.6
|
8.3
|
9.6
|
|||||||||||
|
Operating
income
|
14.7
|
4.8
|
5.0
|
6.7
|
7.7
|
|||||||||||
|
Interest
income (expense), net
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
--
|
|||||||
|
Net
income from continuing operations
|
14.6
|
4.7
|
4.9
|
6.6
|
7.7
|
|||||||||||
|
Gain
(loss) from discontinued operations
|
--
|
(1.2)
|
0.4
|
(1.5)
|
--
|
|||||||||||
|
Net
income
|
14.6
|
%
|
3.5
|
%
|
5.4
|
%
|
5.1
|
%
|
7.7
|
%
|
||||||
Six
Months Ended June 30, 2006 and 2005
Revenues.
Revenues for the six months ended June 30, 2006 were $34.7 million, compared
to
$27.7 million for the six months ended June 30, 2005, representing an increase
of approximately $7.0 million, or 25%. The increase in revenues for the
six
months ended June 30, 2006 was primarily due to growth in network and power
projects of $1.5 million, growth
in
construction management revenue of $4.6 million net of a decrease in 2006
of the
realization of revenue on a percentage of completion method of accounting
on
homeland security related contracts for our major customer over the same
period
in the prior year of $1.0
million, and
an
increase of technology consulting revenue of $0.9
million over the same period in 2006.
-97-
Cost
of earned revenues.
Costs
of earned revenues for the six months ended June 30, 2006 were $28.7
million, or
83% of revenues, compared to $23.5 million, or 85% of revenues, for the
six
months ended June 30, 2005. The increase in cost of earned revenues was
driven
by approximately $5.2 million in additional direct employee, subcontractor
and
equipment purchase expenses to support the increase in new service work
orders
and an increase in construction management contracts to support the increase
in
revenue. The decrease in cost of earned revenues as a percentage of revenues
was
due to the increase of direct service work performed for TSS/Vortech’s customers
that generate higher margins, savings from economies of scale on some
larger
projects and refining of project estimates as they neared
completion.
SG&A
expenses.
SG&A expenses for the six months ended June 30, 2006 were $3.3 million,
or
9.6% of revenues, as compared to $2.3 million, or 8.3%, of revenues for
the six
months ended June 30, 2005. The increase in SG&A expenses was primarily due
to the addition of new sales professionals and increased marketing expenses
as a
part of TSS/Vortech’s business development and geographic expansion strategy and
to the addition of administrative personnel to support the increase in
business.
Overall compensation cost increased by $0.5 million and marketing expenses
increased by $0.3 million.
Operating
income.
For the
six months ended June 30, 2006, operating income was $2.7 million, or
7.7% of
revenues, compared to operating income of $1.8 million, or 6.7%, of revenues
for
the six months ended June 30, 2005. For the six months ended June 30,
2006, the
increase in operating income as a percentage of revenues was primarily
due to
higher profit margins on the mix of work performed compared to the same
period
in 2005 and an increase in revenues compared to the same period in
2005.
Interest
expense (net).
Net interest expense decreased by $8,000 to $10,000 in the first six months
of
2006 as compared with $18,000 in the first six months of 2005, primarily
due to
lower debt as the result of the repayment of a term loan in December
2005.
Discontinued
Operations.
Effective September 1, 2005, TSS/Vortech transferred all the assets of its
S3
Integration division to a separate limited liability company, S3 Integration,
LLC (S3I) (the “S3I Transfer”). As part of the transaction, S3I assumed all the
liabilities of the division and entered into a term loan agreement with VTC,
LLC.
On
the
date of the S3I Transfer, TSS/Vortech had a balance due from the division
of
$0.6 million, of which $0.4 million was converted to a Note receivable from
S3I
and $0.2 million was recorded as a member distribution in 2005.
TSS/Vortech
has no significant continued involvement in S3I. Accordingly, the S3I division’s
operations are accounted for as a discontinued operation and the results
of
operations of the S3I division have been removed from TSS/Vortech’s continuing
operations for 2004 and 2005 and presented as a separate line item in the
statement of income as discontinued operations.
For
the
six months ended June 30, 2005 TSS/Vortech recorded a loss from discontinued
operations of approximately $0.4 million. The loss is comprised of revenue
of
$0.5 million less costs and expenses of $0.9 million.
Years
Ended December 31, 2005 and 2004
Revenues.
TSS/Vortech revenues for the year ended December 31, 2005 were $58.6 million,
compared to $21.3 million for the year ended December 31, 2004, representing
an
increase of $37.3 million, or 175%. The increase in revenues was partially
the
result of an increase in network and power service revenue of $3.5 million,
revenues earned from new customers for construction management services of
$3.5
million, and the completion of an additional $25.0 million of work with our
major customer.
Cost
of earned revenues.
TSS/Vortech costs of earned revenues for the year ended December 31, 2005
were
$50.1 million, or 85.4% of revenues, compared to $15.8 million, or 74.0%
of
revenues, for the year ended December 31, 2004. The increase in cost of earned
revenues and the increase in cost of earned revenues as a percentage of revenues
were primarily due to the increased amount of outsourced work performed on
TSS/Vortech’s contracts with its major customer, which have somewhat lower
margins. Additionally, included in cost of earned revenues is member consulting
compensation of $2.9 million in 2005 compared to $0 in 2004.
-98-
SG&A
expenses.
TSS/Vortech’s SG&A expenses for the year ended December 31, 2005 were $5.6
million, or 9.6% of revenues, compared to $4.5 million, or 21.2% of revenues,
for the year ended December 31, 2004. SG&A expenses were lower as a
percentage of revenues in 2005 due to payment of one time consulting commission
fees of $0.7 million in 2004, partially offset by the SG&A expenses of $0.4
million associated with the addition of sales professionals and technology
consulting personnel in 2005 to support the increase in proposal activity
and
new customer sales.
Operating
income.
For the
year ended December 31, 2005, TSS/Vortech’s operating income was $2.9 million or
5.0% of revenues, as compared to $1.0 million, or 4.8% of revenues, for the
prior year. The increase in operating income as a percentage of revenues
was due
primarily to economies of scale realized as a result of the large increase
in
revenues while SG&A expenses remained essentially flat.
Interest
expense (net).
Net
interest expense increased $6,000 to $35,000 in 2005, as compared with $29,000
in 2004, primarily due to an increase in average debt outstanding of $100,000
during 2005 compared to 2004.
Discontinued
Operations.
On the
effective date of the S3I Transfer, TSS/Vortech had a balance due from the
division in the amount of $0.6 million, of which $0.4 million was converted
to a
Note receivable from S3I and $0.2 million was recorded as a member distribution
in 2005.
The
S3I
division’s operations are accounted for as a discontinued operation and the
results of operations of the S3I division have been removed from TSS/Vortech’s
continuing operations for 2004 and 2005 and presented as a separate line
item in
the statements of income as discontinued operations.
For
the
year ended December 31, 2005, TSS/Vortech recorded a gain from discontinued
operations of approximately $0.3 million related to the S3I Transfer. The
gain
is comprised of revenue of $1.5 million, costs and expenses of $1.8 million
and
a gain recorded on the transfer of assets of $0.6 million.
Years
Ended December 31, 2004 and 2003
Revenues.
TSS/Vortech’s revenues for the year ended December 31, 2004 were $21.3 million,
compared to $12.3 million for the year ended December 31, 2003, representing
an
increase of $9 million, or 73%. The increase was due to a $2.5 million increase
in TSS/Vortech’s network and power project revenues, $1.0 million in revenues on
a facility management contract with its major customer, and a $5.5 million
increase in revenues earned on construction management contracts in
2004.
Cost
of earned revenues.
TSS/Vortech’s cost of earned revenue for the year ended December 31, 2004 was
$15.8 million, or 74.0% of revenues, as compared to $8.4 million, or 68.1%
of
revenues, for the year ended December 31, 2003. The increase in cost of earned
revenues
and the
increase in cost of earned revenues as a percentage of revenues was primarily
the result of completing larger projects for TSS/Vortech’s major customer, which
required more outsourced work than in 2003.
SG&A
expenses.
TSS/Vortech’s SG&A expenses for the year ended December 31, 2004 were $4.5
million, or 21.2% of revenues, as compared to $2.1 million, or 17.2% of
revenues, for the year ended December 31, 2003. The increase in SG&A
expenses as a percentage of revenues was primarily related to payment of
one
time consulting commission fees of $0.7 million in 2004, $0.7 million in
costs
incurred in 2004 as a result of support personnel hired by TSS/Vortech in
connection with new contracts entered in 2004 on which no revenue was recognized
during 2004.
Operating
income.
For the
year ended December 31, 2004, operating income was $1.0 million, or 4.8%
of
revenues, as compared to $1.8 million, or 14.7% of revenues, for the year
ended
December 31, 2003. The decrease in operating income resulted primarily due
to
the increase in SG&A expenses in 2004 described above.
-99-
Interest
expense (net).
Net
interest expense increased $25,000 to $29,000 in 2004 as compared with $4,000
in
2003, principally due to an increase in term loans to finance leasehold
improvements and work vans and other equipment purchases.
Discontinued
Operations.
For the
year ended December 31, 2004, TSS/Vortech recorded a loss from discontinued
operations of approximately $0.3 million related to the S3I Transfer. The
loss
is comprised of revenue of $0.7 million less costs and expenses of $1.0
million.
Effects
of Inflation
TSS/Vortech
generally has been able to price its services and contracts in a manner to
accommodate the rates of inflation experienced in recent years. All proposals
issued by TSS/Vortech guarantee prices for only thirty days. On contracts
awarded on proposals outstanding in excess of thirty days, TSS/Vortech has
the
right to reprice the services if inflation has caused a change in TSS/Vortech’s
cost to perform the work. TSS/Vortech also seeks to minimize the effects
of
inflation by identifying, to extent practicable, the required equipment and
outsourced services at the time of a contract award, which allows it to acquire
the equipment and outsourced services immediately after award to minimize
the
effects of inflation on TSS/Vortech’s profitability. TSS/Vortech is also exposed
to inflation in the prices of commodities, such as steel, copper and concrete,
in connection with construction projects, which it seeks to minimize through
contract provisions that limit its exposure to price increases.
Liquidity
and Capital Resources
TSS/Vortech’s
primary liquidity needs are for financing working capital and for the purchase
of fixed assets related to office equipment, vans and tools for the network
and
power projects division of TSS/Vortech. TSS/Vortech has primarily relied
on its
cash flows from operations and on a credit facility to fund its capital and
liquidity needs. TSS/Vortech expects the combination of profits from operations
and cash available from FAAC after the acquisition to meet its normal working
capital and capital expenditure needs for at least the next twelve months.
Following completion of the FAAC acquisition, TSS/Vortech expects to terminate
its existing credit facility and seek to enter into a larger credit facility
that could be used for potential future acquisitions, as well as for working
capital and capital expenditure needs. However, TSS/Vortech cannot assure
you
that such a credit facility will be available on terms acceptable to it or
at
all.
Cash
and net working capital.
The
following table sets forth TSS/Vortech’s cash and networking capital, defined as
current assets less current liabilities, as of December 31, 2004 and 2005
and
June 30, 2006, respectively:
|
December
31, 2004
|
December
31, 2005
|
June
30, 2006
|
||||
|
(amounts
in millions)
|
||||||
|
Cash
and cash equivalents
|
$1.5
|
$1.7
|
$2.9
|
|||
|
Net
working capital
|
$0.3
|
$2.3
|
$3.2
|
|||
TSS/Vortech
considers cash and time deposits of less than six months to be cash and
cash
equivalents. Net working capital increases from year to year are the result
of
profitable operations over the last three years and the first half of 2006.
TSS/Vortech’s net working capital is reduced by tax distributions to its
members, who are required to pay their proportionate share of TSS/Vortech’s
income on their personal returns. Following the acquisition, the companies
will
be wholly owned by FAAC, which will be subject to all applicable federal
and
state income taxes.
Credit
facility.
In
December 2005, TSS/Vortech obtained a revolving credit facility with a bank
that
allows for maximum borrowings of $1.0 million. Interest accrues daily on
the
outstanding balance at one-month LIBOR plus 2.25%. The credit facility is
collateralized by substantially all of TSS/Vortech’s assets and is personally
guaranteed by one of TSS/Vortech’s members. Following the consummation of the
acquisition and the termination of the credit facility, the member will no
longer guarantee any of the companies’ indebtedness. TSS/Vortech did not draw
any amounts under the credit facility during the six months ended June 30,
2006.
-100-
Operating
cash flows.
Net cash
provided by operating activities was $1.2 million and $3.2 million for
the year
ended December 31, 2005 and six months ended June 30, 2006, respectively.
Net
cash provided by operations is attributable to net income of $3.1 million
and
$2.7 million for the year ended December 31, 2005 and the six months ended
June
30, 2006, respectively, adjusted by the following non-cash items included
in net
income and the following working capital changes:
|
Year
ended
December
31, 2005
|
Six
months ended June 30, 2006
|
|||
|
(in
thousands)
|
||||
|
· Depreciation
and amortization
|
$228
|
$126
|
||
|
· Allowance
for doubtful accounts
|
(27)
|
--
|
||
|
· Gain
from discontinued operations
|
(252)
|
--
|
||
Working
capital changes which contributed to cash flow from operations included the
following:
|
Year
ended
December
31, 2005
|
Six
months ended
June
30, 2006
|
|||
|
(Increase)
decrease in assets:
|
(in
thousands)
|
|||
|
· Contract
and other receivables
|
$(8,441)
|
$(1,162)
|
||
|
· Costs
and estimated earnings in excess
of billings on uncompleted contracts
|
476
|
(128)
|
||
|
· Prepaid
expenses
|
(2)
|
(270)
|
||
|
· Due
from affiliated entities
|
(285)
|
(23)
|
||
|
· Deposits
|
(147)
|
--
|
||
|
Increase
(decrease) in liabilities:
|
||||
|
· Accounts
payable and accrued expenses
|
(5,066)
|
2,843
|
||
|
· Billings
in excess of costs and
estimated earnings on uncompleted
contracts
|
1,320
|
890
|
||
|
· Deferred
compensation payable
|
103
|
25
|
||
Investing
activities.
Net
cash used in investing activities was $59,521 and $38,427 for the year
ended
December 31, 2005 and the six months ended June 30, 2006, respectively.
Net cash
used in investing activities primarily related to equipment
purchases.
Financing
activities.
Net
cash used in financing activities was $891,130 and $1,995,656 for the year
ended
December 31, 2005 and the six months ended June 30, 2006, respectively.
Cash
used in financing activities primarily related to debt repayments and member
distributions.
FAAC
acquisition.
The
acquisition is expected to be consummated in the fourth quarter of 2006,
after
the required approval by the stockholders of FAAC and the fulfillment of
certain
other conditions. If the acquisition is consummated, and TSS/Vortech can
provide
no assurance that the acquisition will be consummated, the combined company
is
expected to receive from a trust account not less than $44 million, plus
accrued
interest after September 30, 2006, less amounts paid to FAAC stockholders
who
have elected to convert their shares to cash in accordance with FAAC’s
certificate of incorporation.
Off-Balance
Sheet Arrangements
TSS/Vortech
may enter into certain contracts which require a performance bond to be
issued
by a bank or surety company in favor of the customer for a portion of the
value
of the contract. These bonds may be exercised by the customer in instances
where
TSS/Vortech fails to provide the contracted services. As of December 31,
2005
and June 30, 2006, TSS/Vortech did not have any outstanding bonds or other
off-balance sheet arrangements.
-101-
Contractual
Obligations
The
following table summarizes TSS/Vortech’s contractual obligations as of June 30,
2006 that require TSS/Vortech to make future cash payments.
|
Payments
due by period
|
|||||||||||||||||
|
Total
|
Less than
1
year
|
1-3
years
|
3-5
years
|
More than
5
years
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||
|
Vehicle
loans
|
$
|
196
|
$
|
73
|
$
|
90
|
$
|
33
|
$
|
--
|
|||||||
|
Rent
on
facilities(1)
|
2,205
|
399
|
949
|
709
|
148
|
||||||||||||
|
Other
(2)
|
364
|
364
|
--
|
--
|
--
|
||||||||||||
|
Total
|
$
|
2,765
|
$
|
836
|
$
|
1,039
|
$
|
743
|
$
|
148
|
|||||||
(1)
Includes obligations under current leases. Does not include obligations under
a
five year lease that TSS/Vortech expects will commence in the fourth quarter
of
2006 to consolidate its administrative staff and technology consulting group
described under “Information About TSS/Vortech-Facilities.”
(2)
Relates to deferred compensation obligations and obligations under an earnout
in
connection with an acquisition of a consulting business.
-102-
INFORMATION
ABOUT FORTRESS AMERICA ACQUISITION CORPORATION
Our
Business
We
are a
“blank check” company organized under the laws of the State of Delaware on
December 20, 2004 and were formed for the purpose of acquiring, through a
merger, capital stock exchange, asset acquisition, stock purchase or other
similar business combination, an operating business in the homeland security
industry. We intend to use cash derived from the net proceeds of our initial
public offering, together with any additional financing arrangements that
we
undertake, to effect a business combination with a target whose fair market
value is at least equal to 80% of our net assets at the time of such
acquisition. Our principal executive offices are located at 4100 North Fairfax
Drive, Suite 1150, Arlington, Virginia 22203.
A
registration statement for our initial public offering was declared effective
on
July 13, 2005. On July 20, 2005, we sold 7,000,000 units and consummated
our
initial public offering, and on August 24, 2005 we sold 800,000 units upon
exercise by our underwriters of the over-allotment option. Each of our
units
consists of one share of our common stock, $0.0001 par value per share,
and two
redeemable common stock purchase warrants. Each warrant entitles the holder
to
purchase from us one share of common stock at an exercise price of $5.00.
The
net proceeds from our initial public offering were approximately $43.2
million,
after deducting offering expenses of approximately $808,479 and underwriting
discounts of $2.8 million. Of this amount, $42.0 million was deposited
into a
trust account and the remaining proceeds (approximately $1.2 million) were
made
available to be used to provide for business, legal and accounting due
diligence
on prospective business combinations and continuing general and administrative
expenses. Through June 30, 2006, we have used approximately $0.9 million
of the
available funds for start up costs representing general and administrative
expenses, travel expenses, professional services, insurance and taxes based
on
capital. The trust account funds remain on deposit in the trust account
earning
interest. As of June 30, 2006, the trust account funds were held in the
form of
U.S. treasury securities with a market value of $43.6 million.
Fair
market value of target business
Pursuant
to our Amended and Restated Certificate of Incorporation, the initial target
business that we acquire must have a fair market value equal to at least
80% of
our net assets at the time of such acquisition. Our board of directors
determined that this test was met in connection with our acquisition of
TSS/Vortech. Further, we received a written opinion from BVC that, as of
the
date therein, and based upon and subject to the assumptions, factors,
qualifications and limitations set forth therein, the consideration to be
paid
by FAAC in the proposed acquisition is fair to FAAC from a financial point
of
view. See “Approval of the Acquisition and the Other Transactions Contemplated
by the Purchase agreement - Satisfaction of Fair Market Value
Requirement”.
Stockholder
approval of business combination
As
required by our Amended and Restated Certificate of Incorporation, we will
proceed with the acquisition only if a majority of the shares of our common
stock voted by public stockholders are voted in favor of the acquisition
and
public stockholders owning less than 20% of our shares sold in our initial
public offering exercise their conversion rights.
Conversion
rights
Each
public stockholder who votes against the acquisition has the right to have
such
stockholder’s shares of common stock converted to cash if the acquisition is
approved and completed. The actual per-share conversion price will be equal
to
the amount in the trust account, inclusive of any interest (calculated
as of two
business days prior to the consummation of the acquisition), divided by
the
number of shares sold in our initial public offering. As of September 30,
2006,
the per-share conversion price was approximately $5.65, or $0.35 less than
the
price ($6.00 per unit) that we sold each unit for in our initial public
offering. An eligible stockholder may request conversion at any time after
receipt of this proxy statement and prior to the vote taken on the acquisition
at the special meeting but the request will not be granted unless the
stockholder votes against the acquisition and the acquisition is approved
and
completed. Any request for conversion, once made, may be withdrawn at any
time
up to the date of the special meeting. It is anticipated that the funds
to be
distributed to stockholders who are entitled to convert their shares and
who
elect conversion will be distributed promptly after completion of the
acquisition. Public stockholders who convert their stock into their share
of the
trust account will retain the right to exercise the warrants they received
as
part of the units. We will not complete any business combination if public
stockholders owning 20% or more of the shares sold in our initial public
offering both vote against the acquisition and exercise their conversion
rights.
-103-
Liquidation
if no business combination
Our
Amended and Restated Certificate of Incorporation requires us to liquidate
if we
have not completed a business combination by July 20, 2006, or January 20,
2007
if we entered into a letter of intent, an agreement in principle or a definitive
agreement to complete a business combination prior to July 20, 2006, but
were
unable to complete such business combination by such date. We signed a
definitive agreement with TSS/Vortech on June 5, 2006, and therefore have
until
January 20, 2007 to complete the acquisition of TSS/Vortech.
Liquidation.
If we
fail to consummate a business combination prior the date discussed above,
we
will be dissolved pursuant to Section 275 of the Delaware General Corporation
Law, or DGCL. At such time, we anticipate that the following will
occur:
|
·
|
our
board of directors will convene and adopt a specific plan of
dissolution
and liquidation, which it will then vote to recommend to our
stockholders;
at such time it will also cause to be prepared a preliminary
proxy
statement setting out such plan of dissolution and liquidation
as well as
our board of director’s recommendation of such
plan;
|
|
·
|
we
will promptly file a preliminary proxy statement with the Securities
and
Exchange Commission;
|
|
·
|
if
the Securities and Exchange Commission does not review the
preliminary
proxy statement, then shortly after the expiration of ten days
following
the filing of such preliminary proxy statement, we will mail
the
definitive proxy statement to our stockholders, and 10-20 days
following
the mailing of such definitive proxy statement, convene a meeting
of our
stockholders, at which our stockholders will vote on the plan
of
dissolution and liquidation;
|
|
·
|
if
the Securities and Exchange Commission does review the preliminary
proxy
statement, we currently estimate that we will receive their
comments
approximately 30 days after the filing of such proxy statement.
We would
then mail the definitive proxy statement to our stockholders
following the
conclusion of the comment and review process (the length of
which we
cannot predict with any certainty, and which may be substantial)
and will
convene a meeting of our stockholders at which our stockholders
will vote
on the plan of dissolution and liquidation;
and
|
|
·
|
upon
notice from us, the trustee will commence liquidating the investment
constituting the trust account and will turn over the proceeds
to the
transfer agent for distribution to our public stockholders
in accordance
with the approved plan of dissolution and
liquidation.
|
We
will
not liquidate the trust account unless and until our stockholders approve
the
plan of dissolution and liquidation. Accordingly, the foregoing procedures
may
result in substantial delays in our liquidation and the distribution
to our
public stockholders of the funds in the trust account and any remaining
net
assets as part of the plan of dissolution and liquidation.
As
of
September 30, 2006, and assuming we had expended all of the funds not
in the
trust account, the per share liquidation price was approximately $5.65,
or $0.35
less than the price ($6.00 per unit) that we sold each unit for in our
initial
public offering. The proceeds deposited in the trust account could, however,
become subject to the claims of our creditors which could be prior to
the claims
of our public stockholders. We cannot assure you that the actual per-share
liquidation price will not be less than $5.65, plus interest, due to
claims of
creditors. Messrs. McMillen and Weiss have agreed pursuant to an agreement
with
us and Sunrise Securities Corp., the underwriter of our initial public
offering,
that, if we liquidate prior to the consummation of a business combination,
they
may be personally liable to ensure that the proceeds of the trust account
are
not reduced by the claims of vendors or other entities that are owed
money by us
for services rendered or products sold to us or the claims of prospective
target
businesses. We cannot assure you, however, that they will be able to
satisfy
those obligations.
-104-
As
of
June 30, 2006, we had liabilities of approximately $574,000. Creditors
with
claims in the amount of approximately $37,000 have executed agreements
with us
waiving their rights, if any, to any funds held in the trust account.
We have
not received a waiver letter from Continental Stock Transfer and Trust
Company,
our escrow agent and warrant agent, the State of Delaware and certain
miscellaneous service providers, with aggregate claims in the amount
of
approximately $6,000. As a result of obtaining the waiver letters, we
believe
the claims that could be made against the trust account are limited.
To the
extent that creditors, even those who have executed a waiver of claims
against
the trust account, or TSS/Vortech bring a claim and attempt to have it
satisfied
out of the trust account, the proceeds available to our stockholders
from the
trust account could be reduced.
Messrs.
McMillen and Weiss have agreed pursuant to an agreement with us and Sunrise
Securities Corp., the representative of the underwriters of our initial
public
offering, that, if we liquidate prior to the consummation of a business
combination, they may be personally liable to ensure that the proceeds
of the
trust account are not reduced by the claims of vendors or other entities
that
are owed money by us for services rendered or products sold to us or
the claims
of prospective target businesses. We cannot assure you, however, that
they will
be able to satisfy those obligations.
Additionally,
if we are forced to file a bankruptcy case or an involuntary bankruptcy
case is
filed against us which is not dismissed, the proceeds held in the trust
account
could be subject to applicable bankruptcy law, and may be included in
our
bankruptcy estate and subject to the claims of third parties with priority
over
the claims of our stockholders. To the extent any bankruptcy claims deplete
the
trust account, we cannot assure you we will be able to return to our
public
stockholders at least $5.65 per share, which is the approximate liquidation
value per share amount held in our trust account as of September 30,
2006.
Our
public stockholders will be entitled to receive funds from the trust account
only in the event of our liquidation or if a public stockholder seeks to
convert
his respective shares into cash upon a business combination which the public
stockholder voted against and which is actually completed by us. In no other
circumstances will a public stockholder have any right or interest of any
kind
to or in the trust account.
Under
Section 282 of the DGCL, stockholders may be held liable for claims by
third
parties against a corporation to the extent of distributions received by
them in
a dissolution. Pursuant to Sections 280 through 282, if the corporation
complies
with certain procedures intended to ensure that it makes reasonable provision
for all claims against it, including a 60-day notice period during which
any
third-party claims can be brought against the corporation, a 90-day period
during which the corporation may reject any claims brought, and a 150-day
waiting period before any liquidating distributions are made to stockholders,
any liability of stockholders with respect to a liquidating distribution
is
limited to the lesser of such stockholder’s pro rata share of the claim or the
amount distributed to the stockholder, and any liability of the stockholder
would be barred after the third anniversary of the dissolution. Although
we will
seek stockholder approval to liquidate the trust account to our public
stockholders as part of the plan of dissolution and liquidation, we will
seek to
conclude this process as soon as possible and as a result do not intend
to
comply with those procedures. Because we do not anticipate complying with
the
foregoing provisions, Section 281(b) of the DGCL requires us to adopt a
plan
that will provide for our payment, based on facts known to us at such time,
of
(i) all existing claims, (ii) all pending claims and (iii) all claims that
may
be potentially brought against us within the subsequent 10 years. However,
because we are not an operating company, and our operations have been limited
to
searching for prospective target businesses to acquire, the only likely
claims
to arise would be from our vendors or service providers, a majority of
whom
executed agreements waiving their rights, if any, to any funds held in
the trust
account. As a result, the claims that could be made against us should be
limited. Nevertheless, such agreements may or may not be enforceable, and
those
parties that have not entered into such agreements may have claims they
will
attempt to assert. As such, our stockholders could potentially be liable
for any
claims to the extent of distributions received by them in a dissolution
and any
liability of our stockholders may extend beyond the third anniversary of
such
dissolution.
Bankruptcy.
The
board of directors may determine it is in our best interest to file a petition
for bankruptcy or we may be forced into bankruptcy by our creditors. A
voluntary
or involuntary bankruptcy proceeding would most likely be filed under Chapter
7
of the United States Bankruptcy Code, which governs liquidations of
corporations. At the time of the filing, we would cease operations and
a
bankruptcy trustee would be appointed to liquidate our assets and distribute
our
assets in the following order of priority: (i) to secured creditors, (ii)
for
the cost of the administration of our bankruptcy, (iii) to unsecured creditors,
and (iv) to our stockholders.
-105-
If
we are
forced to file a bankruptcy case or an involuntary bankruptcy case is filed
against us which is not dismissed, any distributions received by our
stockholders in our dissolution could be viewed under applicable debtor/creditor
and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent
conveyance.” As a result, a bankruptcy court could seek to recover all amounts
received by our stockholders in our dissolution.
FAAC
strategy if the acquisition is completed
If
we are
able to complete the acquisition of TSS/Vortech, we plan to pursue a balanced
but aggressive strategy of organic growth and complementary acquisitions.
We
believe TSS/Vortech’s current customer base has enjoyed excellent service from
TSS/Vortech, and that TSS/Vortech is well positioned to continue to expand
its
current contractual assignments. We plan for TSS/Vortech to expand its revenues
by adding new business from current customers and by securing new business
in
its current geographic regions. At the same time, we intend to accelerate
this
growth plan by finding and acquiring businesses with complementary skills
in
customer relationships. In this way, we believe we will be able to improve
our
revenue growth and achieve economies of scale that will further enhance our
profitability. Although we are often engaged in preliminary discussions with
acquisition candidates, as of the date of this proxy statement we have no
binding commitments or agreements to enter into any acquisition.
Following
the completion of the acquisition of TSS/Vortech, depending on how
many
stockholders opt to convert their shares of common stock into cash,
we currently
expect to have between approximately $24 million and $32 million of
the trust
fund available for working capital needs and to be applied to future
acquisitions.
Dividends
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in the operations
and
expansion of our business. As a result, we do not anticipate paying
cash
dividends in the foreseeable future. Any future determination as to
the
declaration and payment of cash dividends will be at the discretion
of our board
of directors and will depend on factors our board of directors deems
relevant,
including among others, our results of operations, financial condition
and cash
requirements, business prospects, and the terms of any credit facilities
and
other financing arrangements into which we enter.
Employees
We
currently have two part-time officers, each of whom is also a member of
our
board of directors. We have no employees. Our officers are not obligated
to
devote any specific number of hours to our matters and intend to devote
only as
much time as they deem necessary to our affairs. We do not intend to have
any
full time employees prior to the consummation of a business
combination.
Periodic
Reporting and Audited Financial Statements
We
have
registered our securities under the Exchange Act and have reporting obligations,
including the requirement to file annual and quarterly reports with the
SEC. In
accordance with the requirements of the Exchange Act, our annual reports
will
contain financial statements audited and reported on by its independent
accountants. We have filed a Form 10-KSB with the SEC covering the fiscal
year
ended December 31, 2005, a Form 10-QSB covering the quarterly period ended
March
31, 2006 and a Form 10-QSB covering the quarterly period ended June 30,
2006,
and each of those filings have been amended as described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
-
Fortress America Acquisition Corporation”.
-106-
Legal
Proceedings
We
are
not involved in any legal proceeding which may have, or have had a significant
effect on our business, financial positions, results of operations or liquidity,
nor are we aware of any proceedings that are pending or threatened which
may
have a significant effect on our business, financial position, results of
operations or liquidity.
-107-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-
FORTRESS AMERICA ACQUISITION CORPORATION
We
are a
“blank check” company organized under the laws of the State of Delaware on
December 20, 2004 and were formed for the purpose of acquiring, through a
merger, capital stock exchange, asset acquisition, stock purchase or other
similar business combination, an operating business in the federal services
and
defense industries. We intend to use the trust account funds, together with
any
additional financing arrangements that we undertake, to effect a business
combination.
We
have
neither engaged in any operations nor generated any revenues nor incurred
any
debt or expenses during the period ended June 30, 2006, other than in connection
with our public offering and, thereafter, certain legal and other expenses
related to pursuing acquisitions of target businesses. Our entire activity
since
inception has been to prepare for and consummate our initial public offering
and, following the completion of our initial public offering, to identify
and
investigate target businesses for a business combination.
Our
net
proceeds from the sale of our units, after deducting offering expenses
of
approximately $808,479 and underwriting discounts of $2,808,000, were
approximately $43,183,521. Of this amount, $41,964,000 was placed in
trust and
the remaining $1,219,521 was not placed in trust. We will use substantially
all
of the net proceeds of our offering to acquire a target business, including
identifying and evaluating prospective acquisition candidates, selecting
the
target business, and structuring, negotiating and consummating the business
combination. To the extent that our capital stock is used in whole or
in part as
consideration to effect a business combination, the proceeds held in
the trust
account as well as any other net proceeds not expended will be used to
finance
the operations of the target business. We believe that the funds available
to us
outside of the trust account will be sufficient to allow us to operate
for at
least the next five months, assuming that a business combination is not
consummated during that time. Since our inception and until June 30,
2006, we
have incurred the following expenses:
|
·
|
$327,759
for legal, accounting, travel and other expenses attendant
to the due
diligence investigations, structuring, and negotiating of a
business
combination;
|
|
·
|
$83,862 for
rent and administrative services and support (approximately
$7,500 per
month);
|
|
·
|
$106,539
of expenses for legal and accounting fees relating to our SEC
reporting
obligations;
|
|
·
|
$88,027
for franchise and capital taxes;
|
|
·
|
$209,291
for federal and state income taxes;
|
|
·
|
$41,250
for director and officer liability insurance premiums;
and
|
|
·
|
$48,435
for miscellaneous expenses and
reserves.
|
In
addition, we will owe a fee for financial advisory services to Goldman
Associates, a division of Sunrise Securities Corp., the lead underwriter
in our
initial public offering, upon the closing of the acquisition. Under our
agreement with Goldman Advisors, we have agreed to pay a fee equal to
the
greater of 1.25% of the aggregate consideration paid in the acquisition
(or
other potential transaction) and $750,000. Under the terms of the purchase
agreement, we expect the fee we owe at the closing of the acquisition
to be
$750,000. We do not believe we will need to raise additional funds in
order to
meet the expenditures required for operating our business. However, we
may need
to raise additional funds through a private offering of debt or equity
securities if such funds are required to consummate a business combination
that
is presented to us. We would only consummate such a fundraising simultaneously
with the consummation of a business combination.
On
July
20, 2005, we used $45,000 of our general working capital to pay premiums
associated with our directors and officers’ liability insurance. As of June 30,
2006, $3,750 of this amount represents the prepaid portion for the cost
of such
insurance through July 20, 2006.
Washington
Capital Advisors, Mr. Weiss and Mr. Mitchell advanced a total of
$70,000 to us to cover costs related to our initial public offering. These
loans
were repaid on July 20 and September 1, 2005 from the proceeds of our initial
public offering not placed in trust.
-108-
We
have
agreed to pay, through the date of our acquisition of a target business,
Washington Capital Advisors, LLC, an affiliate of Mr. McMillen, $7,500 per
month
for office space and certain office and secretarial services. The $7,500
per
month is reimbursement for office space and the office and secretarial services
provided to us by Washington Capital Advisors, LLC and not as compensation
to
Mr. McMillen.
As
of
June 30, 2006, approximately $43,557,243 was held in trust, and we had
approximately $217,732 of the available funds remaining and available
to us for
our activities in connection with identifying and conducting due diligence
of a
suitable business combination, and for general corporate matters.
Critical
Accounting Policies
We
believe the following critical accounting polices involved the most significant
judgments and estimates used in the preparation of our financial
statements.
Cash
and Cash Equivalents.
We
consider all highly liquid investments with original maturities of three
months
or less to be cash equivalents. We had cash deposits in excess of the
federally
insured limits at June 30, 2006.
Earnings
per common share. Basic
income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the
potential
dilution assuming common shares were issued upon the exercise of outstanding
in-the-money warrants and the proceeds thereof were used to purchase
treasury
shares at the average market price during the period.
Use
of estimates.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the amounts in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Fair
value of financial instruments.
The
carrying amounts of our financial assets, including cash and cash equivalents
and short term investments, approximate fair value because of their short
term
maturities.
Income
Taxes.
Deferred
income taxes are provided for the differences between the bases 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.
New
Accounting Pronouncement.
The
Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty in income
taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December
15,
2006. We are currently evaluating the impact FIN 48 will have on its
results of
operations and financial position. The cumulative effect of applying
the
provisions of FIN 48, if any, will be reported as an adjustment to the
opening
balance of retained earnings accumulated during the development stage
on January
1, 2007.
-109-
DIRECTORS
AND EXECUTIVE OFFICERS OF FORTRESS AMERICA
ACQUISITION
CORPORATION FOLLOWING THE ACQUISITION
At
the
effective time of the acquisition, Mr. McMillen, who has served as our Chairman,
and Mr. Weiss, who has served as our Chief Executive Officer, President and
Secretary, in each case since inception, will resign from those offices,
although each will remain a member of the board of directors. At the time
of the
acquisition, Mr. McMillen will become our Vice Chairman and Mr. Weiss will
become our Chairman. Also at that time, Mr. Rosato will become our Chief
Executive Officer and will also become the Chairman of TSS/Vortech. Mr.
Gallagher will become our President and Chief Operating Officer and will
become
the Chief Executive Officer and President of TSS/Vortech.
At
the
effective time of the acquisition and provided the nomination are approved
by
our stockholders, our directors and executive officers will be:
|
Name
|
Age
|
Position
|
||
|
Harvey
L. Weiss
|
63
|
Director
and Chairman of FAAC
|
||
|
C.
Thomas McMillen
|
54
|
Director
and Vice Chairman of FAAC
|
||
|
Thomas
P. Rosato
|
54
|
Director
and Chief Executive Officer of FAAC and
Chairman
of each of VTC and Vortech
|
||
|
Gerard
J. Gallagher
|
49
|
Director
and President and Chief Operating Officer of
FAAC
and Chief Executive Officer and President of each
of
VTC and Vortech
|
||
|
David
J. Mitchell
|
44
|
Director
|
||
|
Donald
L. Nickles
|
57
|
Director
|
Directors
Harvey
L. Weiss
has
served as our Chief Executive Officer, President and a member of our Board
since
inception and has over 35 years of experience in the information technology
and
security market place. From 2002 to August 1, 2004, Mr. Weiss was the Chief
Executive Officer and President of System Detection, Inc., a software security
company and is presently serving as a consultant. From 2000 to 2002, he served
as President of Engineering Systems Solutions, Inc., a security and biometrics
integration firm. During 1999, Mr. Weiss was the Chief Executive Officer
and President of Global Integrity Corporation, a SAIC subsidiary specializing
in
information security and served as a Director until the company was sold
in
2002. From 1996 to 1998, until sold to Network Associates, Inc, Mr. Weiss
was President of the Commercial Division, Secretary and Director of Trusted
Information Systems, Inc., a NASDAQ-listed security network company. Prior
to
that time, from 1994 to 1996, Mr. Weiss served as President of Public
Sector Worldwide Division for Unisys Corporation. From 1991 to 1993,
Mr. Weiss was the Vice President of Sales and the President and Chief
Operating Officer of Thinking Machines Corporation, a massively parallel
processing company. Prior to that time, he served in various senior capacities
in Digital Equipment Corporation. Mr. Weiss serves on the Board of Forterra
Systems, Inc., a simulation company, is a member of the Brookings Institution
Council, and is a trustee of Capitol College. Mr. Weiss received a Bachelor
of
Science in Mathematics from the University of Pittsburgh.
C.
Thomas McMillen
has
served as our Chairman of the Board since inception and has over 18 years
of
experience in government, finance and mergers and acquisitions.
Mr. McMillen has also served, since August 2005, as the President, Chief
Executive Officer and Chairman of the Board of Homeland Security Capital
Corporation, a consolidator of homeland security companies that provides
capital, management advice and investments for developing companies. Mr.
McMillen co-founded Global Secure Corp., a homeland security company providing
critical infrastructure services, in 2003, and served as its Chief Executive
Officer until February 2004. From February 2004 until February 2005,
Mr. McMillen served as a consultant to Global Secure Corp. In addition,
from October 2004 through July 2005, he served as a Chairman of the Board
of
Global Defense Corporation, a development stage company focused on acquiring
companies in critical infrastructure security. From December 2003 to February
2004, Mr. McMillen served as Vice Chairman and Director of Sky Capital
Enterprises, Inc., a venture firm, and until February 2005 served as a
consultant. From March 2003 to February 2004, Mr. McMillen served as
Chairman of Sky Capital Holdings, Ltd, Sky Capital Enterprises’ London stock
exchange-listed brokerage affiliate. Mr. McMillen has also been Chief
Executive Officer of Washington Capital Advisors, LLC, a merchant bank and
one
of our stockholders, since 2003. He also served as Chairman of TPF Capital,
its
predecessor company, from 2001 through 2002. Mr. McMillen has also been an
independent consultant throughout his career. From 1994 through February
1999,
Mr. McMillen served as the Founder, Chief Executive Officer and Director of
NASDAQ-listed Complete Wellness Centers, Inc., a medical multi-disciplinary
clinic management company. Mr. McMillen was appointed by President Clinton
to Co-Chair the President’s Council on Physical Fitness and Sports from 1993 to
1997. From 1987 through 1993, he served three consecutive terms in the United
States House of Representatives from the 4th Congressional District of Maryland.
Prior to that, Mr. McMillen played 11 years in the National Basketball
Association. Mr. McMillen received a Bachelor of Science in chemistry from
the University of Maryland, and a Bachelor and Master of Arts from Oxford
University as a Rhodes Scholar.
-110-
David
J. Mitchell
has
served as a member of our Board since its inception and has over 20 years
of
investment, finance and mergers and acquisition experience. Mr. Mitchell is
President of Mitchell Holdings LLC, a New York-based merchant banking company
he
founded in January of 1991, and since June 2004, Managing Partner of Las
Vegas
Land Partners LLC, a real estate development firm. From 1996 until the
business
was sold to American Express in August 1998, Mr. Mitchell was the Founder
and Co-Chief Executive Officer of Americash LLC. Mr. Mitchell served as a
Director of Kellstrom Industries from its inception until January 2002.
Kellstrom Industries filed a voluntary petition under Chapter 11 of the
United
States Bankruptcy Code in the United States Bankruptcy Court for the District
of
Delaware on February 20, 2002. Kellstrom Industries completed the U.S.
Bankruptcy Court-approved sale of substantially all of its assets to Kellstrom
Aerospace, LLC, an entity controlled by Inverness Management LLC on July
17,
2002. From October 1999 until March 2002, Mr. Mitchell was a director
of Direct Furniture Inc. An involuntary petition under Chapter 11 of the
United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York (Manhattan) was filed against Direct Furniture on
March 18,
2002. On March 20, 2002, the Court appointed a Chapter 11 trustee who continues
to manage Direct Furniture’s assets. Mr. Mitchell served as a director of
Centerpoint Corporation (including its predecessor companies) from October
1996
until January 2003. Prior to 1991, Mr. Mitchell held various senior
positions at New York Stock Exchange member firms. From 1988 to 1990, he
was a
Managing Director and Principal of Rodman & Renshaw, Inc., and from 1985 to
1988, he was a Managing Director of Laidlaw Adams & Peck, Inc. Previous to
1985, Mr. Mitchell was with Bear Stearns and Oppenheimer &
Co.
Donald
L. Nickles
has been
a member of our board of directors since February 2005 and currently serves
as a
member of the board of directors of Chesapeake Energy Corporation and Valero
Energy Corporation. In 2005 after his retirement from the United States Senate,
Senator Nickles founded and is currently Chairman and Chief Executive Officer
of
The Nickles Group, LLC, a consulting and business venture firm headquartered
in
Washington, D.C. Senator Nickles was elected to the United States Senate
in 1980 where he represented the state of Oklahoma and held numerous leadership
positions, including Assistant Republican Leader from 1996 to 2002 and Chairman
of the Senate Budget Committee from 2003 to 2004. Senator Nickles also served
on
the Energy and Natural Resources Committee and the Finance Committee. While
serving in the Unites States Senate, Senator Nickles was instrumental in
several
key areas of legislation including securing Senate passage of the Homeland
Security Act of 2002, the legislation creating the Department of Homeland
Security and the 2003 Tax Relief Act. Prior to his service in the United
States
Senate, Senator Nickles served in the Oklahoma State Senate from 1979 to
1980
and worked at Nickles Machine Corporation in Ponca City, Oklahoma becoming
vice
president and general manager. Senator Nickles served in the National Guard
from
1970 to 1976 and graduated from Oklahoma State University in 1971.
Thomas
P. Rosato
will
join us as a Director and as our Chief Executive Officer and will become
the
Chairman of each of VTC and Vortech effective when we close the acquisition
of
TSS/Vortech. Mr. Rosato has over 25 years of experience in mission-critical
service businesses. Since 2002, he has served as the co-founder and chairman
of
TSS and the co-founder and chairman of Vortech. From 1998 to 2001, Mr. Rostato
served as the President - Group Maintenance of America/Encompass Services
Corporation, National Accounts Division. From 1995 to 1998, he served as
the
founder and President of Commercial Air, Power & Cable, Inc. From 1980 to
1995, he served in various capacities at Com-Site Enterprises, most recently
as
Chief Financial Officer and Chief Operating Officer. Mr. Rosato started his
career in 1973 as a certified public accountant at Coopers & Lybrand. Mr.
Rosato received a Bachelor of Science in Accounting from Temple
University.
-111-
Gerard
J. Gallagher
will
join us as a Director and as our President and Chief Operating Officer and
will
become the Chief Executive Officer and President of each of VTC and Vortech
effective when we close the acquisition of TSS/Vortech. Mr. Gallagher has
more
than 25 years of experience in mission critical fields. Since 2002, he has
served as the co-founder and President of TSS and the co-founder and President
of Vortech. From 1998 to 2001, Mr. Gallagher served as the President of the
Total Site Solutions division of Encompass Services Corp. From 1997 to 1998,
he
served as the President of the Total Site Solutions division of Commercial
Air,
Power & Cable, Inc. From 1991 to 1997, he served as the Chief Facilities
Operations and Security Officer of the International Monetary Fund. From
1980 to
1991, Mr. Gallagher served in various capacities at Com Site International,
most
recently as Senior Vice President of Engineering and Sales. Mr. Gallagher
received a Bachelor of Science in Fire Science from the University of Maryland
and a Bachelor of Science in Organizational Management (Summa Cum Laude)
from
Columbia Union College.
Board
of Directors and Committees of the Board
Our
board
of directors is divided into three classes, which are required to be as nearly
equal in number as possible , with each director serving a three-year term
and
one class being elected at each year’s annual meeting of stockholders. At each
annual meeting of our stockholders, successors to the class of directors
whose
term expires at such meeting will be elected to serve for three-year terms
or
until their respective successors are elected and qualified. At the effective
time of the acquisition and provided the nomination are approved by our
stockholders, our directors in each class will be:
|
Class
|
Name
|
||
|
Term
expiring at the 2009
|
David
J. Mitchell
|
||
|
annual
meeting of our
|
Gerard
J. Gallagher
|
||
|
stockholders
|
|||
|
Term
expiring at the 2007
|
Harvey
L. Weiss
|
||
|
annual
meeting of our
|
Donald
L. Nickles
|
||
|
stockholders
|
|||
|
Term
expiring at the 2008
|
C.
Thomas McMillen
|
||
|
annual
meeting of our
|
Thomas
P. Rosato
|
||
|
stockholders
|
In
anticipation of being listed on NASDAQ, we will adhere to the rules of NASDAQ
in
determining whether a director is independent. Our board of directors will
consult with counsel to ensure that the board of directors’ determinations are
consistent with those rules and all relevant securities laws and regulations
regarding the independence of directors. The NASDAQ listing standards define
an
“independent director” generally as a person, other than an officer of a
company, who does not have a relationship with the company that would interfere
with the director’s exercise of independent judgment. Consistent with these
standards, the board of directors has determined that David J. Mitchell and
Donald L. Nickles are independent.
Compensation
Committee
Upon
closing of the acquisition, we will establish a compensation committee composed
entirely of independent directors. The compensation committee’s purpose will be
to review and approve compensation paid to our officers and directors and
to
administer the incentive compensation plan, if approved by our
stockholders.
-112-
Audit
Committee
On
____________, 2006, our board of directors established an Audit Committee.
The
Audit Committee of the board of directors operates under a written charter,
which is attached to this proxy statement as Annex G. The Audit Committee
was
established to provide assistance to the board of directors in fulfilling
its
oversight responsibility to the stockholders, potential stockholders, the
investment community and others relating to our financial statements and
the
financial reporting process, our systems of internal accounting and financial
controls, the internal audit function, the annual independent audit of our
financial statements and report on internal control over financial reporting,
and the legal compliance and ethics programs as established by management
and
our board of directors. In so doing, it is the responsibility of the Audit
Committee to maintain free and open communication among the Audit Committee,
our
independent registered public accounting firm and our management. In discharging
its oversight role, the Audit Committee is empowered to investigate any matter
brought to its attention with full access to all books, records, facilities
and
personnel and has the power to retain outside counsel or other experts for
this
purpose. Notwithstanding the foregoing, the Audit Committee is not responsible
for conducting audits, preparing financial statements or assuring the accuracy
of financial statements or filings, all of which is the responsibility of
our
management and the independent registered public accounting firm. Following
the
closing of the acquisition, ___________________________ will comprise the
Audit
Committee, of which __________ will be the Chairman.
Code
of Ethics
Our
board
of directors has adopted a code of ethics for our officers and directors.
A copy
of our code of ethics was filed as an exhibit to our Annual Report on Form
10-KSB for the year ended December 31, 2005.
Board
and Committee Meetings
During
the fiscal year ended December 31, 2005, our board of directors held six
meetings. During the fiscal quarter ended June 30, 2006, our board of directors
held ____ meetings. Although we do not have any formal policy regarding
director
attendance at our annual meetings, we will attempt to schedule our annual
meetings so that all of our directors can attend. During the fiscal year
ended
December 31, 2005, all of our directors attended at least 75% of the meetings
of
the board of directors and committees on which they served.
The
Audit
Committee was not formed until ___________, 2006 and, accordingly, there
were no
meetings of the Audit Committee prior to that date.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
directors and persons who beneficially own more than ten percent of our common
stock to file reports of ownership and changes in ownership with the SEC.
These
reporting persons are also required to furnish us with copies of all Section
16(a) forms they file. All of these reports were filed in a timely
manner.
Compensation
of Directors
It
is
anticipated that at or prior to the closing of the acquisition, the compensation
to be paid to members of our board of directors will be established and such
compensation will be reasonable and customary for the industry.
Executive
Compensation
No
executive officer or director has received any cash or non-cash compensation
for
services rendered. We will not pay any finders or consulting fees to our
founders, or any of their respective affiliates, for services rendered to
or in
connection with the consummation of the acquisition. However, our founders
will
receive reimbursement for any out-of-pocket expenses incurred by them in
connection with activities on our behalf such as identifying potential target
businesses and performing due diligence on suitable business combinations.
There
is no limit on the amount of these out-of-pocket expenses and there will
be no
review of the reasonableness of the expenses or fees by anyone other than
our
board of directors, which includes persons who may be entitled to reimbursement
or a court of competent jurisdiction if such expenses are challenged. If
all of
our directors are not deemed “independent,” we will not have the benefit of
independent directors examining the propriety of expenses incurred on our
behalf
and subject to reimbursement or monitoring our compliance with the terms
of our
initial public offering. We have agreed to pay Washington Capital Advisors,
LLC,
an affiliate of Mr. McMillen, a monthly fee of $7,500 for general and
administrative services including office space, utilities and secretarial
support. These arrangements will be modified following the closing of the
acquisition as described under “—Employment Agreements” below.
-113-
Employment
Agreements
Employment
Agreement with Thomas P. Rosato
Effective
as of the date of closing date, FAAC will enter an Employment Agreement with
Thomas P. Rosato whereby Mr. Rosato will be engaged to serve as FAAC’s chief
executive officer for a period of three years. Under the terms of the Employment
Agreement, Mr. Rosato’s base compensation will be $425,000 per year (subject to
a minimum annual increase of 5% per year), Mr. Rosato will be eligible to
receive an annual bonus of up to 50% of his then applicable base compensation
(the amount of the bonus and the criteria for the bonus to be determined
by the
Board of Directors) with the bonus for 2006 to be prorated for the number
of
months remaining in 2006 following the closing date, and Mr. Rosato will
be
eligible for the share performance bonus described below. In addition to
base
compensation and bonus eligibility, (i) FAAC will pay the premiums on the
life
insurance policies currently paid by VTC and Vortech, (ii) Mr. Rosato will
be
entitled to an office allowance of $3,000 and (iii) Mr. Rosato will otherwise
be
entitled to receive vacation, health insurance and other benefits as generally
made available to other FAAC executives. Pursuant to the terms of the Employment
Agreement, if FAAC terminates Mr. Rosato’s employment for reasons other than
“Cause” or Mr. Rosato terminates his employment for “Good Reason” (as those
terms are defined in the Employment Agreement), Mr. Rosato is entitled to
receive his base compensation as and when it would otherwise be payable if
his
employment had not been terminated (provided, however that if termination
occurs
during the last twelve months of Mr. Rosato’s employment, then Mr. Rosato shall
be entitled to receive amounts equal to base compensation (as and on the
terms
otherwise payable) for twelve months from the date of termination). Under
the
terms of the Employment Agreement, Mr. Rosato is subject to covenants not
to
solicit customers or employees of FAAC or its subsidiaries and to not otherwise
compete against FAAC or its subsidiaries. In connection with signing the
Employment Agreement (and as a condition of his employment), Mr. Rosato is
required to sign an Invention Assignment, Non-Compete and Confidentiality
Agreement.
Share
performance bonus.
Up to
$5.0 million in additional shares of our common stock will be issuable to
Mr.
Rosato if during the period from the closing of the acquisition through July
13,
2008, certain share performance thresholds (alternative and not cumulative)
set
forth below are satisfied:
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $9.00 per share but is no more than $10.00
per
share, he will be entitled to $0.5 million worth of additional
shares;
or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $10.00 per share but is no more than $12.00
per
share, he will be entitled to $1.5 million worth of additional
shares;
or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $12.00 per share but is no more than $14.00
per
share, he will be entitled to $3.0 million worth of additional
shares;
or
|
|
·
|
if
the highest average share price of FAAC’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $14.00 per share, he will be entitled to
$5.0
million worth of additional shares.
|
-114-
Employment
Agreement with Gerard J. Gallagher
Effective
as of the date of closing date, FAAC will enter an Employment Agreement with
Gerard J. Gallagher whereby Mr. Gallagher will be engaged to serve as FAAC’s
president and chief operating officer for a period of three years. Under
the
terms of the Employment Agreement, Mr. Gallagher’s base compensation will be
$425,000 per year (subject to a minimum annual increase of 5% per year),
Mr.
Gallagher will be eligible to receive an annual bonus of up to 50% of his
then
applicable base compensation (the amount of the bonus and the criteria for
the
bonus to be determined by the Board of Directors) with the bonus for 2006
to be
prorated for the number of months remaining in 2006 following the closing
date,
and Mr. Gallagher will be eligible to receive a share performance bonus on
terms
identical to those described above under “Employment Agreement with Thomas P.
Rosato”. In addition to base compensation and eligibility for a bonus, (i) FAAC
will pay the premiums on the life insurance policies currently paid by VTC
and
Vortech, and (ii) Mr. Gallagher will otherwise be entitled to receive vacation,
health insurance and other benefits as generally made available to other
FAAC
executives. Pursuant to the terms of the Employment Agreement, if FAAC
terminates Mr. Gallagher’s employment for reasons other than “Cause” or Mr.
Gallagher terminates his employment for “Good Reason” (as those terms are
defined in the Employment Agreement), Mr. Gallagher is entitled to receive
his
base compensation as and when it would otherwise be payable if his employment
had not been terminated (provided, however that if termination occurs during
the
last twelve months of Mr. Gallagher’s employment, then Mr. Gallagher shall be
entitled to receive amounts equal to base compensation (as and on the terms
otherwise payable) for twelve months from the date of termination). Under
the
terms of the Employment Agreement, Mr. Gallagher is subject to covenants
not to
solicit customers or employees of FAAC or its subsidiaries and to not otherwise
compete against FAAC or its subsidiaries. In connection with signing the
Employment Agreement (and as a condition of his employment), Mr. Gallagher
is
required to sign an Invention Assignment, Non-Compete and Confidentiality
Agreement.
Employment
Agreement with Harvey L. Weiss
Effective
as of the date of closing date, FAAC will enter an Employment Agreement with
Harvey L. Weiss whereby Mr. Weiss shall be engaged to serve as FAAC’s chairman
for a period of three years. Under the terms of the Employment Agreement,
Mr.
Weiss’ base compensation is $200,000 per year (subject to a minimum annual
increase of 5% per year) and Mr. Weiss is eligible to receive an annual bonus
of
up to 50% of his then applicable base compensation (the amount of the bonus
and
the criteria for the bonus to be determined by the Board of Directors) with
the
bonus for 2006 to be prorated for the number of months remaining in 2006
following the closing date. In addition to base compensation and eligibility
for
a bonus, (i) Mr. Weiss will be entitled to a referral fee equal to 5% of
the
“Gross Profits” (as defined in the Employment Agreement) attributable to any
client or customer (other than the federal government, or any agency or
subdivision thereof) identified by Mr. Weiss to FAAC or its subsidiaries,
(ii)
Mr. Weiss will be entitled to an “office allowance” of $3,000 per month and
(iii) Mr. Weiss will otherwise be entitled to receive vacation, health insurance
and other benefits as generally made available to other FAAC executives.
Pursuant to the terms of the Employment Agreement, if FAAC terminates Mr.
Weiss’
employment for reasons other than “Cause” or Mr. Weiss terminates his employment
for “Good Reason” (as those terms are defined in the Employment Agreement), Mr.
Weiss is entitled to receive his base compensation as and when it would
otherwise be payable if his employment had not been terminated (provided,
however that if termination occurs during the last twelve months of Mr. Weiss’
employment, then Mr. Weiss shall be entitled to receive amounts equal to
base
compensation (as and on the terms otherwise payable) for twelve months from
the
date of termination). Under the terms of the Employment Agreement, Mr. Weiss
is
subject to covenants not to solicit customers or employees of FAAC or its
subsidiaries and to not otherwise compete against FAAC or its subsidiaries.
In
connection with signing the Employment Agreement (and as a condition of his
employment), Mr. Weiss is required to sign an Invention Assignment, Non-Compete
and Confidentiality Agreement.
-115-
Consulting
Agreement with Washington Capital Advisors, LLC
Effective
as of the date of closing date, FAAC will enter a Consulting Agreement
with
Washington Capital Advisors, LLC (“Washington Capital Advisors”) whereby
Washington Capital Advisors will be engaged to serve as a consultant to
FAAC for
a period of three years. Under the terms of the Consulting Agreement, Washington
Capital Advisors will provide advisory services relating to strategic,
financial, marketing and business development matters and will also provide
mergers and acquisitions assistance. Under the terms of the Consulting
Agreement, Washington Capital Advisors’ base compensation is $200,000 per year
(subject to a minimum annual increase of 5% per year) and Washington Capital
Advisors is eligible to receive an annual bonus of up to 50% of its then
applicable base compensation (the amount of the bonus and the criteria
for the
bonus to be determined by the Board of Directors) with the bonus for 2006
to be
prorated for the number of months remaining in 2006 following the closing
date.
In addition to base compensation and eligibility for a bonus Washington
Capital
Advisors will be entitled to a referral fee equal to 5% of the “Gross Profits”
(as defined in the Consulting Agreement) attributable to any client or
customer
(other than the federal government, or any agency or subdivision thereof)
identified by Washington Capital Advisors to FAAC or its subsidiaries.
Pursuant
to the terms of the Consulting Agreement, if FAAC terminates the Consulting
Agreement for reasons other than “Cause” or Washington Capital Advisors
terminates the Consulting Agreement for “Good Reason” (as those terms are
defined in the Consulting Agreement), Washington Capital Advisors is entitled
to
receive its base compensation as and when it would otherwise be payable
if the
Consulting Agreement had not been terminated (provided, however that if
termination occurs during the last twelve months of the Consulting Agreement,
then Washington Capital Advisors shall be entitled to receive amounts equal
to
base compensation (as and on the terms otherwise payable) for twelve months
from
the date of termination). Under the terms of the Consulting Agreement,
Washington Capital Advisors is subject to covenants not to solicit customers
or
employees of FAAC or its subsidiaries and to not otherwise compete against
FAAC
or its subsidiaries. In connection with signing the Consulting Agreement
(and as
a condition of its engagement), Washington Capital Advisors is required
to sign
an Invention Assignment, Non-Compete and Confidentiality Agreement. Washington
Capital Advisors is not affiliated with us, TSS/Vortech or any of their
respective officers, directors or material equity holders, except that
Washington Capital Advisors’ principal equity owner and officer is Mr. McMillen,
our Chairman.
Independent
Registered Public Accounting Firm
Goldstein
Golub Kessler LLP, or GGK, is currently our independent registered public
accounting firm. Representatives of GGK will not be present at the special
meeting.
Fees
of the Independent Registered Public Accounting Firm
The
firm
of GGK acts as our principal accountant. Through September 30, 2005, GGK
had a
continuing relationship with American Express Tax and Business Services Inc.,
or
TBS, from which it leased auditing staff who were full time, permanent employees
of TBS and through which its partners provide non-audit services. Subsequent
to
September 30, 2005, this relationship ceased and the firm established a similar
relationship with RSM McGladrey, Inc., or RSM. GGK has no full time employees
and therefore, none of the audit services performed were provided by permanent
full-time employees of GGK. GGK manages and supervises the audit and audit
staff, and is exclusively responsible for the opinion rendered in connection
with its examination. The following is a summary of fees paid or to be paid
to
GGK and RSM for services rendered.
Audit
Fees
Fees
incurred in connection with our initial public offering, the review of our
quarterly financial statements, and services provided in connection with
the our
statutory and regulatory filings in respect of year ended December 31, 2005
were
in the amount of $69,153.
Pre-Approval
of Fees
All
the
services and fees described above were approved by our full board of directors
which considered whether the provision of non-audit related services was
compatible with maintaining the independence of GGK. Commencing on
_____________, 2006, the Audit Committee of the Board of Directors was granted
the authority to pre-approve all auditing services and all non-audit services
(including the fees and terms thereof) to be performed by the independent
auditors. The Audit Committee may delegate to the Audit Committee Chairman
the
authority to grant pre-approvals for audit and permitted non-audit services
to
be performed for us by the independent auditor, provided that decisions of
such
member to grant pre-approvals shall be presented to the full Audit Committee
at
its next regularly scheduled meeting.
-116-
Stockholder
Communications with the Board of Directors
Stockholders
may send communications to our board of directors by mail or courier delivery
addressed as follows: Fortress America Acquisition Corporation, c/o Corporate
Secretary, 4100 North Fairfax Drive, Suite 1150, Arlington, Virginia 22203.
In
general, the Corporate Secretary will forward all such communications to
the
board of directors. However, for communications addressed to a particular
member
of the board of directors or the Chairman of a particular committee, the
Corporate Secretary forwards those communications directly to the board member
so addressed.
Promoters
Messrs.
McMillen, Weiss, Mitchell and Nickles may be our “promoters,” as that term is
defined under Federal securities laws.
-117-
BENEFICIAL
OWNERSHIP OF SECURITIES
The
following table sets forth information regarding the beneficial ownership
of our
common stock as of September 30, 2006, by each of our officers and directors,
all of our officers and directors as a group, and each person known by
us, as a
result of such person’s public filings with the SEC and the information
contained therein, to be the beneficial owner of more than 5% of our outstanding
shares of common stock.
Unless
otherwise indicated, we believe that all persons named in the table have
sole
voting and investment power with respect to all shares of common stock
beneficially owned by them. The address of each of the below, unless otherwise
indicated, is 4100 North Fairfax Dr., Suite 1150, Arlington, Virginia
22203-1664.
|
Name
and Address of Beneficial Owner (1)
|
Amount
and Nature of Beneficial
Ownership
|
Percentage
of Outstanding Common Stock
|
|||||
|
C.
Thomas McMillen
|
575,000
|
(1)
|
6.0
|
%
|
|||
|
Harvey
L. Weiss
|
575,000
|
(2)
|
6.0
|
%
|
|||
|
David
J. Mitchell
|
150,000
|
1.6
|
%
|
||||
|
Donald
L. Nickles
|
200,000
|
2.1
|
%
|
||||
|
All
directors and executive officers as a group
(four individuals)
|
1,500,000
|
15.7
|
%
|
||||
|
Amaranth
LLC *
|
903,220
|
(3)
|
9.5
|
%
|
|||
|
Satellite
Advisors, L.L.C. /Satellite Asset
|
|||||||
|
Management,
L.P. **
|
740,947
|
(4)
|
7.8
|
%
|
|||
| Hummingbirg Management, LLC*** | 894,000 | (5) | 9.4 | % | |||
———————
| * |
c/o
Amaranth Advisors L.L.C., One American Lane, Greenwich, Connecticut
06831
|
| ** |
623
Fifth Avenue, 19th
Floor, New York, New York 10022
|
| *** | 460 Park Avenue, 12th Floor, New York, New York 10022 |
|
(1)
|
Includes
575,000 shares held by Washington Capital Advisors, LLC, of which
Mr.
McMillen is the Chief Executive
Officer.
|
|
(2)
|
Does
not includes warrants to purchase 452,000 shares of our common
stock,
which are exercisable upon the later of July 13, 2006 or the completion
of
a business combination.
|
|
(3)
|
As
reported in a Schedule 13G/A dated February 3, 2006, and filed
with the
SEC on February 3, 2006.
|
|
(4)
|
As
reported in a Schedule 13G dated September 12, 2005, and filed
with the
SEC on September 12, 2005.
|
| (5) | As reported in a Schedule 13D dated August 17, 2006, and filed with the SEC on August 30, 2006. |
All
of
the shares of our outstanding common stock owned by our initial stockholders
prior to our initial public offering have been placed in escrow with Continental
Stock Transfer & Trust Company, as escrow agent, pursuant to an escrow
agreement described in “Certain Relationships and Related Party Transactions” on
page ____.
As
a
result of the acquisition and assuming that no FAAC stockholder exercises
such
stockholder’s conversion rights and assuming that FAAC does not assume any debt
of TSS/Vortech, immediately after the consummation of the acquisition, the
selling members will own approximately 20.1% of the outstanding FAAC common
stock and the present stockholders of FAAC (or their transferees) will own
approximately 74.9% of the outstanding FAAC common stock. The percentage
ownership of the selling members will be increased and that of FAAC’s
stockholders will be decreased upon issuances of the contingent shares to
be
issued pursuant to the purchase agreement or upon the issuances of shares
upon
conversion of the convertible promissory notes to be delivered to the selling
members at the consummation of the acquisition.
-118-
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Relating
to FAAC
Escrow.
All of
the shares of our common stock outstanding prior to our initial public offering
(“initial shares”) and held by the above stockholders (“initial stockholders”)
have been placed in escrow with Continental Transfer & Trust Company,
as escrow agent, until the earliest of:
|
·
|
July
13, 2008;
|
|
·
|
our
dissolution and liquidation; or
|
|
·
|
the
consummation of a liquidation, merger, stock exchange or other
similar
transaction which results in all of our stockholders having the
right to
exchange their shares of common stock for cash, securities or other
property subsequent to our consummating a business combination
with a
target business.
|
During
the escrow period, the initial stockholders will not be able to sell or transfer
their securities except to their spouses and children or trusts established
for
their benefit or otherwise as provided in the stock escrow agreement, but
will
retain all other rights as our stockholders, including, without limitation,
the
right to vote their shares of common stock and the right to receive cash
dividends, if declared. If dividends are declared and payable in shares of
common stock, such dividends will also be placed in escrow. If we are unable
to
effect a business combination and liquidate, none of our existing stockholders
will receive any portion of the liquidation proceeds with respect to common
stock owned by them prior to our initial public offering.
Purchase
of Warrants.
Pursuant
to an agreement with the underwriters of our initial public offering, C.
Thomas
McMillen, our Chairman, and Harvey Weiss, our Chief Executive Officer,
President, Secretary and a member of our Board of Directors, or certain of
their
affiliates or designees, have collectively purchased 600,000 warrants in
the
public marketplace at prices not exceeding $0.70 per warrant. Messrs. McMillen
and Weiss further agreed that any warrants purchased by them or their affiliates
or designees will not be sold or transferred until the completion of a business
combination.
Registration
Rights.
The
holders of the majority of the initial shares are entitled to make up to
two
demands that we register the initial shares. The holders of the majority
of the
initial shares may elect to exercise these registration rights at any time
after
the date on which the initial shares are released from escrow, which, except
in
limited circumstances, is not before July 13, 2008. In addition, the initial
stockholders have certain “piggyback” registration rights on registration
statements filed subsequent to the date on which these shares of common stock
are released from escrow. We will bear the expenses incurred in connection
with
the filing of any such registration statements.
Washington
Capital Advisors, LLC.
We are
paying Washington Capital Advisors, LLC, an affiliate of Mr. McMillen, $7,500
per month for office space and general administrative services. This arrangement
was agreed to by Washington Capital Advisors, LLC, the successor-in-interest
to
Global Defense Corporation, also an affiliate of Mr. McMillen, for our
benefit and is not intended to provide Mr. McMillen compensation in lieu of
salary. We believe, based on rents and fees for similar services in the
Washington, D.C. metropolitan area, that the fee charged by Washington Capital
Advisors, LLC is at least as favorable as we could have obtained from an
unaffiliated person. However, as our directors may not be deemed “independent,”
we did not have the benefit of disinterested directors approving this
transaction. Upon completion of a business combination or our liquidation,
we
will no longer be required to pay this monthly fee.
Advancement
of Certain Costs. Washington
Capital Advisors, Mr. Weiss and Mr. Mitchell advanced a total of
$70,000 to us to cover costs related to our initial public offering. These
loans
were repaid from the proceeds of our initial public offering not placed in
trust.
Goldman
Advisors.
Goldman
Advisors, a division of Sunrise Securities Corp., the lead underwriter in
our
initial public offering, has provided financial advisory services to us in
connection with the proposed acquisition of TSS/Vortech. Goldman will receive
reimbursement of its reasonable expenses and a fee of approximately $750,000
upon the consummation of the acquisition.
-119-
Certain
Reimbursements.
We have
agreed to reimburse the initial stockholders, officers and directors for
any
reasonable out-of-pocket business expenses incurred by them in connection
with
certain activities on our behalf, such as identifying and investigating possible
target businesses and business combinations. There is no limit on the amount
of
out-of-pocket expenses reimbursable by us, which will be reviewed only by
our
board or a court of competent jurisdiction if such reimbursement is
challenged.
General.
Other
than the $7,500 per month administrative fee and reimbursable out-of-pocket
expenses payable to our officers and directors, no compensation or fees of
any
kind, including finders and consulting fees, will be paid to any of our initial
stockholders or to any of their respective affiliates for services rendered
to
us prior to or with respect to the business combination.
Relating
to TSS/Vortech
CSI
Engineering, Inc.
CSI
Engineering, Inc. (“CSI”), which is 9% owned by Mr. Gallagher, acts as an
engineering services subcontractor to TSS/Vortech, and TSS/Vortech acts as
an
electrical subcontractor to CSI. Amounts paid by TSS/Vortech to CSI for the
years ended December 31, 2003, 2004 and 2005 were $1,549,493, $1,824,017,
and
$380,586, respectively. Amounts paid by CSI to TSS/Vortech for the years
ended
December 31, 2003, 2004 and 2005 were $1,574, $68,166 and $3,627,743,
respectively.
TPR
Group LLC.
As of
January 1, 2006, TPR Group LLC (“TPR Group”), which is wholly-owned by Mr.
Rosato, has provided human resources, administrative support and insurance
and
employee benefit plan administration services to TSS/Vortech. As of June
27,
2006, TSS/Vortech has paid TPR Group $418,200. This arrangement will be
terminated effective upon the closing of the acquisition.
S3
Integration LLC.
S3
Integration LLC (“S3 Integration”), which is owned 15% by Mr. Rosato and 15% by
Mr. Gallagher, provides commercial and government security systems design
and
installation services as a subcontractor to TSS. In addition, S3 Integration
utilizes Vortech as subcontractor. There is an oral agreement between S3
Integration and Vortech that provides for labor sharing of one or two field
employees who bill at approximately $40 per hour. In addition, S3 Integration
reimburses TSS/Vortech for services provided by certain TSS/Vortech employees.
As of June 16, 2006, S3 Integration had been charged approximately $9,284
under
this arrangement, which will be terminated at the closing. All engagements
between S3 and TSS/Vortech have been on a project-by-project basis. Amounts
paid
by TSS/Vortech to S3 Integration under the arrangement for the years ended
December 31, 2003, 2004 and 2005 were $0, $1,333 and $6,628, respectively.
Amounts paid by S3 Integration to TSS/Vortech under the arrangement for the
years ended December 31, 2003, 2004 and 2005 were $3,480, $0 and $18,204,
respectively.
There
is
also a promissory note, dated September 5, 2005, owed by S3 Integration to
TSS
in the principal amount of $350,000, evidencing amounts loaned to S3 as start-up
capital. This note will be distributed to the members of TSS effective upon
the
closing of the acquisition.
GR
Partners.
GR
Partners, which is owned 50% by Mr. Rosato and 50% by Mr. Gallagher, leases
office equipment to TSS/Vortech and also leases field equipment to Vortech
under
the terms of an equipment lease by and between TSS and GR Partners. Lease
expenses of TSS/Vortech under the lease for the years ended December 31,
2003,
2004 and 2005 were $19,158, $29,619 and $33,066, respectively. Effective
upon
the closing of the acquisition, the lease will be terminated and TSS/Vortech
will purchase its leased equipment from GR Partners for approximately $106,000.
During 2005, TSS/Vortech paid GR Partners $508,234 for services, which is
included in cost of sales; no such costs were incurred in 2003 or 2004. In
addition, GR Partners has provided certain management services to TSS/Vortech.
Management fees paid by TSS/Vortech for management services (which is included
in general and administrative expenses) for the years ended December 31,
2003,
2004 and 2005 were $0, $0 and $275,000, respectively.
-120-
Equipment
Reseller and Subcontractor.
Chesapeake Tower Systems, Inc. (“Chesapeake”), which is 60% owned by Mr. Rosato,
is a manufacturer’s representative of APC equipment and other mechanical and
electrical products, which Chesapeake sells to TSS. In addition, Vortech
is a
reseller of APC equipment, which it obtains directly from APC and on which
APC
pays Chesapeake a commission. Vortech is also a reseller of Chesapeake equipment
and acts as a subcontractor to Chesapeake for APC equipment installation
on
project-by-project basis. Amounts paid by TSS/Vortech for equipment purchases
for the years ended December 31, 2003, 2004 and 2005 were $71,158, $652,630
and
$7,387,225, respectively. Amounts paid by Chesapeake to TSS/Vortech under
the
reseller and installation arrangement for the years ended December 31, 2003,
2004 and 2005 were $189, $187,083 and $7,729, respectively.
Real
Property Leases.
There is
a Sublease Agreement, dated October 1, 2003, by and between Chesapeake, as
sublandlord, and Vortech and TSS, as subtenants, for office and warehouse
space
located at 11850 Baltimore Avenue, Beltsville, Maryland - Unit H. The sublease
expires in October 2008. Rent expense of Vortech under the sublease for the
years ended December 31, 2003, 2004 and 2005 were $108,121, $152,425 and
$190,727, respectively.
TPR
Group
Re Three, LLC, which is 50% owned by Mr. Rosato and 50% by Mr. Gallagher,
is a
real estate partnership which intends, as landlord, to lease to TSS/Vortech
the
space located at 7226 Lee DeForest Drive, Columbia, Maryland, Units 104,
105 and
209 under the terms of a lease agreement, subject to the prior written consent
of FAAC in accordance with the terms of the purchase agreement.
CTS
Services LLC.
CTS
Services LLC (“CTS”), which is 55% owned by Mr. Rosato, is a mechanical
contractor and acts as subcontractor to TSS for certain projects in the
Washington, DC area on a project-by-project basis. In addition, CTS and Vortech
utilize each other as subcontractors on a project-by-project basis. Amounts
paid
by TSS/Vortech under the arrangement for the years ended December 31, 2003,
2004
and 2005 were $232,875, $2,213,227 and $3,425,784, respectively. Amounts
paid by
CTS to TSS/Vortech under the arrangement for the years ended December 31,
2003,
2004 and 2005 were $1,517,850, $201,178 and $189,743, respectively. CTS also
provided human resources, administrative support and insurance and employee
benefit plan administration services to TSS /Vortech through December 31,
2005.
Amounts paid by TSS/Vortech to CTS for such services for the years ended
December 31, 2003, 2004 and 2005 were $71,650, $400,400 and $534,700,
respectively.
L.H.
Cranston Acquisition Group, Inc.
L.H.
Cranston Acquisition Group, Inc., 25% of which was acquired by Mr. Rosato
in
July 2005, is a mechanical, electrical and plumbing contractor that acts,
directly or through its subsidiary L.H. Cranston and Sons, Inc., as
subcontractor to TSS on a project-by-project basis in the Baltimore area.
Amounts paid by TSS/Vortech under the subcontracting arrangement for the
year
ended December 31, 2005 was $2,001,354.
Telco
P&C, LLC.
Telco
P&C, LLC (“Telco”), which is 55% owned by Mr. Rosato, is a three person
specialty electrical installation company that acts as a subcontractor to
TSS by
purchase order. There are no current ongoing contracts. Amounts paid by
TSS/Vortech under the subcontracting arrangement for the years ended December
31, 2003, 2004 and 2005 were $6,606, $77,521 and $0, respectively. Telco
paid
Vortech $6,606 for the year ended December 31, 2003 for work performed during
a
single engagement as a subcontractor to Telco.
Automotive
Technologies, Inc.
Automotive Technologies, Inc., which is 60% owned by Mr. Rosato, services
vehicles used by Vortech on a project-by-project basis using standard purchase
orders. Amounts paid by TSS/Vortech for these services for the years ended
December 31, 2003, 2004 and 2005 were $6,113, $12,895 and $26,165, respectively.
There are no current ongoing contracts.
Ongoing
and Future Transactions
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, will be on terms believed by us to be no
less
favorable than are available from unaffiliated third parties and will require
prior approval in each instance by a majority of the members of our board
of
directors who do not have an interest in the transaction.
-121-
PRICE
RANGE OF SECURITIES AND DIVIDENDS
Fortress
America Acquisition Corporation
The
shares of our common stock, warrants and units are currently quoted on the
Over-the-Counter Bulletin Board under the symbols “FAAC,” “FAACW” and “FAACU,”
respectively. On June 5, 2006, the last day for which information was available
prior to the date of the public announcement of the proposed acquisition,
the
last quoted sale prices of FAAC, FAACW and FAACU were $5.39, $0.58 and $6.665,
respectively.
Each
of
our units sold in our initial public offering consists of one share of our
common stock and two redeemable common stock purchase warrants. Our warrants
became separable from our common stock on September 26, 2005. Each warrant
entitles the holder to purchase from us one share of common stock at an exercise
price of $5.00 commencing the later of the completion of the acquisition
or July
13, 2006. Our warrants will expire at 5:00 p.m.,
New York City time, on July 13, 2009, or earlier upon redemption.
Prior to July 20, 2005, there was no established public trading market for
our
common stock.
We
do not
currently have any authorized or outstanding equity compensation
plans.
The
following table sets forth, for the calendar quarter indicated, the quarterly
high and low bid information of our common stock, warrants and units as reported
on the OTC Bulletin Board. The quotations listed below reflect interdealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions:
|
Quarter
Ended
|
Common
Stock (FAAC)
|
Warrants
(FAACW)
|
Units
(FAACU)
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
December
31, 2005
|
$
|
5.24
|
$
|
5.02
|
$
|
0.52
|
$
|
0.38
|
$
|
6.10
|
$
|
5.76
|
|||||||
|
March
31, 2006
|
$
|
5.60
|
$
|
5.22
|
$
|
0.78
|
$
|
0.36
|
$
|
7.15
|
$
|
5.95
|
|||||||
|
June
30, 2006
|
$
|
5.57
|
$
|
5.37
|
$
|
0.83
|
$
|
0.49
|
$
|
7.20
|
$
|
6.25
|
|||||||
|
September
30, 2006
|
$
|
5.48
|
$
|
5.35
|
$
|
0.55
|
$
|
0.41
|
$
|
6.50
|
$
|
6.12
|
|||||||
Holders
of our common stock, warrants and units should obtain current market quotations
for their securities. The market price of our common stock, warrants and
units
could vary at any time before the acquisition.
Holders
of Common Stock
As
of
__________, 2006, there were _____ holders of record of our common
stock.
Dividends
We
have
not paid any dividends on our common stock to date and do not intend to pay
dividends prior to the completion of the acquisition.
Upon
completion of the acquisition of TSS/Vortech, we do not intend to pay dividends.
We currently intend to retain all future earnings, if any, for use in the
operations and expansion of our business. As a result, we do not anticipate
paying cash dividends in the foreseeable future. Any future determination
as to
the declaration and payment of cash dividends will be at the discretion of
our
board of directors and will depend on factors our board of directors deems
relevant, including among others, our results of operations, financial condition
and cash requirements, business prospects, and the terms of our credit
facilities and other financing arrangements.
There
is
no established public trading market for the membership interests of VTC
or
Vortech because it is a private company. There are currently two holders
of the
membership interests of each of VTC and Vortech.
-122-
DESCRIPTION
OF OUR COMMON STOCK
General
We
are
authorized to issue 50.0 million shares of common stock, par value $0.0001,
and
1.0 million shares of preferred stock, par value $0.0001. As of June 30,
2006,
9,550,000 shares of common stock were outstanding. No shares of preferred
stock
are currently outstanding.
Common
Stock
Our
stockholders are entitled to one vote for each share held of record on all
matters to be voted on by stockholders. In connection with the vote required
for
any business combination, all of our initial stockholders have agreed to
vote
their respective shares of common stock owned by them immediately prior to
our
initial public offering in accordance with the public stockholders. This
voting
arrangement does not apply to shares included in units purchased in the initial
public offering or purchased following the initial public offering in the
open
market by any of our initial stockholders. Additionally, our initial
stockholders may vote all of their shares in any manner they determine, in
their
sole discretion, with respect to any other items that come before a vote
of our
stockholders.
We
will
proceed with the business combination only if a majority of the shares of
common
stock voted by the public stockholders are voted in favor of the business
combination and public stockholders owning less than 20% of the shares sold
in
our initial public offering (less than 1,560,000 of such shares) exercise
their
conversion rights.
Our
board
of directors is divided into three classes, each of which will generally
serve
for a term of three years with only one class of directors being elected
in each
year. There is no cumulative voting with respect to the election of directors,
with the result that a plurality of the vote entitled to be cast in the election
of directors shall be sufficient to elect directors. Article Eighth of our
amended and restated certificate of incorporation provides for the classified
board of directors. These provisions could prevent or delay a holder of shares
representing a majority of the voting power from obtaining control of the
board
of directors because the holder would not be able to replace a majority of
the
directors prior to at least the second annual meeting of stockholders after
it
acquired a majority position.
If
we are
forced to dissolve and liquidate prior to a business combination, our public
stockholders are entitled to share ratably in the trust fund, inclusive of
any
interest, and any net assets remaining available for distribution to them
after
payment of liabilities. Our existing stockholders have agreed to waive their
rights to share in any distribution with respect to common stock owned by
them
prior to the offering if we are forced to dissolve and liquidate.
Our
stockholders have no conversion, preemptive or other subscription rights
and
there are no sinking fund or redemption provisions applicable to the common
stock, except that public stockholders have the right to have their shares
of
common stock converted to cash equal to their pro rata share of the trust
fund
if they vote against the business combination and the business combination
is
approved and completed. Public stockholders who convert their stock into
their
share of the trust fund still have the right to exercise the warrants that
they
received as part of the units.
Preferred
Stock
Our
amended and restated certificate of incorporation authorizes the issuance
of 1.0
million shares of blank check preferred stock with such designation, rights
and
preferences as may be determined from time to time by our board of directors.
No
shares of preferred stock have been issued. Accordingly, our board of directors
is empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of common stock, although
the underwriting agreement prohibits us, prior to a business combination,
from
issuing preferred stock which participates in any manner in the proceeds
of the
trust fund, or which votes as a class with the common stock on a business
combination. We may issue some or all of the preferred stock to effect a
business combination. In addition, the preferred stock could be utilized
as a
method of discouraging, delaying or preventing a change in control of us.
Although we do not currently intend to issue any shares of preferred stock,
we
cannot assure you that we will not do so in the future.
-123-
Dividends
We
have
not paid any dividends on our common stock to date and do not intend to pay
dividends prior to the completion of a business combination. The payment
of
dividends in the future will be contingent upon our revenues and earnings,
if
any, capital requirements and general financial condition subsequent to
completion of a business combination. The payment of any dividends subsequent
to
a business combination will be within the discretion of our then board of
directors. It is the present intention of our board of directors to retain
all
earnings, if any, for use in our business operations and, accordingly, our
board
of directors does not anticipate declaring any dividends in the foreseeable
future.
Restrictive
Provisions of our Amended and Restated Certificate of Incorporation and
By-Laws
Our
Amended and Restated Certificate of Incorporation, and, if approved, our
Second
Amended and Restated Certificate of Incorporation, and by-laws contain certain
provisions that may make it more difficult, expensive or otherwise discourage,
a
tender offer or a change in control or takeover attempt by a third-party,
even
if such a transaction would be beneficial to our stockholders. The existence
of
these provisions may have a negative impact on the price of our common stock
by
discouraging third-party investors from purchasing our common stock. In
particular, our Amended and Restated Certificate of Incorporation and by-laws
include provisions that:
|
·
|
classify
our board of directors into three groups, each of which serve for
staggered three-year terms;
|
|
·
|
permit
our directors to fill vacancies on our board of
directors;
|
|
·
|
require
stockholders to give us advance notice to nominate candidates for
election
to our board of directors or to make stockholder proposals at a
stockholders’ meeting;
|
|
·
|
permit
a special meeting of our stockholders be called only by the board
of
directors and not by any other person or
persons;
|
|
·
|
permit
our board of directors to issue, without approval of our stockholders,
preferred stock with such terms as our board of directors may
determine;
|
|
·
|
permit
the authorized number of directors to be changed only by the board
of
directors or at a meeting of the stockholders called for the purpose
of
electing directors at which a quorum is present, by the affirmative
vote
of 66 2/3% of the shares represented at the meeting and entitled
to vote
generally in the election of directors;
and
|
|
·
|
require
the vote of the holders of 66 2/3% of the shares of our common
stock for
amendments by the stockholders of certain provisions of our by-laws,
including some of the provisions described
above.
|
Our
by-laws require that, subject to certain exceptions, any stockholder desiring
to
propose business or nominate a person to the board of directors at a
stockholders meeting must give notice of any proposals or nominations within
a
specified time frame. These provisions may have the effect of precluding
a
nomination for the election of directors or the conduct of business at a
particular annual meeting if the proper procedures are not followed or may
discourage or deter a third-party from conducting a solicitation of proxies
to
elect its own slate of directors or otherwise attempting to obtain control
of
us, even if the conduct of such solicitation or such attempt might be beneficial
to us and our stockholders. For us to include a proposal in our annual proxy
statement, the proponent and the proposal must comply with the proxy proposal
submission rules of the SEC.
Our
Amended and Restated Certificate of Incorporation has established that we
will
have a classified board of directors. A classified board of directors is
one in
which a group or class of directors is elected on a rotating basis each year.
This method of electing directors makes changes in the composition of the
board
of directors lengthier, which consequently would make a change in control
of a
corporation a lengthier and more difficult process.
-124-
STOCKHOLDER
PROPOSALS
If
you
are a stockholder and you want to include a proposal in the proxy statement
for
the year 2007 annual meeting, presently scheduled for _________ 2007, under
our
by-laws you must give timely notice of the proposal, in writing, along with
any
supporting materials to our secretary at our principal office in Arlington,
Virginia. To be timely, the notice has to be given between
______________, 200__ and _____________, 200__.
MULTIPLE STOCKHOLDERS
SHARING ONE ADDRESS
In
accordance with Rule 14a-3(e)(1) under the Exchange Act, one proxy
statement will be delivered to two or more stockholders who share an address,
unless we have received contrary instructions from one or more of the
shareholders. We will deliver promptly upon written or oral request a separate
copy of the proxy statement to a stockholder at a shared address to which
a
single copy of the proxy statement was delivered. Requests for additional
copies
of the proxy statement, and requests that in the future separate proxy
statements be sent to stockholders who share an address, should be directed
to
Fortress America Acquisition Corporation, 4100 North Fairfax Drive, Suite
1150,
Arlington, Virginia 22203, Attn: Secretary, telephone: (703) 528-7073. In
addition, stockholders who share a single address but receive multiple copies
of
the proxy statement may request that in the future they receive a single
copy by
contacting us at the address and phone number set forth in the prior
sentence.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
consolidated financial statements of TSS/Vortech as of and for the years
ended
December 31, 2003, 2004 and 2005 included in this proxy statement have been
audited by McGladrey & Pullen, LLP, independent registered public accounting
firm.
The
financial statements of FAAC as of and for the period from December 20, 2004
(date of inception) through December 31, 2005 included in this proxy statement
have been audited by Goldstein Golub Kessler LLP, independent registered
public
accounting firm. Goldstein Golub Kessler LLP has acted as the independent
auditor for FAAC since its inception.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
reports, proxy statements and other information with the SEC as required
by the
Exchange Act. You may access this information at the SEC website at http://www.sec.gov
.
You
may
read and copy reports, proxy statements and other information filed by us
with
the SEC at their public reference room located at Headquarters Office, 100
F
Street, N.E., Room 1580, Washington, D.C. 20549.
You
may
obtain information on the operation of the Public Reference Room by calling
the
Securities and Exchange Commission at 1-800-SEC-0330. You may also obtain
copies
of the materials described above at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549.
-125-
INDEX
TO FINANCIAL STATEMENTS
|
Contents
|
||
|
TSS/VORTECH
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
F-4
|
|
|
COMBINED
FINANCIAL STATEMENTS OF TSS/VORTECH (DECEMBER 31, 2005,
|
||
|
2004,
2003)
|
||
|
Combined
Balance Sheet
|
F-5
|
|
|
Combined
Statement of Income
|
F-6
|
|
|
Combined
Statement of Changes in Members’ Equity
|
F-7
|
|
|
Combined
Statement of Cash Flows
|
F-8
|
|
|
Notes
to Combined Financial Statements
|
F-9
|
|
|
UNAUDITED
COMBINED FINANCIAL STATEMENTS OF TSS/VORTECH FOR THE
SIX
|
||
|
MONTHS
ENDED JUNE 30, 2006 AND 2005
|
||
|
Combined
Balance Sheets
|
F-18
|
|
|
Combined Statement
of Income
|
F-19
|
|
|
Combined
Statement of Changes in Members’ Equity
|
F-20
|
|
|
Combined
Statement of Cash Flows
|
F-21
|
|
|
Notes
to Combined Financial Statements (Unaudited)
|
F-22
|
|
|
FAAC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
F-30
|
|
|
FINANCIAL STATEMENTS
OF FAAC FOR THE YEAR ENDED DECEMBER 31, 2005
|
||
|
Balance
Sheet
|
F-31
|
|
|
Statement
of Operations
|
F-32
|
|
|
Statement
of Stockholders’ Equity
|
F-33
|
|
|
Statement
of Cash Flows
|
F-34
|
|
|
Notes
to Financial Statements
|
F-35
|
|
|
UNAUDITED
CONDENSED FINANCIAL STATEMENTS OF FAAC FOR THE SIX
MONTHS
|
||
|
ENDED
JUNE 30, 2006 AND 2005
|
||
|
Condensed
Balance Sheet
|
F-41
|
|
|
Condensed
Statement of Operations
|
F-42
|
|
|
Condensed
Statement of Stockholders’ Equity
|
F-43
|
|
F-1
|
Condensed
Statement of Cash Flows
|
F-44
|
|
|
Notes
to Unaudited Condensed Financial Statements
|
F-45
|
F-2
Vortech,
LLC and VTC, LLC
Combined
Financial Report
December
31, 2005, 2004 and 2003
F-3
McGladrey
& Pullen
Certified
Public Accountants
Independent
Auditor’s Report
To
the
Members
Vortech,
LLC and VTC, LLC
Beltsville,
Maryland
We
have
audited the accompanying combined balance sheets of Vortech, LLC and
VTC, LLC
(the “Company”) as described in Note 1 to the financial statements, as of
December 31, 2005, 2004 and 2003, and the related combined statements of
income, changes in members’ equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company management.
Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We
conducted our audits in accordance with auditing standards generally
accepted in
the United States of America. 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 audits provide a reasonable
basis
for our opinion.
In
our
opinion, the combined financial statements referred to above present
fairly, in
all material respects, the financial position of the Vortech,
LLC and VTC, LLC
as of
December 31, 2005, 2004 and 2003 and the results of their operations
and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
McGladrey & Pullen, LLP
Bethesda,
Maryland
May
12,
2006
McGladrey
& Pullen, LLP is a member firm of RSM International,
an
affiliation of separate and independent legal entities.
F-4
|
Combined
Balance Sheet
|
||||||||||
|
December
31, 2005, 2004 and 2003
|
||||||||||
|
Assets
|
2005
|
2004
|
2003
|
|||||||
|
Current
Assets
|
||||||||||
|
Cash
and cash equivalents
|
$
|
1,737,075
|
$
|
1,503,338
|
$
|
1,071,940
|
||||
|
Contract
and other receivables, net including $869,131,
|
||||||||||
|
$162,
342 and $395,640 from related parties in 2005,
|
||||||||||
|
2004
and 2003
|
11,136,833
|
2,669,370
|
3,592,924
|
|||||||
|
Costs
and estimated earnings in excess of billings
|
||||||||||
|
on
uncompleted contracts
|
528,494
|
963,089
|
202,017
|
|||||||
|
Prepaid
expenses
|
6,197
|
3,961
|
||||||||
|
Due
from affiliated entities
|
51,773
|
21,317
|
17,177
|
|||||||
|
Assets
of discontinued operation
|
-
|
258,734
|
-
|
|||||||
|
Total
current assets
|
13,460,372
|
5,419,809
|
4,884,058
|
|||||||
|
Property
and Equipment, net
|
532,452
|
554,967
|
557,375
|
|||||||
|
Deposits
and Other Assets
|
106,486
|
27,177
|
7,041
|
|||||||
|
$
|
14,099,310
|
$
|
6,001,953
|
$
|
5,448,474
|
|||||
|
Liabilities
And Members' Equity
|
||||||||||
|
Current
Liabilities
|
||||||||||
|
Notes
payable, current portion
|
$
|
72,808
|
$
|
116,654
|
$
|
48,726
|
||||
|
Accounts
payable, including $1,388,347, $605,458 and
|
||||||||||
|
$1,075,630
to related parties in 2005, 2004 and 2003
|
6,360,959
|
2,011,561
|
1,710,333
|
|||||||
|
Accrued
bonuses
|
745,247
|
461,000
|
344,348
|
|||||||
|
Other
accrued expenses
|
1,140,244
|
707,589
|
167,183
|
|||||||
|
Billings
in excess of costs and estimated earnings
|
||||||||||
|
on
uncompleted contracts
|
2,899,728
|
1,538,462
|
1,734,432
|
|||||||
|
Liabilities
of discontinued operations
|
-
|
416,425
|
-
|
|||||||
|
Total
current liabilities
|
11,218,986
|
5,251,691
|
4,005,022
|
|||||||
|
Long-Term
Liabilities
|
||||||||||
|
Notes
payable, less current portion
|
160,652
|
369,579
|
167,015
|
|||||||
|
Deferred
compensation payable
|
128,038
|
24,566
|
||||||||
|
288,690
|
394,145
|
167,015
|
||||||||
|
Commitments
and Contingencies (Notes 5, 6, 7, 8, 9, and 12)
|
||||||||||
|
Members'
Equity
|
2,941,634
|
356,117
|
1,276,437
|
|||||||
|
Note
receivable from affiliate
|
(350,000
|
)
|
-
|
-
|
||||||
|
2,591,634
|
356,117
|
1,276,437
|
||||||||
|
$
|
14,099,310
|
$
|
6,001,953
|
$
|
5,448,474
|
|||||
|
See
Notes To Combined Financial Statements.
|
||||||||||
F-5
|
Combined
Statement Of Income
|
||||||||||
|
Years
Ended December 31, 2005, 2004 and 2003
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Earned
Revenues, including $3,852,227, $1,324,188 and
|
||||||||||
|
$1,842,081
with related parties in 2005, 2004 and 2003
|
$
|
58,632,293
|
$
|
21,302,997
|
$
|
12,330,785
|
||||
|
Cost
of earned revenues, including $13,709,811, $4,814,302
|
||||||||||
|
and
$342,670 with related parties in 2005, 2004 and 2003
|
50,056,924
|
15,769,341
|
8,392,786
|
|||||||
|
Gross
profit
|
8,575,369
|
5,533,656
|
2,131,908
|
|||||||
|
General
and administrative expenses, including $1,033,493,
|
||||||||||
|
$582,444,
and $342,670 with related parties in 2005, 2004
|
||||||||||
|
and
2003
|
5,647,897
|
5,504,429
|
2,827,044
|
|||||||
|
Operating
income
|
2,927,472
|
1,019,181
|
1,806,091
|
|||||||
|
Interest
expense
|
(35,184
|
)
|
(29,139
|
)
|
(3,957
|
)
|
||||
|
Income
from continuing operations
|
2,892,288
|
990,042
|
1,802,134
|
|||||||
|
Gain
(loss) from discontinued operations (Note 13)
|
252,845
|
(252,845
|
)
|
-
|
||||||
|
Net
income
|
$
|
3,145,133
|
$
|
737,197
|
$
|
1,802,134
|
||||
|
See
Notes To Combined Financial Statements.
|
||||||||||
F-6
|
Combined
Statement Of Changes In Members' Equity
|
||||||||||
|
Years
Ended December 31, 2005, 2004 and 2003
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Balance,
Beginning of year
|
$
|
356,117
|
1,276,437
|
29,303
|
||||||
|
Capital
Contributions
|
-
|
-
|
45,000
|
|||||||
|
Distributions
|
(559,616
|
)
|
(1,657,517
|
)
|
(600,000
|
)
|
||||
|
Net
income
|
3,145,133
|
737,197
|
1,802,134
|
|||||||
|
Balance,
End of year
|
$
|
2,941,634
|
$
|
356,117
|
$
|
1,276,437
|
||||
|
See
Notes To Combined Financial Statements.
|
||||||||||
F-7
|
Combined
Statement Of Cash Flows
|
||||||||||
|
Years
Ended December 31, 2005, 2004 and 2003
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Cash
Flows From Operating Activities
|
||||||||||
|
Net
income
|
$
|
3,145,133
|
$
|
737,197
|
$
|
1,802,134
|
||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
228,279
|
136,203
|
48,019
|
|||||||
|
Allowance
for doubtful accounts
|
(26,876
|
)
|
(1,544
|
)
|
35,500
|
|||||
|
(Gain)
loss from discontinued operations
|
(252,845
|
)
|
252,845
|
-
|
||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
(Increase)
decrease in:
|
||||||||||
|
Contract
and other receivables
|
(8,440,587
|
)
|
925,098
|
(3,628,424
|
)
|
|||||
|
Costs
and estimated earnings in excess of billings
|
||||||||||
|
on
uncompleted contracts
|
475,857
|
(625,777
|
)
|
(202,017
|
)
|
|||||
|
Prepaid
expenses
|
(2,236
|
)
|
(3,961
|
)
|
(7,041
|
)
|
||||
|
Due
from affiliated entities
|
(285,303
|
)
|
(95,153
|
)
|
-
|
|||||
|
Deposits
and other assets
|
(146,809
|
)
|
(20,136
|
)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||||
|
Accounts
payable and accrued expenses
|
5,066,299
|
958,286
|
2,221,864
|
|||||||
|
Billings
in excess of costs and estimated earnings
|
||||||||||
|
on
uncompleted contracts
|
1,320,004
|
(331,265
|
)
|
1,734,432
|
||||||
|
Deferred
compensation payable
|
103,472
|
24,566
|
-
|
|||||||
|
Net
cash provided by operating activities
|
1,184,388
|
1,956,359
|
2,004,467
|
|||||||
|
Cash
Flows From Investing Activities
|
||||||||||
|
Purchases
of property and equipment
|
(59,521
|
)
|
(133,796
|
)
|
(605,394
|
)
|
||||
|
Increase
in due from affiliated entities
|
-
|
(4,140
|
)
|
(17,177
|
)
|
|||||
|
Net
cash used in investing activities
|
(59,521
|
)
|
(137,936
|
)
|
(622,571
|
)
|
||||
|
Cash
Flows From Financing Activities
|
||||||||||
|
Proceeds
from notes payable
|
-
|
320,794
|
247,864
|
|||||||
|
Principal
payments on notes payable
|
(331,514
|
)
|
(50,302
|
)
|
(32,123
|
)
|
||||
|
Capital
contributions
|
-
|
45,000
|
||||||||
|
Member
distributions
|
(559,616
|
)
|
(1,657,517
|
)
|
(600,000
|
)
|
||||
|
Net
cash used in financing activities
|
(891,130
|
)
|
(1,387,025
|
)
|
(339,259
|
)
|
||||
|
Net
increase in cash and cash equivalents
|
233,737
|
431,398
|
1,042,637
|
|||||||
|
Cash
And Cash Equivalents
|
||||||||||
|
Beginning
|
1,503,338
|
1,071,940
|
29,303
|
|||||||
|
Ending
|
$
|
1,737,075
|
$
|
1,503,338
|
$
|
1,071,940
|
||||
|
Supplemental
Disclosure Of Cash Flow Information
|
||||||||||
|
Cash
paid for interest
|
$
|
35,184
|
$
|
29,139
|
3,957
|
|||||
|
See
Notes To Combined Financial Statements.
|
||||||||||
F-8
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting
Policies
|
The
Companies and nature of businesses: Vortech
Consulting, LLC (the Company), was organized in the State of Maryland
on May 31,
2002. The Company previously operated under three separate divisions,
Vortech,
C2 Solutions (C2) and S3 Integration.
Effective
August 15, 2005, Vortech Consulting, LLC changed its name to VTC, LLC
and the
Vortech division began operating as a separate LLC named Vortech, LLC.
The 2005
financial statements include the combined financial position and results
of
operations of both VTC, LLC and Vortech, LLC. The 2004 and 2003 financial
statements include the financial position and results of operations of
all
divisions of Vortech Consulting, LLC as described herein.
S3
Integration was in operation from July 1, 2004 to August 31, 2005 as
a division
of Vortech Consulting, LLC. S3 Integration is a provider of turnkey electronic
security integration services. The operations of S3 Integration have been
included in the 2005 and 2004 financial statements as a discontinued
operation
(see Note 13).
Vortech
provides cable and electrical plan design, installation and service. C2 provides
a variety of services to the mission critical and high-tech industry, including
planning and programming, engineering and design, project and construction
manager, field installation, and facilities management. Operations of both
divisions commenced effective January 1, 2003.
A
summary
of the Company’s significant accounting policies follows:
Principles
of combination:
The combined financial statements include Vortech, LLC and VTC, LLC for
December
31, 2005, and Vortech Consulting, LLC for December 31, 2004 and 2003.
All
intercompany accounts and transactions have been eliminated in
combination.
Personal
assets and liabilities and member salaries: In
accordance with the generally accepted method of presenting financial
statements
for a limited liability company, the financial statements do not include
the
personal assets and liabilities of the members, including their obligation
for
income taxes on their distributive shares of the Company’s net income or their
rights to refunds on the Company’s net loss, nor any provision for income tax
expense or an income tax refund. The expenses shown on the statement
of income
include salaries paid to members.
Revenue
recognition:
Revenue
from contracts is recognized on the percentage-of-completion method, measured
by
the percentage of total costs incurred to date to estimated total costs for
each
contract. This method is used because management considers cost incurred
and
costs to complete to be the best available measure of progress in the contracts.
Contract
costs include all direct materials, subcontract and labor costs and those
indirect costs related to contract performance, such as indirect labor, payroll
taxes, and supplies. General and administrative expenses are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are
made
in the period in which losses are determined.
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents revenue recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted
contracts,” represents billings in excess of revenue recognized.
As
these
long-term contracts extend over one or more years, revisions in cost and
profit
estimates during the course of the contract are reflected in the accounting
period in which the facts which require the revisions are
determined.
Cash
and cash equivalents: For
purposes of reporting cash flows, the Company considers all highly-liquid
debt
instruments with original maturities of three months or less to be cash
equivalents.
F-9
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Contract
receivables: Contract
receivables are carried at original invoice amount less an estimate made
for
doubtful receivables based on a review of all outstanding amounts on a
monthly
basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer's
financial condition, credit history, and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Recoveries of contract
receivables previously written off are recorded when received. An account
receivable is considered to be past due if any portion of the receivable
balance
is outstanding for more than 30 days. Interest is not recorded on any past
due balances.
Property
and equipment: Property
and equipment are recorded at cost and depreciated using the straight-line
method of depreciation over their estimated useful lives, ranging from 3
to 7
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the asset or the remaining lease term. Normal repairs and
maintenance are charged against income.
Valuation
of long-lived assets: The
Company accounts for the valuation of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. Recoverability of the long-lived asset is measured
by a
comparison of the carrying amount of the asset to future undiscounted net
cash
flows expected to be generated by the asset. If such assets are considered
to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reportable at the lower of the carrying amount
or
fair value, less costs to sell.
Advertising
costs: The
Company expenses all advertising costs as incurred. Advertising expense
was
$384,409, $14,082 and $24,311 for the years ended December 31, 2005, 2004
and 2003 respectively.
Income
taxes: The
Company is treated as a partnership for Federal income tax purposes, and
members
are taxed individually on their pro-rata share of the Company’s earnings. The
Company’s net income or loss is allocated among the members in accordance with
the Company’s operating agreement. The Company intends to make distributions to
its members subsequent to year-end sufficient to pay personal income taxes
on
taxable income, if any, from the Company.
Credit
risk: The
Company may from time to time, have cash in banking institutions in excess
of
the amount insured by the Federal Deposit Insurance Corporation. The Company
has
not experienced any losses in such accounts and believes it is not exposed
to
any significant credit risk on cash.
The
Company grants credit to its customers in the normal course of business on
an
unsecured basis. The Company’s accounts receivable are derived from customers
throughout the metropolitan Washington, D.C. and Baltimore, Maryland areas,
and
are made on an unsecured basis.
Estimates: The
preparation of financial statements 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 financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for estimated costs to complete long-term contracts
in
progress, allowance for doubtful accounts, and depreciation, among others.
Estimates and assumptions are reviewed periodically and the effects of
revisions
are reflected in the financial statements in the period they are determined
to
be necessary.
F-10
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
2.
|
Uncompleted
Contracts
|
Information
regarding uncompleted contracts as of December 31, 2005, 2004 and 2003 is
as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Costs
incurred on uncompleted contracts
|
$
|
52,493,306
|
$
|
14,350,725
|
$
|
3,096,016
|
||||
|
Estimated
earnings
|
8,274,479
|
3,423,709
|
1,072,013
|
|||||||
|
60,767,785
|
17,774,434
|
4,168,029
|
||||||||
|
Less
billings to date
|
63,139,019
|
18,347,807
|
5,700,444
|
|||||||
|
$
|
(2,371,234
|
)
|
$
|
(573,373
|
)
|
$
|
(1,532,415
|
)
|
||
The foregoing balances are included in the accompanying
balance sheets under the following captions:
|
|
2005
|
2004
|
2003
|
|||||||
|
Costs
and estimated earnings in excess of billings
|
||||||||||
|
on
uncompleted contracts
|
$
|
528,494
|
$
|
963,089
|
$
|
202,017
|
||||
|
Billings
in excess of costs and estimated earnings
|
||||||||||
|
on
uncompleted contracts
|
(2,899,728
|
)
|
(1,538,462
|
)
|
(1,734,432
|
)
|
||||
|
$
|
(2,371,234
|
)
|
$
|
(575,373
|
)
|
$
|
(1,532,415
|
)
|
|
Note
3.
|
Contract
and Other Receivables
|
|
2005
|
|
2004
|
|
2003
|
||||||
|
Completed
contracts, including retentions
|
$
|
620,403
|
$
|
645,416
|
$
|
755,144
|
||||
|
Contracts
in progress
|
||||||||||
|
Current
|
10,309,204
|
1,991,753
|
2,835,871
|
|||||||
|
Retention
|
198,391
|
7,659
|
15,018
|
|||||||
|
Other
miscellaneous receivables
|
33,835
|
56,720
|
22,391
|
|||||||
|
11,161,833
|
2,701,548
|
3,628,424
|
||||||||
|
Less
allowance for doubtful accounts
|
(25,000
|
)
|
(32,178
|
)
|
(35,500
|
)
|
||||
|
$
|
11,136,833
|
$
|
2,669,370
|
$
|
3,592,924
|
|||||
|
Note
4.
|
Property
and Equipment
|
Property
and equipment as of December 31, 2005, 2004 and 2003 consists of the
following:
|
2005
|
|
2004
|
|
2003
|
|
|||||
|
Vehicles
|
$
|
395,006
|
$
|
313,760
|
$
|
261,199
|
||||
|
Leasehold
improvements
|
375,638
|
366,334
|
329,937
|
|||||||
|
Furniture
and fixtures
|
14,732
|
5,130
|
-
|
|||||||
|
Office
equipment
|
92,076
|
53,965
|
14,258
|
|||||||
|
877,452
|
739,189
|
605,394
|
||||||||
|
Less
accumulated depreciation
|
345,000
|
184,222
|
48,019
|
|||||||
|
$
|
532,452
|
$
|
554,967
|
$
|
557,375
|
|||||
F-11
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
5.
|
Notes
Payable
|
The
Company has entered into multiple notes payable arrangements, certain of
which
were secured by vehicles, that require monthly payments ranging from $273
to
$789, including interest at the rate of 0% to 5.92% through October 2010.
Future
principal payments on these notes payable are as follows:
|
Years
Ending December 31,
|
||||
|
2006
|
$
|
72,808
|
||
|
2007
|
76,934
|
|||
|
2008
|
50,525
|
|||
|
2009
|
22,990
|
|||
|
2010
|
10,203
|
|||
|
$
|
233,460
|
|||
|
Note
6.
|
Line
of Credit
|
VTC,
LLC
has a revolving demand line of credit agreement with a bank that allows
for
maximum borrowings of up to $1,000,000. Interest accrues daily on the
outstanding balance at the one month LIBOR rate plus 225 basis points.
The line
is personally guaranteed by a 50% member of the Company, and is collateralized
by substantially all Company assets. There were no borrowings under the
line of
credit as of December 31, 2005.
As
of
December 31, 2004 and 2003 the Vortech Consulting, LLC had a revolving
line of
credit with a bank that allowed for maximum borrowings for the lesser of
$500,000 or 80% of eligible receivables. Interest accrues daily on the
outstanding balance at the bank’s prime rate, plus 1% (effective rate of 6% at
December 31, 2004). The line is personally guaranteed by certain members of
the Company, and is collateralized by substantially all Division assets.
The
agreement requires the Company to maintain certain tangible net worth.
There
were no borrowings by the Company as of December 31, 2004, and 2003 however,
the
S3 Integration division had borrowings under this line of credit of $140,000
as
of December 31, 2004, which is included in liabilities from discontinued
operations.
|
Note
7.
|
Leasing
Arrangements
|
Chesapeake
Tower Systems, Inc. (Chesapeake) and affiliated entity, entered into a
six-year
lease for office and warehouse space expiring in October 2008. The Company
is
subleasing a portion of the space under a similar arrangement, however
Chesapeake remains ultimately obligated. The Company is also leasing office
equipment under operating lease arrangements. Rent expense under the above
arrangements was $190,727, $152,425 and $108,121 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Future
minimum payments under leasing arrangements as of December 31, 2005, are as
follows:
|
Years
Ending December 31,
|
||||
|
2006
|
$
|
198,597
|
||
|
2007
|
179,300
|
|||
|
2008
|
146,101
|
|||
|
2009
|
107
|
|||
|
$
|
524,105
|
|||
F-12
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
8.
|
Profit
Sharing Plan
|
The
Company provides retirement benefits to its employees through its participation
in the Chesapeake Tower Systems and Affiliates 401(k) Plan in which it
is an
adopting employer. Substantially all employees who meet certain eligibility
requirements are eligible to participate. Participants may elect to defer
a
percentage of their annual compensation, subject to certain limitations,
in
accordance with Section 401(k) of the Internal Revenue Code. The Company
makes
matching contributions of 40% (35% for 2003) of the first 6% of compensation
deferred by each participant. Employer matching contributions were $70,709,
$54,036 and $16,985 for the years ended December 31, 2005, 2004 and 2003,
respectively.
|
Note
9.
|
Phantom
Unit Plan
|
The
Company signed agreements with certain key employees to provide incentive
compensation for enhancement of Company and shareholder value and to share
in
the future economic success of the Company. Under these agreements, the
Company
had issued 30,250 phantom units as of December 31, 2005 and 2004. The phantom
units vest over a three-year period from the grant date and realize value
based
on a
formula
provided in the agreements. The
deferred compensation is to be paid to the individuals or their beneficiaries
over a period of five years commencing with the termination of employment,
death
or date of closing if the Company is sold or merged. The Company records
periodic accruals for the cost of providing such benefits by charges to
income.
Compensation expense recorded under these agreements was $103,472 and $24,566
for the years ended December 31, 2005 and 2004 respectively. As of December
31,
2005, 20,167 units were vested.
|
Note
10.
|
Related
Party Transactions
|
The
Company participates in transactions with the following entities affiliated
through common ownership and management.
CSI
Engineering, Inc.
CSI
Engineering, Inc. ("CSI"), which is 9% owned by a 50% partner in the
Company,
acts as an engineering services subcontractor to the Company, and the
Company
acts as an electrical subcontractor to CSI.
TPR
Group LLC.
As of
January 1, 2006, TPR Group LLC ("TPR Group"), which is wholly-owned by
a 50%
partner in the Company, has provided human resources, administrative
support and
insurance and employee benefit plan administration services to TSS/Vortech.
S3
Integration LLC.
S3
Integration LLC ("S3 Integration"), which is owned 15% by each of the
partners,
provides commercial and government security systems design and installation
services as a subcontractor to the Company. In addition, S3 Integration
utilizes
the Company as subcontractor.
GR
Partners.
GR
Partners, which is owned 50% by each of the partners, leases office and
field
equipment to the Company under the terms of an equipment lease. In addition
the
Company has paid fees for management services (which is included in general
and
administrative expenses) for the years ended December 31, 2003, 2004
and
2005.
Chesapeake
Tower Systems, Inc.
Chesapeake Tower Systems, Inc. ("Chesapeake"), which is 60% owned by
one of the
partners, is a manufacturer's representative and distributor of mechanical
and
electrical equipment, which Chesapeake sells to the Company. In addition,
the
Company acts as a subcontractor to Chesapeake for certain equipment installation
on project-by-project basis.
CTS
Services, LLC. CTS
Services, LLC ("CTS"), which is 55% owned by a partner, is a mechanical
contractor and acts as subcontractor to the Company for certain projects.
In
addition, CTS utilizes the Company as a subcontractor on projects as
needed.
F-13
Vortech
Consulting, LLC
Notes
To Combined Financial Statements
|
Note
10.
|
Related
Party Transactions
(Continued)
|
L.H.
Cranston Acquisition Group, Inc.
L.H.
Cranston Acquisition Group, Inc., 25% of which was acquired by a partner
in July
2005, is a mechanical, electrical and plumbing contractor that acts,
directly or
through its subsidiary L.H. Cranston and Sons, Inc., as subcontractor
to the
Company on a project-by-project basis.
Telco
P&C, LLC.
Telco
P&C, LLC, which is 55% owned by a partner, is a specialty electrical
installation company that acts as a subcontractor to the Company. The
Company
has also acted as a subcontractor to Telco as needed.
Automotive
Technologies, Inc.
Automotive Technologies, Inc., which is 60% owned by a partner, provides
vehicle
maintenance and repair services to the Company.
Jet
Facilities Group, Inc.
Jet Facilities Group, Inc. ("Jet") which was 50% owned by a
partner
provides facilities management services to commercial customers. As of
January
1, 2005 the partner has divested himself of his ownership interest in
Jet.
A
summary
of such transactions for the years ended December 31, 2005, 2004 and 2003
and the amounts due from and to these related parties as of December 31,
2005, 2004 and 2003 are listed below:
|
|
2005
|
2004
|
2003
|
|||||||
|
Sales/Contract
Revenue:
|
||||||||||
|
CTS
Services, LLC
|
$
|
189,743
|
$
|
201,178
|
$
|
1,517,850
|
||||
|
CSI
Engineering, Inc.
|
3,627,743
|
68,166
|
1,574
|
|||||||
|
S3
Integration, LLC
|
18,204
|
-
|
-
|
|||||||
|
Chesapeake
Tower Systems, Inc.
|
7,729
|
187,083
|
189
|
|||||||
|
TPR
Group, LLC
|
8,808
|
-
|
-
|
|||||||
|
Jet
Facilities Group, Inc.
|
-
|
867,761
|
315,862
|
|||||||
|
Telco
P&C, LLC
|
-
|
-
|
6,606
|
|||||||
|
Purchases/Contract
Costs:
|
||||||||||
|
Chesapeake
Tower Systems, Inc.
|
7,387,225
|
652,630
|
76,558
|
|||||||
|
CTS
Services, LLC
|
3,425,784
|
2,213,227
|
232,875
|
|||||||
|
S3
Integration, LLC
|
6,628
|
-
|
-
|
|||||||
|
CSI
Engineering, Inc.
|
380,586
|
1,824,017
|
1,549,493
|
|||||||
|
GR
Partners
|
508,234
|
46,907
|
19,158
|
|||||||
|
LH
Cranston & Sons, Inc.
|
2,001,354
|
-
|
-
|
|||||||
|
Telco
P&C, LLC
|
-
|
77,521
|
-
|
|||||||
|
Management/Consulting
Fees:
|
||||||||||
|
CTS
Services, LLC
|
534,700
|
400,400
|
71,650
|
|||||||
|
GR
Partners
|
275,000
|
-
|
-
|
|||||||
|
Office
rent paid to Chesapeake Tower Systems, Inc.
|
190,727
|
152,425
|
108,121
|
|||||||
|
Equipment
rent paid to GR Partners
|
33,066
|
29,619
|
19,158
|
|||||||
F-14
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements
|
Note
10.
|
Related
Party Transactions
(Continued)
|
|
|
2005
|
2004
|
2003
|
|||||||
|
Accounts
receivable/(payable):
|
||||||||||
|
CTS
Services, LLC
|
4,669
|
108,409
|
197,606
|
|||||||
|
CSI
Engineering, Inc.
|
854,455
|
38,964
|
-
|
|||||||
|
S3
Integration, LLC
|
9,381
|
614
|
-
|
|||||||
|
TPR
Group
|
532
|
-
|
-
|
|||||||
|
Chesapeake
Tower Systems, Inc.
|
94
|
14,805
|
214
|
|||||||
|
CTS
Services, LLC
|
(275,553
|
)
|
(322,626
|
)
|
(80,115
|
)
|
||||
|
Chesapeake
Tower Systems, Inc.
|
(469,418
|
)
|
(31,570
|
)
|
(845
|
)
|
||||
|
Telco
P&C, LLC
|
(4,174
|
)
|
(52,834
|
)
|
-
|
|||||
|
GR
Partners
|
(14,785
|
)
|
(3,299
|
)
|
(3,019
|
)
|
||||
|
CSI
Engineering, Inc.
|
(8,795
|
)
|
(195,129
|
)
|
(913,710
|
)
|
||||
|
LH
Cranston & Sons, Inc.
|
(615,622
|
)
|
-
|
-
|
||||||
|
Jet
Facilities Group, Inc.
|
-
|
-
|
225,080
|
|||||||
|
Note
11.
|
Major
Customers
|
The
Company earned approximately 78% of its revenue under several different
contracts and locations from one major customer for the year ended
December 31, 2005. Accounts receivable from this customer was $7,824,600 at
December 31, 2005. For the year ended December 31, 2004 the Company earned
approximately 60% of its revenue from three customers. Accounts receivable
from
these customers was $1,446,183 at December 31, 2004. For the year ended
December 31, 2003 the Company earned approximately 77% of its revenue from
three
major customers under several different contracts for the year ended
December 31, 2003. Accounts receivable from these major customers was
$2,180,769 at December 31, 2003.
|
Note
12.
|
Litigation
|
From
time
to time, the Company has certain pending claims and legal proceedings that
generally involve contract claims and disputes. These proceedings are, in
the
opinion of management, ordinary routine matters incidental to the construction
business. In the opinion of management, the ultimate disposition of such
proceedings are not expected to have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
|
Note
13.
|
Discontinued
Operations
|
Effective
September 1, 2005 VTC, LLC transferred all the assets of the S3 Integration
division (Division) of the Company to a separate LLC, S3 Integration,
LLC (S3I),
as part of the transaction S3I assumed all the liabilities of the division
and
entered into a term loan agreement with VTC, LLC.
On
the
date of the transaction the Company had a balance due from the Division
in the
amount of $577,956 as follows:
|
Term
loan payable to VTC, LLC
|
$
|
350,000
|
||
|
Distribution
to members
|
200,000
|
|||
|
Amount
remaining in due from affiliated entities
|
27,956
|
|||
|
$
|
577,956
|
|||
F-15
Vortech
Consulting, LLC
Notes
To Financial Statements
|
Note
13.
|
Discontinued
Operations
(Continued)
|
The
term
loan payable is payable to VTC, LLC over seven years in monthly principal
and
interest payments $5,282 beginning in February 2006 with interest at
7%. It has
been classified as contra equity on the December 31, 2005 combined balance
sheet
as it is the intention of the Company to distribute the balance of the
loan to
it’s members in 2006.
A
summary
of the assets and liabilities of discontinued operations as of December
31, 2004
were as follows:
|
Assets
of discontinued operations
|
||||
|
Current
assets
|
$
|
157,414
|
||
|
Property
and equipment
|
101,320
|
|||
|
$
|
258,734
|
|||
|
Liabilities
of discontinued operations
|
||||
|
Current
liabilities
|
$
|
400,172
|
||
|
Notes
payable, net of current portion
|
16,253
|
|||
|
$
|
416,425
|
|||
The
following results of the Division have been presented as gain (loss) from
discontinued operations in the accompanying statements of income for the
years
ended December 31, 2005 and 2004 as follows:
|
2005
|
2004
|
||||||
|
Earned
revenues
|
$
|
1,525,897
|
$
|
738,905
|
|||
|
Costs
and expenses
|
1,832,007
|
991,750
|
|||||
|
Operating
loss
|
(306,110
|
)
|
(252,845
|
)
|
|||
|
Gain
on transfer of the Division
|
558,955
|
-
|
|||||
|
Gain
(loss) from discontinued operations
|
$
|
252,845
|
$
|
(252,845
|
)
|
||
F-16
Vortech,
LLC and VTC, LLC
Combined
Financial Report
June
30,
2006
(unaudited)
F-17
|
Vortech,
LLC And VTC, LLC
|
|||||||
|
Combined
Balance Sheet
|
|||||||
|
June
30, 2006 and December 31, 2005
|
|||||||
|
June
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Assets
|
(Unaudited)
|
||||||
|
Current
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,927,721
|
$
|
1,737,075
|
|||
|
Contract
and other receivables, net including $421,819 and $869,131
|
12,299,033
|
11,136,833
|
|||||
|
from
related parties in 2006 and 2005
|
|||||||
|
Costs
and estimated earnings in excess of billings
|
|||||||
|
on
uncompleted contracts
|
656,569
|
528,494
|
|||||
|
Prepaid
expenses
|
276,090
|
6,197
|
|||||
|
Due
from affiliated entities
|
74,682
|
51,773
|
|||||
|
Total
current assets
|
16,234,095
|
13,460,372
|
|||||
|
Property
and Equipment, net
|
478,379
|
532,452
|
|||||
|
Deposits
and Other Assets
|
72,986
|
106,486
|
|||||
|
$
|
16,785,460
|
$
|
14,099,310
|
||||
|
Liabilities
And Members' Equity
|
|||||||
|
Current
Liabilities
|
|||||||
|
Notes
payable, current portion
|
$
|
72,808
|
$
|
72,808
|
|||
|
Accounts
payable, including $1,049,748 and
|
8,723,511
|
6,360,959
|
|||||
|
$1,388,347
to related parties in 2006 and 2005
|
|||||||
|
Accrued
bonuses
|
72,547
|
745,247
|
|||||
|
Other
accrued expenses
|
2,292,988
|
1,140,244
|
|||||
|
Billings
in excess of costs and estimated earnings
|
|||||||
|
on
uncompleted contracts
|
2,010,183
|
2,899,728
|
|||||
|
Total
current liabilities
|
13,172,037
|
11,218,986
|
|||||
|
Long-Term
Liabilities
|
|||||||
|
Notes
payable, less current portion
|
123,496
|
160,652
|
|||||
|
Deferred
compensation payable
|
153,538
|
128,038
|
|||||
|
277,034
|
288,690
|
||||||
|
Commitments
(Note 5)
|
|||||||
|
Members'
Equity
|
3,686,389
|
2,941,634
|
|||||
|
Note
receivable from affiliate
|
(350,000
|
)
|
(350,000
|
)
|
|||
|
3,336,389
|
2,591,634
|
||||||
|
$
|
16,785,460
|
$
|
14,099,310
|
||||
See Notes to Combined Financial Statements.
F-18
|
Combined
Statement Of Income
|
|||||||
|
Six
Months Ending June 30, 2006 and June 30, 2005
|
|||||||
|
June
30,
|
June
30,
|
||||||
|
2006
|
2005
|
||||||
|
|
(Unaudited)
|
(Unaudited)
|
|||||
|
Earned
Revenues, including $1,639,946 and $3,852,227
|
$
|
34,726,161
|
$
|
27,693,746
|
|||
|
with
related parties in 2006 and 2005
|
|||||||
|
Cost
of earned revenues, including $4,068,566 and
|
|||||||
|
$13,709,811
with related parties in 2006 and 2005
|
28,719,264
|
23,537,806
|
|||||
|
Gross
profit
|
6,006,897
|
4,155,940
|
|||||
|
General
and administrative expenses, including $692,046
|
|||||||
|
and
$1,033,493 with related parties in 2006 and 2005
|
3,333,944
|
2,306,771
|
|||||
|
Operating
income
|
2,672,953
|
1,849,169
|
|||||
|
Interest
expense
|
(9,698
|
)
|
(17,866
|
)
|
|||
|
Net
income from continuing operations
|
$
|
2,663,255
|
$
|
1,831,303
|
|||
|
Loss
from discontinued operations (Note 11)
|
-
|
(414,993
|
)
|
||||
|
Net
income
|
$
|
2,663,255
|
$
|
1,416,310
|
|||
See Notes to Combined Financial Statements.
F-19
|
Vortech,
LLC And VTC, LLC
|
||||
|
Combined
Statement Of Changes In Members' Equity
|
||||
|
Six
Months Ending June 30, 2006
|
||||
|
|
(Unaudited)
|
|||
|
Balance,
December 31, 2005
|
$
|
2,941,634
|
||
|
Distributions
|
(1,918,500
|
)
|
||
|
Net
income
|
2,663,255
|
|||
|
Balance,
June 30, 2006
|
$
|
3,686,389
|
||
See Notes to Combined Financial Statements.
F-20
|
Vortech,
LLC And VTC, LLC
|
|||||||
|
Combined
Statement Of Cash Flows
|
|||||||
|
Six
Months Ending June 30, 2006 and June 30, 2005
|
|||||||
|
June
30,
|
June
30,
|
||||||
|
2006
|
2005
|
||||||
|
|
(Unaudited)
|
(Unaudited)
|
|||||
|
Cash
Flows From Operating Activities
|
|||||||
|
Net
income
|
$
|
2,663,255
|
$
|
1,416,310
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
126,000
|
79,552
|
|||||
|
Allowance
for doubtful accounts
|
-
|
-
|
|||||
|
Loss
from discontinued operation
|
-
|
414,993
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
(Increase)
decrease in:
|
|||||||
|
Contract
and other receivables
|
(1,162,200
|
)
|
(11,351,993
|
)
|
|||
|
Costs
and estimated earnings in excess of billings
|
|||||||
|
on
uncompleted contracts
|
(128,075
|
)
|
963,089
|
||||
|
Prepaid
expenses
|
(269,893
|
)
|
(79,001
|
)
|
|||
|
Due
from affiliated entities
|
(22,909
|
)
|
(504,755
|
)
|
|||
|
Deposits
|
-
|
(156,327
|
)
|
||||
|
Increase
(decrease) in:
|
|||||||
|
Accounts
payable and accrued expenses
|
2,842,596
|
5,872,803
|
|||||
|
Billings
in excess of costs and estimated earnings
|
|||||||
|
on
uncompleted contracts
|
(889,545
|
)
|
3,533,451
|
||||
|
Deferred
compensation payable
|
25,500
|
-
|
|||||
|
Net
cash provided by operating activities
|
3,184,729
|
188,122
|
|||||
|
Cash
Flows From Investing Activities
|
|||||||
|
Purchases
of property and equipment
|
(38,427
|
)
|
(56,672
|
)
|
|||
|
Net
cash used in investing activities
|
(38,427
|
)
|
(56,672
|
)
|
|||
|
Cash
Flows From Financing Activities
|
|||||||
|
Principal
payments on notes payable
|
(37,156
|
)
|
(34,929
|
)
|
|||
|
Member
distributions
|
(1,918,500
|
)
|
(60,000
|
)
|
|||
|
Net
cash used in financing activities
|
(1,955,656
|
)
|
(94,929
|
)
|
|||
|
Net
increase in cash and cash equivalents
|
1,190,646
|
36,521
|
|||||
|
Cash
And Cash Equivalents
|
|||||||
|
Beginning
|
$
|
1,737,075
|
$
|
1,503,338
|
|||
|
Ending
|
$
|
2,927,721
|
$
|
1,539,859
|
|||
|
Supplemental
Disclosure Of Cash Flow Information
|
|||||||
|
Cash
paid for interest
|
$
|
(9,698
|
)
|
$
|
(17,866
|
)
|
|
See Notes to Combined Financial Statements.
F-21
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
Note
1. Interim
Financial Statements
This
document includes unaudited interim financial statements that should be
read in
conjunction with the Company’s latest audited annual financial statements.
However, in the opinion of management, these financial statements contain
all
adjustments, consisting only of normal recurring items, necessary for a
fair
presentation of the Company’s financial position as of June 30, 2006 and 2005,
the results of its operations for the six months ended June 30, 2006 and
2005,
and its cash flows for the six months ended June 30, 2006 and 2005. Operating
results for the six months ended June 30, 2006 are not necessarily indicative
of
the results expected for the full fiscal year.
Note
2. Nature
of Business and Significant Accounting Policies
The
Companies and nature of businesses: Vortech
Consulting, LLC (the Company), was organized in the State of Maryland
on May 31,
2002. The Company previously operated under three separate divisions,
Vortech,
C2 Solutions (C2) and S3 Integration.
Effective
August 15, 2005, Vortech Consulting, LLC changed its name to VTC, LLC
and the
Vortech division began operating as a separate LLC named Vortech, LLC.
The 2005
financial statements include the combined financial position and results
of
operations of both VTC, LLC and Vortech, LLC and S3 Integration.
S3
Integration was in operation from July 1, 2004 to August 31, 2005 as
a division
of Vortech Consulting, LLC. S3 Integration is a provider of turnkey
electronic
security integration services. The operations of S3 Integration have been
included in the 2005 Statement of income as a discontinued operation
(see Note
13).
Vortech
provides cable and electrical plan design, installation and service.
C2 provides
a variety of services to the mission critical and high-tech industry,
including
planning and programming, engineering and design, project and construction
manager, field installation, and facilities management. Operations
of both
divisions commenced effective January 1, 2003.
A
summary
of the Company’s significant accounting policies follows:
Principles
of combination:
The
combined financial statements include Vortech, LLC and VTC, LLC. for June
30,
2006 and December 31, 2005 and the results of operations and cash flows
of
Vortech Consulting, LLC for the six months ending June 30, 2005. All
intercompany accounts and transactions have been eliminated in
combination.
Personal
assets and liabilities and member salaries: In
accordance with the generally accepted method of presenting financial statements
for a limited liability company, the financial statements do not include
the
personal assets and liabilities of the members, including their obligation
for
income taxes on their distributive shares of the Company’s net income or their
rights to refunds on the Company’s net loss, nor any provision for income tax
expense or an income tax refund. The expenses shown on the statement of income
include salaries paid to members.
Revenue
recognition:
Revenue
from contracts is recognized on the percentage-of-completion method, measured
by
the percentage of total costs incurred to date to estimated total costs for
each
contract. This method is used because management considers cost incurred
and
costs to complete to be the best available measure of progress in the contracts.
Contract
costs include all direct materials, subcontract and labor costs and those
indirect costs related to contract performance, such as indirect labor, payroll
taxes, and supplies. General and administrative expenses are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are
made
in the period in which losses are determined.
F-22
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
2.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents revenue recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted
contracts,” represents billings in excess of revenue recognized.
As
these
long-term contracts extend over one or more years, revisions in cost and
profit
estimates during the course of the contract are reflected in the accounting
period in which the facts which require the revisions are
determined.
Cash
and cash equivalents: For
purposes of reporting cash flows, the Company considers all highly-liquid
debt
instruments with original maturities of three months or less to be cash
equivalents.
Contract
receivables: Contract
receivables are carried at original invoice amount less an estimate made
for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer's
financial condition, credit history, and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Recoveries of contract
receivables previously written off are recorded when received. An account
receivable is considered to be past due if any portion of the receivable
balance
is outstanding for more than 30 days. Interest is not recorded on any past
due balances.
Property
and equipment: Property
and equipment are recorded at cost and depreciated using the straight-line
method of depreciation over their estimated useful lives, ranging from 3
to 7
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the asset or the remaining lease term. Normal repairs and
maintenance are charged against income.
Valuation
of long-lived assets: The
Company accounts for the valuation of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. Recoverability of the long-lived asset is measured
by a
comparison of the carrying amount of the asset to future undiscounted net
cash
flows expected to be generated by the asset. If such assets are considered
to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reportable at the lower of the carrying amount
or
fair value, less costs to sell.
Advertising
costs: The
Company expenses all advertising costs as incurred. Advertising expense was
$384,409 for the year ended December 31, 2005.
Income
taxes: The
Company is treated as a partnership for Federal income tax purposes, and
members
are taxed individually on their pro-rata share of the Company’s earnings. The
Company’s net income or loss is allocated among the members in accordance with
the Company’s operating agreement. The Company intends to make distributions to
its members subsequent to year-end sufficient to pay personal income taxes
on
taxable income, if any, from the Company.
Credit
risk: The
Company may from time to time, have cash in banking institutions in excess
of
the amount insured by the Federal Deposit Insurance Corporation. The Company
has
not experienced any losses in such accounts and believes it is not exposed
to
any significant credit risk on cash.
F-23
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
2.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
The
Company grants credit to its customers in the normal course of business
on an
unsecured basis. The Company’s accounts receivable are derived from customers
throughout the metropolitan Washington, D.C. and Baltimore, Maryland areas,
and
are made on an unsecured basis.
Estimates: The
preparation of financial statements 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 financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for estimated costs to complete long-term contracts
in
progress, allowance for doubtful accounts, and depreciation, among others.
Estimates and assumptions are reviewed periodically and the effects of
revisions
are reflected in the financial statements in the period they are determined
to
be necessary.
F-24
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
3.
|
Property
and Equipment
|
Property
and equipment as of June 30, 2006 and December 31, 2005, consist of the
following:
|
2006
|
2005
|
||||||
|
(Unaudited)
|
|
||||||
|
Vehicles
|
$
|
393,185
|
$
|
395,006
|
|||
|
Leasehold
improvements
|
375,638
|
375,638
|
|||||
|
Furniture
and fixtures
|
14,732
|
14,732
|
|||||
|
Office
equipment
|
133,175
|
92,076
|
|||||
|
916,730
|
877,452
|
||||||
|
Less
accumulated depreciation
|
438,351
|
345,000
|
|||||
|
$
|
478,379
|
$
|
532,452
|
||||
Note
4. Line
of Credit
VTC,
LLC
has a revolving demand line of credit agreement with a bank that allows for
maximum borrowings of up to $1,000,000. Interest accrues daily on the
outstanding balance at the one month LIBOR rate plus 225 basis points. The
line
is personally guaranteed by a 50% member of the Company, and is collateralized
by substantially all Company assets. There were no borrowings under the line
of
credit as of June 30, 2006 and December 31, 2005.
Note
5. Leasing
Arrangements
Chesapeake
Tower Systems, Inc. (Chesapeake) and affiliated entity, entered into a six-year
lease for office and warehouse space expiring in October 2008. The Company
is
subleasing a portion of the space under a similar arrangement, however
Chesapeake remains ultimately obligated. The Company is also leasing office
equipment under operating lease arrangements.
Future
minimum payments under leasing arrangements as of June 30, 2006, are as
follows:
|
Years
Ending December 31,
|
Unaudited
|
|||
|
2007
|
$
|
204,602
|
||
|
2008
|
179,300
|
|||
|
2009
|
104,592
|
|||
|
$
|
488,494
|
|||
F-25
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
Note
6. Profit
Sharing Plan
The
Company provides retirement benefits to its employees through its participation
in the Chesapeake Tower Systems and Affiliates 401(k) Plan in which it is
an
adopting employer. Substantially all employees who meet certain eligibility
requirements are eligible to participate. Participants may elect to defer
a
percentage of their annual compensation, subject to certain limitations,
in
accordance with Section 401(k) of the Internal Revenue Code. The Company
makes
matching contributions of 40% of the first 6% of compensation deferred by
each
participant. .
Note
7. Phantom
Unit Plan
The
Company signed agreements with certain key employees to provide incentive
compensation for enhancement of Company and shareholder value and to share
in
the future economic success of the Company. Under these agreements, the Company
had issued 30,250 phantom units as of June 30, 2006. The phantom units vest
over
a three-year period from the grant date and realize value based on a
formula
provided in the agreements. The
deferred compensation is to be paid to the individuals or their beneficiaries
over a period of five years commencing with the termination of employment,
death
or date of closing if the Company is sold or merged. The Company records
periodic accruals for the cost of providing such benefits by charges to income.
Note
8. Related
Party Transactions
The
Company participates in transactions with entities affiliated through common
ownership and management.
CSI
Engineering, Inc.
CSI
Engineering, Inc. ("CSI"), which is 9% owned by a 50% partner in the
Company,
acts as an engineering services subcontractor to the Company, and the
Company
acts as an electrical subcontractor to CSI.
TPR
Group LLC.
As of
January 1, 2006, TPR Group LLC ("TPR Group"), which is wholly-owned by
a 50%
partner in the Company, has provided human resources, administrative
support and
insurance and employee benefit plan administration services to TSS/Vortech.
S3
Integration LLC.
S3
Integration LLC ("S3 Integration"), which is owned 15% by each of the
partners,
provides commercial and government security systems design and installation
services as a subcontractor to the Company. In addition, S3 Integration
utilizes
the Company as subcontractor.
GR
Partners.
GR
Partners, which is owned 50% by each of the partners, leases office and
field
equipment to the Company under the terms of an equipment lease. In addition
the
Company has paid fees for management services (which is included in general
and
administrative expenses) for the years ended December 31, 2003, 2004
and
2005.
Chesapeake
Tower Systems, Inc.
Chesapeake Tower Systems, Inc. ("Chesapeake"), which is 60% owned by
one of the
partners, is a manufacturer's representative and distributor of mechanical
and
electrical equipment, which Chesapeake sells to the Company. In addition,
the
Company acts as a subcontractor to Chesapeake for certain equipment installation
on project-by-project basis.
CTS
Services, LLC.
CTS
Services, LLC ("CTS"), which is 55% owned by a partner, is a mechanical
contractor and acts as subcontractor to the Company for certain projects.
In
addition, CTS utilizes the Company as a subcontractor on projects as
needed.
F-26
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
8.
|
Related
Party Transactions
(Continued)
|
F-27
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
8.
|
Related
Party Transactions
(Continued)
|
Telco
P&C, LLC.
Telco
P&C, LLC, which is 55% owned by a partner, is a specialty electrical
installation company that acts as a subcontractor to the Company. The
Company
has also acted as a subcontractor to Telco as needed.
Automotive
Technologies, Inc.
Automotive Technologies, Inc., which is 60% owned by a partner, provides
vehicle
maintenance and repair services to the Company.
Jet
Facilities Group, Inc.
Jet
Facilities Group, Inc. (Jet) which was 50% owned by a partner provides
facilities management services to commercial customers. As of January
1, 2005
the partner has divested himself of his ownership interest in Jet.
A
summary
of the entities and such transactions for the six months ended and year
ended
June 30, 2006 and December 31, 2005, and the amount due from and to these
related parties as of June 30, 2006 and December 31, 2005, are listed
below:
|
June
30, 2006
|
December
31, 2005
|
||||||
|
|
(Unaudited)
|
|
|||||
|
Sales/Contract
Revenue:
|
|||||||
|
CTS
Services, LLC
|
$
|
76,007
|
$
|
189,743
|
|||
|
CSI
Engineering, Inc.
|
1,548,524
|
3,627,743
|
|||||
|
S3
Integration, LLC
|
1,468
|
18,204
|
|||||
|
Chesapeake
Tower Systems, Inc.
|
12,175
|
7,729
|
|||||
|
TPR
Group, LLC
|
1,772
|
8,808
|
|||||
|
Purchases/Contract
Costs:
|
|||||||
|
Chesapeake
Tower Systems, Inc.
|
536,621
|
7,387,225
|
|||||
|
CTS
Services, LLC
|
2,866,976
|
3,425,784
|
|||||
|
S3
Integration, LLC
|
3,500
|
6,628
|
|||||
|
CSI
Engineering, Inc.
|
356,494
|
380,586
|
|||||
|
GR
Partners
|
-
|
508,234
|
|||||
|
LH
Cranston & Sons, Inc.
|
300,119
|
2,001,354
|
|||||
|
Telco
P&C, LLC
|
4,856
|
-
|
|||||
|
Management/Consulting
Fees:
|
|||||||
|
CTS
Services, LLC
|
-
|
534,700
|
|||||
|
GR
Partners
|
50,935
|
275,000
|
|||||
|
TPR
Group, LLC
|
517,200
|
-
|
|||||
|
Office
rent paid to Chesapeake Tower Systems, Inc.
|
80,195
|
190,727
|
|||||
|
Equipment
rent paid to GR Partners
|
32,676
|
33,066
|
|||||
|
Vehicle
repairs to Automotive Technologies, Inc.
|
11,040
|
26,165
|
|||||
F-28
Vortech,
LLC and VTC, LLC
Notes
To Combined Financial Statements (Unaudited)
|
Note
8.
|
Related
Party Transactions
(Continued)
|
|
June
30, 2006
|
December
31, 2005
|
||||||
|
|
(Unaudited)
|
|
|||||
|
Accounts
receivable/(payable):
|
|||||||
|
CTS
Services, LLC
|
20,353
|
4,669
|
|||||
|
CSI
Engineering, Inc.
|
396,438
|
854,455
|
|||||
|
S3
Integration, LLC
|
-
|
9,381
|
|||||
|
TPR
Group
|
-
|
532
|
|||||
|
Chesapeake
Tower Systems, Inc.
|
5,028
|
94
|
|||||
|
CTS
Services, LLC
|
(902,287
|
)
|
(275,553
|
)
|
|||
|
Chesapeake
Tower Systems, Inc.
|
(13,237
|
)
|
(469,418
|
)
|
|||
|
Telco
P&C, LLC
|
(681
|
)
|
(4,174
|
)
|
|||
|
GR
Partners
|
(5,719
|
)
|
(14,785
|
)
|
|||
|
CSI
Engineering, Inc.
|
(81,977
|
)
|
(8,795
|
)
|
|||
|
LH
Cranston & Sons, Inc.
|
(17,969
|
)
|
(615,622
|
)
|
|||
|
TPR
Group, LLC
|
(27,878
|
)
|
-
|
||||
Note
9. Major
Customer
The
Company earned approximately 66% of its revenue under several different
contracts and locations from one major customer for the six months ended
June
30, 2006. Accounts receivable from this customer was $6,565,086 at June
30,
2006.
Note
10.
Litigation
From
time
to time, the Company has certain pending claims and legal proceedings that
generally involve contract claims and disputes. These proceedings are, in
the
opinion of management, ordinary routine matters incidental to the construction
business. In the opinion of management, the ultimate disposition of such
proceedings are not expected to have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
Note
11. Discontinued
Operations
Effective
September 1, 2005 VTC, LLC transferred all the assets of the S3 Integration
division (Division) of the Company to a separate LLC, S3 Integration,
LLC (S3I),
as part of the transaction S3I assumed all the liabilities of the division
and
entered into a term loan agreement with VTC, LLC.
The
following results of the Company have been presented as loss from discontinued
operations in the accompanying statements of income for the six months
ended
June 30, 2005:
|
(Unaudited)
|
||||
|
Earned
Revenues
|
$
|
515,563
|
||
|
Costs
and Expenses
|
(930,556
|
)
|
||
|
(Loss)
from discontinued operations
|
$
|
(414,993
|
)
|
|
F-29
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Fortress
America Acquisition Corporation
We
have
audited the accompanying balance sheet of Fortress America Acquisition
Corporation (a corporation in the development stage) as of December 31, 2005
and
the related statements of operations, stockholders’ equity and cash flows for
the year ended December 31, 2005, the period from December 20, 2004 (inception)
to December 31, 2004, and the cumulative period from December 20, 2004
(inception) to December 31, 2005. 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 misstatements. 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 audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Fortress America Acquisition
Corporation as of December 31, 2005, and the results of its operations and
its
cash flows for the year ended December 31, 2005, the period from December
20,
2004 (inception) to December 31, 2004 and the cumulative period from December
20, 2004 (inception) to December 31, 2005 in conformity with United States
generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that Fortress
America Acquisition Corporation will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company may face a mandatory
liquidation by July 20, 2006 if a business combination is not consummated,
unless certain extension criteria are met, which raises substantial doubt
its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
GOLDSTEIN
GOLUB KESSLER LLP
New
York,
New York
March
27,
2006
F-30
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Balance
Sheet
|
December
31, 2005
|
||||
|
Assets
|
||||
|
Current
assets:
|
||||
|
Cash
|
$
|
992,547
|
||
|
Investments
held in Trust Fund
|
42,603,801
|
|||
|
Prepaid
expenses
|
50,165
|
|||
|
Total
current assets
|
43,646,513
|
|||
|
Deferred
tax asset
|
132,000
|
|||
|
Total
assets
|
$
|
43,778,513
|
||
|
Liabilities
and Stockholders’ Equity
|
||||
|
Current
liabilities:
|
||||
|
Accounts
payable and accrued expenses
|
$
|
105,308
|
||
|
Income
taxes payable
|
206,194
|
|||
|
Deferred
interest on investments
|
127,904
|
|||
|
Total
current liabilities
|
439,406
|
|||
|
Common
stock, subject to possible conversion, 1,559,220 shares at conversion
value
|
8,388,604
|
|||
|
Commitment
|
||||
|
Stockholders’
equity
|
||||
|
Preferred
stock, $.0001 par value, Authorized 1,000,000 shares; none
issued
|
-
|
|||
|
Common
stock, $.0001 par value
|
||||
|
Authorized
50,000,000 shares. Issued and outstanding 9,550,000 shares (which
includes
1,559,220 subject to possible conversion)
|
955
|
|||
|
Additional
paid-in capital
|
34,819,062
|
|||
|
Income
(deficit) accumulated during the development stage
|
130,486
|
|||
|
Total
stockholders’ equity
|
34,950,503
|
|||
|
Total
liabilities and stockholders’ equity
|
$
|
43,778,513
|
||
The
accompanying notes should be read in conjunction with the financial
statements.
F-31
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Statement
of Operations
|
For
the Year Ended
December
31, 2005
|
For
the Period December 20, 2004
(inception)
to
December
31, 2004
|
For
the Period December 20, 2004
(inception)
to
December
31, 2005
|
||||||||
|
Income:
|
||||||||||
|
Net
interest income
|
$
|
525,430
|
$
|
-
|
$
|
525,430
|
||||
|
Total
income
|
525,430
|
-
|
525,430
|
|||||||
|
Expenses:
|
||||||||||
|
Formation
and operating costs
|
319,694
|
1,056
|
320,750
|
|||||||
|
Net
income (loss) for the period before income taxes
|
205,736
|
(1,056
|
)
|
204,680
|
||||||
|
State
and federal income taxes
|
74,194
|
-
|
74,194
|
|||||||
|
Net
income (loss) for the period
|
$
|
131,542
|
$
|
(1,056
|
)
|
$
|
130,486
|
|||
|
Weighted
average number of shares outstanding - basic and diluted
|
5,107,534
|
1,250,000
|
4,984,748
|
|||||||
|
Net
income (loss) per share - basic and diluted
|
$
|
.03
|
$
|
(.00
|
)
|
$
|
.03
|
|||
The
accompanying notes should be read in conjunction with the financial
statements.
F-32
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Statement
of Stockholders’ Equity
For
the period from December 20, 2004 (inception) to December 31,
2005
|
Addition
|
Income
(Deficit)
Accumulated
During
the
|
Total
|
||||||||||||||
|
Common
Stock
|
paid-in
|
Development
|
Stockholders’
|
|||||||||||||
|
Shares
|
Amount
|
capital
|
Stage
|
Equity
|
||||||||||||
|
Common
shares issued December 20, 2004
at
$.02 per share
|
1,250,000
|
$
|
125
|
$
|
24,875
|
$
|
25,000
|
|||||||||
|
Net
loss for the period
|
$
|
(1,056
|
)
|
(1,056
|
)
|
|||||||||||
|
Balance
at December 31, 2004
|
1,250,000
|
125
|
24,875
|
(1,056
|
)
|
23,944
|
||||||||||
|
Redemption
of common stock
|
(1,250,000
|
)
|
(125
|
)
|
(24,875
|
)
|
(25,000
|
)
|
||||||||
|
Common
shares issued March 9, 2005 at $0.01429 per share
|
1,750,000
|
175
|
24,825
|
25,000
|
||||||||||||
|
Common
shares issued July 20, 2005, net of underwriters’ discount and offering
expenses (includes 1,399,300 shares subject to possible
conversion)
|
7,000,000
|
700
|
38,687,329
|
38,688,029
|
||||||||||||
|
Common
shares issued August 24, 2005, net of underwriters’ discount and offering
expenses (includes 159,920 shares subject to possible
conversion)
|
800,000
|
80
|
4,495,412
|
4,495,492
|
||||||||||||
|
Proceeds
subject to possible conversion of 1,559,220 shares
|
(8,388,604
|
)
|
(8,388,604
|
)
|
||||||||||||
|
Proceeds
from issuance of option
|
100
|
100
|
||||||||||||||
|
Net
income for the period
|
131,542
|
131,452
|
||||||||||||||
|
Balance
at December 31, 2005
|
9,550,000
|
$
|
955
|
$
|
34,819,062
|
$
|
130,486
|
$
|
34,950,503
|
|||||||
The
accompanying notes should be read in conjunction with the financial
statements.
F-33
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Statement
of Cash Flows
|
For
the Year Ended
December
31, 2005
|
For
the period December 20, 2004
(inception)
to
December
31, 2004
|
For
the period December 20, 2004
(inception)
to
December
31, 2005
|
||||||||
|
Cash
flow from operating activities
|
||||||||||
|
Net
income (loss)
|
$
|
131,542
|
$
|
(1,056
|
)
|
$
|
130,486
|
|||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||||
|
Deferred
income taxes
|
(132,000
|
)
|
(132,000
|
)
|
||||||
|
Interest
income on treasury bills
|
(639,801
|
)
|
-
|
(639,801
|
)
|
|||||
|
Increase
in prepaid expenses
|
(50,165
|
)
|
-
|
(50,165
|
)
|
|||||
|
Increase
in accounts payable and accrued expenses
|
104,252
|
1,056
|
105,308
|
|||||||
|
Increase
in income taxes payable
|
206,194
|
-
|
206,194
|
|||||||
|
Increase
in deferred interest
|
127,904
|
-
|
127,904
|
|||||||
|
Net
cash used in operating activities
|
(252,074
|
)
|
-
|
(252,074
|
)
|
|||||
|
Cash
flows from investing activities
|
||||||||||
|
Investments
placed in Trust Fund
|
(41,964,000
|
)
|
-
|
(41,964,000
|
)
|
|||||
|
Net
cash used in investing activities
|
(41,964,000
|
)
|
-
|
(41,964,000
|
)
|
|||||
|
Cash
flows from financing activities
|
||||||||||
|
Gross
proceeds of public offering, including over-allotment option
exercise
|
46,800,000
|
-
|
46,800,000
|
|||||||
|
Proceeds
of issuance of option
|
100
|
-
|
100
|
|||||||
|
Proceeds
of notes payable, stockholders
|
57,500
|
12,500
|
70,000
|
|||||||
|
Payment
of notes payable, stockholders
|
(70,000
|
)
|
-
|
(70,000
|
)
|
|||||
|
Proceeds
from sales of shares of common stock
|
25,000
|
25,000
|
50,000
|
|||||||
|
Redemption
of common stock
|
(25,000
|
)
|
-
|
(25,000
|
)
|
|||||
|
Payment
of costs of public offering, including over-allotment option
exercise
|
(3,603,979
|
)
|
(12,500
|
)
|
(3,616,479
|
)
|
||||
|
Net
cash provided by financing activities
|
43,183,621
|
25,000
|
43,208,621
|
|||||||
|
Net
increase in cash
|
967,547
|
25,000
|
992,547
|
|||||||
|
Cash
at beginning of the period
|
25,000
|
0
|
-
|
|||||||
|
Cash
at the end of the period
|
$
|
992,547
|
25,000
|
$
|
992,547
|
|||||
The
accompanying notes should be read in conjunction with the financial
statements.
F-34
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Notes
to Financial Statements
1. Organization
and Proposed Business Operations
Fortress
America Acquisition Corporation (the “Company”) was incorporated in Delaware on
December 20, 2004 as a blank check company, the objective of which is to
acquire
one or more operating businesses in the homeland security industry.
The
Company was formed on December 20, 2004 and consummated an initial public
offering (“IPO”) on July 20, 2005. In addition, on August 24, 2005 the
underwriters for the IPO exercised their over-allotment option (the
“Over-Allotment Option Exercise” and, together with the IPO, the “Offering”),
generating total net proceeds of $43,183,521. The Company’s management has broad
discretion with respect to the specific application of the net proceeds of
this
Offering, although substantially all the net proceeds of this Offering are
intended to be generally applied toward consummating a business combination
with
(or acquisition of) one or more operating businesses in the homeland security
industry (“Business Combination”). Furthermore, there is no assurance that the
Company will be able to successfully effect a Business Combination. Upon
the
closing of the Offering, approximately $41,964,000 of the net proceeds was
deposited in a trust fund account (“Trust Fund”) and has been invested in
Treasury Bills until the earlier of (i) the consummation of its first Business
Combination; or (ii) the liquidation of the Company. The Treasury Bills have
been accounted for as trading securities and are recorded at their market
value
of approximately $42,603,801 at December 31, 2005. The excess of market value
over cost, exclusive of the deferred interest described further below, is
included in interest income in the accompanying statement of operations.
The
remaining proceeds may be used to pay for business, legal and accounting
due
diligence on prospective acquisitions and continuing general and administrative
expenses. The Company, after signing a definitive agreement for the acquisition
of a target business, will submit such transaction for stockholder approval.
All
of the Company stockholders prior to the Offering, including all of the officers
and directors of the Company (“Initial Stockholders”), have agreed to vote their
1,750,000 founding shares of common stock in accordance with the vote of
the
majority in interest of all other stockholders of the Company (“Public
Stockholders”) with respect to any Business Combination. After consummation of
the Company’s first Business Combination, all of these voting safeguards will no
longer be applicable.
In
the
event (i) the Business Combination is not approved by a majority of the shares
of common stock held by the Public Stockholders or (ii) 20% or more of the
shares of common stock held by the Public Stockholders vote against the Business
Combination and exercise their conversion rights described below, the Business
Combination will not be consummated.
With
respect to the first Business Combination which is approved and consummated,
any
Public Stockholder who voted against the Business Combination may demand
that
the Company convert his or her shares. The per share conversion price will
equal
the amount in the Trust Fund, calculated as of two business days prior to
the
proposed Business Combination, divided by the number of shares of common
stock
held by Public Stockholders at the consummation of the Offering. Accordingly,
Public Stockholders holding approximately 19.99% of the aggregate number
of
shares owned by all Public Stockholders may seek conversion of their shares
in
the event of a Business Combination. Such Public Stockholders are entitled
to
receive their per share interest in the Trust Fund computed without regard
to
the shares held by the Initial Stockholders. Accordingly, a portion of the
net
proceeds of the Offering (19.99% of the amount originally held in the Trust
Fund) has been classified as common stock subject to possible conversion
in the
accompanying December 31, 2005 balance sheet and 19.99% of the related interest
earned has been recorded as deferred interest.
The
Company’s Certificate of Incorporation, as amended, provides for the mandatory
liquidation of the Company in the event that the Company does not consummate
a
Business Combination within 12 months from the date of the consummation of
the
Offering, or 18 months from the consummation of the Offering if certain
extension criteria have been satisfied. There is no assurance that the Company
will be able to successfully effect a Business Combination during this period.
This factor raises substantial doubt about the Company’s ability to continue as
a going concern. The accompanying financial statements are prepared assuming
the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
In the event of liquidation, it is likely that the per share value of the
residual assets remaining available for distribution (including Trust Fund
assets) will be less than the initial public offering price per share in
the
Offering.
F-35
The
Company maintains cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
Deferred
income taxes are provided for the differences between the bases of assets
and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established when necessary to reduce deferred tax assets to
the
amount expected to be realized.
Basic
income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of common stock outstanding during the
period.
Diluted earnings per share gives effect to dilutive options, warrants and
other
potential common stock outstanding during the period. Potential common stock
(consisting of 15,600,000 warrants included in the units issued in the initial
public offering and 700,000 units issued to the underwriters as described
in
Note 4) has not been included in the computations for all periods as the
effect
would be antidilutive.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of
expenses during the reporting period. Actual results could differ from those
estimates.
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share
Based Payment”. SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. The Company is required to adopt SFAS
123(R) effective January 1, 2006. The Company does not believe that the
adoption of SFAS No. 123(R) will have a significant impact on its financial
condition or results of operations.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on
the
accompanying financial statements.
2. Notes
Payable-Stockholders
The
Company had unsecured promissory notes to the Initial Stockholders, who are
officers and directors of the Company, of $12,500 at December 31, 2004. The
loans were non-interest bearing and were payable the earlier of March 9,
2006 or
the consummation of the Offering. Due to the short-term nature of the notes,
the
fair value of the notes approximated its carrying amount. The notes were
paid in
full subsequent to the consummation of the Offering.
3. Commitment
Commencing
January 1, 2005, the Company occupied office space from, and had certain
office
and secretarial services made available to it by, an unaffiliated third party.
Rent expense under this agreement for each of the periods from December 20,
2004
(inception) to December 31, 2005 and for the year ended December 31, 2005
was
$1,362. The rental agreement expired June 30, 2005.
Commencing
on the consummation of the Offering, the Company occupies office space provided
by an affiliate of an Initial Stockholder. Such affiliate has agreed that,
until
the acquisition or a target business by the Company, it will make such office
space, as well as certain office and secretarial services, available to the
Company, as may be required by the Company from time to time. The Company
has
agreed to pay such affiliate $7,500 per month for such services. Rent expense
under this agreement amounted to $37,500 during the periods ended December
31,
2005.
F-36
4.
Initial
Public Offering
On
July
20, 2005, the Company sold 7,000,000 units (“Units”) in the IPO. On August 24,
2005 the Company sold an additional 800,000 Units pursuant to the Over-Allotment
Option Exercise. Each Unit consists of one share of the. Company’s common stock,
$0.0001 par value, and two Redeemable Common Stock Purchase Warrants
(“Warrants”). Each Warrant entitles the holder to purchase from the Company one
share of common stock at an exercise price of $5.00 (which such Warrant may
be
exercised on a cashless basis) commencing the later of (a) one year from
the effective date of the IPO; or (b) the completion of a Business Combination
with a target business and expiring four years from the date of the prospectus
(unless earlier redeemed). The Warrant will be redeemable, upon written consent
of the representative of the underwriters, at a price of $0.01 per Warrant
upon
30 days notice after the Warrant becomes exercisable, only in the event that
(a)
the last sales price of the common stock is at least $8.50 per share for
any 20
trading days within a 30-trading-day period ending on the third day prior
to
date on which notice of redemption is given and (b) the weekly trading volume
of
our common stock has been at least 200,000 shares for each of the 2 calendar
weeks before the Company sends the notice of redemption.
In
addition, the Company sold to Sunrise Securities Corporation, for $100, an
option to purchase up to a total of 700,000 units. The units issuable upon
exercise of this option are identical to those offered in the Offering, except
that each of the warrants underlying this option entitles the holder to purchase
one share of our common stock at a price of $6,25. This option is exercisable
at
$7.50 per unit commencing on the later of the consummation of a business
combination and one year from the date of the prospectus and expiring five
years
from the date of the prospectus. In lieu of exercise, the option maybe converted
into units (i.e., a “cashless exercise”) to the extent that the market value of
the units at the time of conversion exceeds the exercise price of the option.
The option may only be exercised or converted by the option holder.
The
sale
of the option is accounted for as an equity transaction. Accordingly, there
is
no net impact on the Company’s financial position or results of operations,
except for the recording of the $100 proceeds from the sale. The Company
determined, based upon a Black-Scholes model, that the fair value of the
option
on the date of sale was approximately $3.075 per unit, or $2,152,500 total,
using an expected life of four years, volatility of 75.19% and a risk-free
interest rate of 3.922%.
The
volatility calculation of 75.19% is based upon the 365-day average volatility
of
a representative sample of seven (7) companies with market capitalizations
under
$250 million that management believes could be considered to be engaged in
a
business in the homeland security industry (the “Sample Companies”). Because the
Company does not have a trading history, the Company needed to estimate the
potential volatility of its common stock price, which will depend on a number
of
factors which cannot be ascertained at this time. The Company referred to
the
365-day average volatility of the Sample Companies because management believes
that the average volatility of such companies is a reasonable benchmark to
use
in estimating the expected volatility of the Company’s common stock
post-business combination. Although an expected life of four years was taken
into account for purposes of assigning a fair value to the option, if the
Company does not consummate a business ‘combination within the prescribed time
period and liquidates, the option would become worthless.
Although
the purchase option and its underlying securities have been registered, the
purchase option grants to holders demand and “piggyback” rights for periods of
five and seven years, respectively, from the date of the prospectus with
respect
to the registration under the Securities Act of 1933 of the securities directly
and indirectly issuable upon exercise of the purchase option. The Company
will
bear all fees and expenses attendant to registering the securities, other
than
underwriting commissions which will be paid for by the holders themselves.
The
exercise price and number of units issuable upon exercise of the purchase
option
may be adjusted in certain circumstances including in the event of a stock
dividend, or the Company’s recapitalization, reorganization, merger or
consolidation. However, the purchase option will not be adjusted for issuances
of common stock at a price below its exercise price.
F-37
5. Common
Stock
On
December 20, 2004, the Company issued 1,250,000 shares of Common Stock. On
March
8, 2005, the Company authorized the redemption of the 1,250,000 shares of
common
stock at the original subscription price. On March 9, 2005, the Company issued
1,750,000 shares of common stock to the original stockholders along with
new
stockholders (in the aggregate, these stockholders are the Initial
Stockholders).
At
August
24, 2005, 17,700,000 shares of Common Stock were reserved for issuance upon
exercise of redeemable warrants and underwriters’ unit purchase
option.
6. Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined
from
time to time by the Board of Directors.
7. Income
Taxes
The
provision for income taxes consists of the following:
|
For
the period ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
202,163
|
$
|
-
|
|||
|
State
|
4,031
|
-
|
|||||
|
Deferred:
|
|||||||
|
Federal
|
(132,000
|
)
|
-
|
||||
|
$
|
74,194
|
$
|
-
|
||||
The
total
provision for income taxes differs from that amount which would be computed
by
applying the U.S. federal income tax rate to income before provision for
income
taxes due to the following:
|
For
the period ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Federal
statutory rate
|
34
|
%
|
(34
|
)%
|
|||
|
State
tax, net of income tax benefit
|
2
|
-
|
|||||
|
36
|
(34
|
)
|
|||||
|
Valuation
allowance
|
-
|
34
|
|||||
|
36
|
%
|
-
|
|||||
F-38
The
tax
effect of temporary differences that give rise to the net deferred tax asset
is
as follows:
|
December
31, 2005
|
||||
|
Interest
income deferred for reporting purposes
|
43,000
|
|||
|
Expenses
deferred for income tax purposes
|
89,000
|
|||
|
Subtotal
|
132,000
|
|||
|
Valuation
allowance
|
-
|
|||
|
Net
deferred tax asset
|
$
|
132,000
|
||
F-39
Fortress
America Acquisition Corporation
Financial
Report
June
30, 2006
(unaudited)
F-40
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Condensed
Balance Sheet
|
June
30, 2006 (unaudited)
|
December
31, 2005
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
217,732
|
$
|
992,547
|
|||
|
Investments
held in Trust Fund
|
43,557,243
|
42,603,801
|
|||||
|
Prepaid
expenses
|
11,250
|
50,165
|
|||||
|
Total
current assets
|
43,786,225
|
43,646,513
|
|||||
|
Deferred
acquisition costs
|
75,000
|
-
|
|||||
|
Deferred
tax asset
|
314,315
|
132,000
|
|||||
|
Total
assets
|
$
|
44,175,540
|
$
|
43,778,513
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
43,084
|
$
|
105,308
|
|||
|
Income
taxes payable
|
212,606
|
206,194
|
|||||
|
Deferred
interest on investments
|
318,497
|
127,904
|
|||||
|
Total
current liabilities
|
574,187
|
439,406
|
|||||
|
Common
stock, subject to possible conversion, 1,559,220 shares at conversion
value
|
8,388,604
|
8,388,604
|
|||||
|
Commitment
|
|||||||
|
Stockholders’
equity
|
|||||||
|
Preferred
stock, $.0001 par value, Authorized 1,000,000 shares; none
issued
|
-
|
-
|
|||||
|
Common
stock, $.0001 par value
|
|||||||
|
Authorized
50,000,000 shares
|
|||||||
|
Issued
and outstanding 9,550,000 shares (which includes 1,559,220 subject
to
possible conversion)
|
955
|
955
|
|||||
|
Additional
paid-in capital
|
34,819,062
|
34,819,062
|
|||||
|
Income
accumulated during the development stage
|
392,732
|
130,486
|
|||||
|
Total
stockholders’ equity
|
35,212,749
|
34,950,503
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
44,175,540
|
$
|
43,778,513
|
|||
See
Notes to Unaudited Condensed Financial Statements.
F-41
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Condensed
Statement of Operations
(unaudited)
|
For
the Three Months Ended June 30, 2006
|
For
the Six
Months
Ended
June
30, 2006
|
For
the Three
Months
Ended
June
30, 2005
|
For
the Six
Months
Ended
June
30, 2005
|
For
the Period December 20, 2004
(inception)
to
June
30, 2006
|
||||||||||||
|
Income:
|
||||||||||||||||
|
Net
interest income
|
$
|
410,904
|
$
|
772,465
|
$
|
-
|
$
|
-
|
$
|
1,297,895
|
||||||
|
Total
income
|
410,904
|
772,465
|
-
|
-
|
1,297,895
|
|||||||||||
|
Expenses:
|
||||||||||||||||
|
Formation
and operating costs
|
198,920
|
375,122
|
1,080
|
1,646
|
695,872
|
|||||||||||
|
Net
income (loss) for the period before income taxes
|
211,984
|
397,343
|
(1,080
|
)
|
(1,646
|
)
|
602,023
|
|||||||||
|
SState
and federal income taxes
|
72,075
|
135,097
|
-
|
-
|
209,291
|
|||||||||||
|
Net
income (loss) for the period
|
$
|
139,909
|
$
|
262,246
|
$
|
(1,080
|
)
|
$
|
(1,646
|
)
|
$
|
392,732
|
||||
|
Weighted
average number of shares outstanding - basic and diluted
|
9,550,000
|
9,550,000
|
1,750,000
|
1,562,155
|
6,474,955
|
|||||||||||
|
Net
income (loss) per share - basic and diluted
|
$
|
.01
|
$
|
.03
|
$
|
(.00
|
)
|
$
|
(.00
|
)
|
$
|
.06
|
||||
See
Notes to Unaudited Condensed Financial Statements.
F-42
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Condensed
Statement of Stockholders’ Equity
For
the period from December 20, 2004 (inception) to June 30, 2006
|
Common
Stock
|
Additional
paid-in
|
Income
(Deficit) Accumulated During the Development
|
||||||||||||||
|
Shares
|
Amount
|
capital
|
Stage
|
Total
|
||||||||||||
|
Common
shares issued December 20, 2004 at $.02 per share
|
1,250,000
|
$
|
125
|
$
|
24,875
|
$
|
25,000
|
|||||||||
|
Net
Loss
|
$
|
(1,056
|
)
|
(1,056
|
)
|
|||||||||||
|
Balance
at December 31, 2004
|
1,250,000
|
125
|
24,875
|
(1,056
|
)
|
23,944
|
||||||||||
|
Redemption
of common stock
|
(1,250,000
|
)
|
(125
|
)
|
(24,875
|
)
|
(25,000
|
)
|
||||||||
|
Common
shares issued March 9, 2005 at $0.01429 per share
|
1,750,000
|
175
|
24,825
|
25,000
|
||||||||||||
|
Common
shares issued July 20, 2005, net of underwriters’ discount and offering
expenses (includes 1,399,300 shares subject to possible
conversion)
|
7,000,000
|
700
|
38,687,329
|
38,688,029
|
||||||||||||
|
Common
shares issued August 24, 2005, net of underwriters’ discount and offering
expenses (includes 159,920 shares subject to possible
conversion)
|
800,000
|
80
|
4,495,412
|
4,495,492
|
||||||||||||
|
Proceeds
subject to possible conversion of 1,559,220 shares
|
(8,388,604
|
)
|
(8,388,604
|
)
|
||||||||||||
|
Proceeds
from issuance of option
|
100
|
100
|
||||||||||||||
|
Net
Income
|
131,542
|
131,542
|
||||||||||||||
|
Balance
at December 31, 2005
|
9,550,000
|
955
|
34,819,062
|
130,486
|
34,950,503
|
|||||||||||
|
Unaudited:
|
||||||||||||||||
|
Net
income
|
262,246
|
262,246
|
||||||||||||||
|
Balance
at June 30, 2006
|
9,550,000
|
$
|
955
|
$
|
34,819,062
|
$
|
392,732
|
$
|
35,212,749
|
See
Notes to Unaudited Condensed Financial Statements
F-43
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Condensed
Statement of Cash Flows
(unaudited)
|
For
the Six
Months
Ended
June
30, 2006
|
For
the Six
Months
Ended
June
30, 2005
|
For
the period December 20, 2004
(inception)
to
June
30, 2006
|
||||||||
|
Cash
flow from operating activities
|
||||||||||
|
Net
income (loss)
|
$
|
262,246
|
$
|
(1,646
|
)
|
$
|
392,732
|
|||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||||
|
Deferred
income taxes
|
(182,315
|
)
|
-
|
(314,315
|
)
|
|||||
|
Interest
income on treasury bills
|
(953,442
|
)
|
-
|
(1,593,243
|
)
|
|||||
|
Decrease
(Increase) in prepaid expenses
|
38,915
|
-
|
(11,250
|
)
|
||||||
|
(Decrease)
Increase in accounts payable and accrued expenses
|
(62,224
|
)
|
-
|
43,084
|
||||||
|
Increase
in income taxes payable
|
6,412
|
-
|
212,606
|
|||||||
|
Increase
in deferred interest
|
190,593
|
-
|
318,497
|
|||||||
|
Net
cash used in operating activities
|
(699,815
|
)
|
(1,646
|
)
|
(951,889
|
)
|
||||
|
Cash
flows from investing activities
|
||||||||||
|
Payment
of deferred acquisition costs
|
(75,000
|
)
|
(75,000
|
)
|
||||||
|
Investments
placed in Trust Fund
|
-
|
-
|
(41,964,000
|
)
|
||||||
|
Net
cash used in investing activities
|
(75,000
|
)
|
-
|
(42,039,000
|
)
|
|||||
|
Cash
flows from financing activities
|
||||||||||
|
Gross
proceeds of public offering, including over-allotment option
exercise
|
-
|
-
|
46,800,000
|
|||||||
|
Proceeds
of issuance of option
|
-
|
-
|
100
|
|||||||
|
Proceeds
from notes payable, stockholders
|
-
|
57,500
|
70,000
|
|||||||
|
Payment
of notes payable, stockholders
|
-
|
-
|
(70,000
|
)
|
||||||
|
Proceeds
from sale of shares of common stock
|
-
|
25,000
|
50,000
|
|||||||
|
Redemption
of common stock
|
-
|
(25,000
|
)
|
(25,000
|
)
|
|||||
|
Payment
of costs of public offering, including over-allotment option
exercise
|
-
|
-
|
(3,616,479
|
)
|
||||||
|
Payment
of deferred offering costs
|
(80,204
|
)
|
-
|
|||||||
|
Advances
from stockholder
|
-
|
1,517
|
-
|
|||||||
|
Net
cash (used in) provided by financing activities
|
-
|
(21,187
|
)
|
43,208,621
|
||||||
|
Net
(decrease) increase in cash
|
(774,815
|
)
|
(22,833
|
)
|
217,732
|
|||||
|
Cash
at beginning of the period
|
992,547
|
25,000
|
-
|
|||||||
|
Cash
at the end of the period
|
$
|
217,732
|
$
|
2,167
|
$
|
217,732
|
||||
See
Notes to Unaudited Condensed Financial Statements.
F-44
Fortress
America Acquisition Corporation
(a
corporation in the development stage)
Notes
to Unaudited Condensed Financial Statements
|
1.
Organization
and Proposed Business Operations
|
Fortress
America Acquisition Corporation (the “Company”) was incorporated in
Delaware on December 20, 2004 as a blank check company, the objective
of
which is to acquire one or more operating businesses in the homeland
security industry. The Company has elected December 31 as its
fiscal
year-end.
|
|
|
The
financial statements at June 30, 2006 and for the periods from
inception
to June 30, 2006 and the three and six month periods ended June
30, 2006
are unaudited. In the opinion of management, all adjustments
(consisting
of normal adjustments) have been made that are necessary to present
fairly
the financial position of the Company as of June 30, 2006, the
results of
its operations for the three and six month periods ended June
30, 2006 and
2005 and for the period from December 20, 2004 (inception) through
June
30, 2006, and its cash flows for the six month period ended June
30, 2006
and for the period from December 20, 2004 (inception) through
June 30,
2006. Operating results for the interim period presented are
not
necessarily indicative of the results to be expected for a full
year. The
condensed balance sheet at December 31, 2005 has been derived
from the
audited financial statements.
|
||
|
The
Company was formed on December 20, 2004 and consummated an initial
public
offering (“IPO”) on July 20, 2005. In addition, on August 24, 2005 the
underwriters for the IPO exercised their over-allotment option
(the
“Over-Allotment Option Exercise” and, together with the IPO, the
“Offering”). The Offering generated total net proceeds of $43,183,521.
The
Company’s management has broad discretion with respect to the specific
application of the net proceeds of the Offering, although substantially
all the net proceeds of the Offering are intended to be generally
applied
toward consummating a business combination with (or acquisition
of) one or
more operating businesses in the homeland security industry (“Business
Combination”). Furthermore, there is no assurance that the Company will be
able to successfully effect a Business Combination. Upon the
closing of
the Offering, approximately $41,964,000 of the net proceeds was
deposited
in a trust fund account (“Trust Fund”) and has been invested in Treasury
Bills until the earlier of (i) the consummation of its first
Business
Combination; or (ii) the liquidation of the Company. The Treasury
Bills
have been accounted for as trading securities and are recorded
at their
market value of approximately $43,557,243 at June 30, 2006. The
excess of
market value over cost, exclusive of the deferred interest described
further below, is included in interest income in the accompanying
statement of operations. The proceeds not deposited into the
Trust Fund
may be used to pay for business, legal and accounting due diligence
on
prospective acquisitions and continuing general and administrative
expenses. The Company, after signing a definitive agreement for
the
acquisition of a target business, will submit such transaction
for
stockholder approval. All of the Company stockholders prior to
the
Offering, including all of the officers and directors of the
Company
(“Initial Stockholders”), have agreed to vote their 1,750,000 founding
shares of common stock in accordance with the vote of the majority
in
interest of all other stockholders of the Company (“Public Stockholders”)
with respect to any Business Combination. After consummation
of the
Company’s first Business Combination, all of these voting safeguards
will
no longer be applicable.
|
F-45
|
In
the event (i) the Business Combination is not approved by a majority
of
the shares of common stock held by the Public Stockholders or
(ii) 20% or
more of the shares of common stock held by the Public Stockholders
vote
against
the Business Combination and exercise their conversion rights
described
below, the Business Combination will not be
consummated.
|
||
|
With
respect to the first Business Combination which is approved and
consummated, any Public Stockholder who voted against the Business
Combination may demand that the Company convert his or her shares
into
cash. The per share conversion price will equal the amount in
the Trust
Fund, calculated as of two business days prior to the proposed
Business
Combination, divided by the number of shares of common stock
held by
Public Stockholders at the consummation of the Offering. Accordingly,
Public Stockholders holding approximately 19.99% of the aggregate
number
of shares owned by all Public Stockholders may seek conversion
of their
shares in the event of a Business Combination. Such Public Stockholders
are entitled to receive their per share interest in the Trust
Fund
computed without regard to the shares held by the Initial Stockholders.
Accordingly, a portion of the net proceeds of the Offering (19.99%
of the
amount originally held in the Trust Fund) has been classified
as common
stock subject to possible conversion in the accompanying balance
sheets
and 19.99% of the related interest earned has been recorded as
deferred
interest.
|
||
|
The
Company’s Amended and Restated Certificate of Incorporation provides
for
the mandatory liquidation of the Company in the event that the
Company
does not consummate a Business Combination within 12 months from
the date
of the consummation of the Offering, or 18 months from the consummation
of
the Offering if certain extension criteria have been satisfied.
There is
no assurance that the Company will be able to successfully effect
a
Business Combination during this period. This factor raises substantial
doubt about the Company’s ability to continue as a going concern. The
accompanying financial statements are prepared assuming the Company
will
continue as a going concern. The financial statements do not
include any
adjustments that might result from the outcome of this uncertainty.
In the
event of liquidation, it is likely that the per share value of
the
residual assets remaining available for distribution (including
Trust Fund
assets) will be less than the initial public offering price per
share in
the Offering.
|
||
|
In
December 2004, the Financial Accounting Standards Board issued
Statement
of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”),
“Share Based Payment”. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in
the financial statements based on their fair values. The Company
is
required to adopt SFAS 123(R) effective January 1, 2006. The
Company does
not believe that the adoption of SFAS No. 123(R) will have a
significant
impact on its financial condition or results of
operations.
|
F-46
|
In
June 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken
or expected
to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently reviewing
this
new standard to determine the effects, if any, on its results
of
operations or financial position.
|
||
|
Management
does not believe that any other recently issued, but not yet
effective,
accounting standards if currently adopted would have a material
effect on
the accompanying financial statements.
|
||
|
2.
Commitment
|
Commencing
January 1, 2005, the Company occupied office space from, and
had certain
office and secretarial services made available to it by, an unaffiliated
third party. Rent expense under this agreement for each of the
periods
from December 20, 2004 (inception) to June 30, 2006 and from
January 1,
2006 to June 30, 2006 amounted to $1,362 and $0, respectively.
The rental
agreement expired June 30, 2005.
|
|
|
Commencing
on the consummation of the Offering, the Company occupies office
space
provided by an affiliate of an Initial Stockholder. Such affiliate
has
agreed that, until the acquisition or a target business by the
Company, it
will make such office space, as well as certain office and secretarial
services, available to the Company, as may be required by the
Company from
time to time. The Company has agreed to pay such affiliate $7,500
per
month for such services. Rent expense under this agreement for
each of the
periods from December 20, 2004 (inception) to June 30, 2006 and
from
January 1, 2006 to June 30, 2006 amounted to $82,500 and $45,000,
respectively.
|
||
|
3.
Proposed Acquisition
|
On
June 5, 2006, the Company entered into a Membership Interest
Purchase
Agreement (the “Purchase Agreement”) with VTC, L.L.C. (“VTC”), Vortech,
LLC (together with VTC, the “Acquisition Companies”), Thomas P. Rosato
(“Rosato”) and Gerard J. Gallagher (together with Rosato, the “Members”),
pursuant to which the Company will acquire (the “Acquisition”) all of the
issued and outstanding membership units of the Acquisition Companies
from
the Members.
|
F-47
|
On
June 26, 2006, the Company and the other parties to the Purchase
Agreement
entered into an Amended and Restated Membership Interest Purchase
Agreement, pursuant to which the cash portion of the initial
purchase
consideration was reduced from $19.0 million to $11.0 million,
the portion
the initial purchase consideration consisting of convertible
promissory
notes was increased from $8.0 million to $10.0 million and the
portion of
the initial purchase consideration consisting of the Company’s common
stock was increased from approximately $11.5 million to approximately
$17.5 million (subject, in both cases, to a dollar for dollar
reduction
for assumed debt up to a maximum of $161,000). As a result of
the increase
in value of the initial purchase consideration consisting of
the Company’s
common stock, the maximum number of shares of the Company’s common stock
issuable at closing has increased from 2,107,385 to 3,205,128.
The
aggregate initial purchase consideration, before adjustments
for
assumption of debt and working capital adjustments, remained
unchanged at
$38.5 million. Through June 30, 2006, the Company incurred $75,000
of
costs in connection with the acquisition of the Acquisition Companies
which have been recorded as deferred acquisition costs on the
accompanying
June 30, 2006 balance sheet.
|
||
|
4.
Common
Stock
|
On
December 20, 2004, the Company issued 1,250,000 shares of common
stock. On
March 8, 2005, the Company authorized the redemption of the 1,250,000
shares of common stock at the original subscription price. On
March 9,
2005, the Company issued 1,750,000 shares of common stock to
the original
stockholders along with new stockholders (in the aggregate, these
stockholders are the “Initial Stockholders” defined in note 1,
above).
|
|
|
On
July 20, 2005, the Company issued 7,000,000 shares of Common
Stock in
connection with the IPO. On August 24, 2005, the Company issued
800,000
share of Common Stock pursuant to the Over-Allotment Option
Exercise.
|
||
|
5.
Preferred
Stock
|
The
Company is authorized to issue 1,000,000 shares of preferred
stock with
such designations, voting and other rights and preferences as
may be
determined from time to time by the Board of
Directors.
|
F-48
Annex
A
SECOND
AMENDED AND RESTATED
MEMBERSHIP
INTEREST PURCHASE AGREEMENT
BY
AND AMONG
FORTRESS
AMERICA ACQUISITION CORPORATION,
VTC,
L.L.C.,
VORTECH,
LLC,
THOMAS
P. ROSATO
AND
GERARD
J. GALLAGHER
Effective
July 31, 2006
A-1
TABLE
OF CONTENTS
This
Table of Contents is for convenience of reference only and is not intended
to
define, limit or describe the scope, intent or meaning of any provision
of this
Agreement.
|
ARTICLE
I Definitions and Rules of Construction
|
2
|
|
|
1.1
|
Definitions.
|
2
|
|
1.2
|
Rules
of Construction.
|
13
|
|
ARTICLE
II Closing; Purchase Price; Adjustments; Escrow
|
14
|
|
|
2.1
|
Closing.
|
14
|
|
2.2
|
Purchase
Consideration; Employee Payments and Stock Grants.
|
14
|
|
2.4
|
Cash
Consideration and Net Working Capital Adjustments.
|
17
|
|
2.5
|
Financial
Issue Resolution Process.
|
19
|
|
2.6
|
Members’
Representative.
|
19
|
|
ARTICLE
III Representations and Warranties of the Members and the
Companies
|
21
|
|
|
3.1
|
Organization
and Power.
|
21
|
|
3.2
|
Authorization
and Enforceability.
|
21
|
|
3.3
|
No
Violation.
|
21
|
|
3.4
|
Consents.
|
22
|
|
3.5
|
Financial
Statements.
|
22
|
|
3.6
|
Relationships
with Affiliates.
|
23
|
|
3.7
|
Indebtedness
to/from Officers, Directors, Members and Employees.
|
24
|
|
3.8
|
No
Adverse Change.
|
24
|
|
3.9
|
Conduct
of the Business.
|
24
|
|
3.10
|
Capital
Structure; Equity Interests.
|
24
|
|
3.11
|
Title
to Membership Interests.
|
25
|
|
3.12
|
Articles,
Operating Agreements and Records.
|
25
|
A-2
|
3.13
|
Assets
- In General.
|
25
|
|
3.14
|
Real
Property Interests.
|
25
|
|
3.15
|
Personal
Property.
|
26
|
|
3.16
|
Intellectual
Property Rights.
|
26
|
|
3.17
|
Scheduled
Contracts and Proposals.
|
27
|
|
3.18
|
Government
Contracting.
|
29
|
|
3.19
|
Clients.
|
36
|
|
3.20
|
Backlog.
|
36
|
|
3.21
|
Compliance
with Laws.
|
36
|
|
3.22
|
Environmental
Matters.
|
37
|
|
3.23
|
Licenses
and Permits.
|
37
|
|
3.24
|
Absence
of Certain Business Practices.
|
37
|
|
3.25
|
Litigation.
|
38
|
|
3.26
|
Personnel
Matters.
|
38
|
|
3.27
|
Labor
Matters.
|
40
|
|
3.28
|
ERISA.
|
41
|
|
3.29
|
Tax
Matters.
|
44
|
|
3.30
|
Insurance.
|
46
|
|
3.31
|
Bank
Accounts.
|
46
|
|
3.32
|
Powers
of Attorney.
|
46
|
|
3.33
|
No
Broker.
|
47
|
|
3.34
|
Security
Clearances.
|
47
|
|
3.35
|
No
Unusual Transactions.
|
47
|
|
3.36
|
Full
Disclosure.
|
49
|
A-3
|
ARTICLE
IV Representations and Warranties of FAAC
|
50
|
|
|
4.1
|
Organization
and Power.
|
50
|
|
4.2
|
Authorization
and Enforceability.
|
50
|
|
4.3
|
No
Violation.
|
50
|
|
4.4
|
Consents.
|
51
|
|
4.5
|
Authorization
of Stock Consideration.
|
51
|
|
4.6
|
Capitalization.
|
51
|
|
4.7
|
Public
Disclosure Documents.
|
52
|
|
4.8
|
Litigation.
|
52
|
|
4.9
|
Brokers.
|
52
|
|
4.10
|
Full
Disclosure.
|
52
|
|
ARTICLE
V Covenants
|
53
|
|
|
5.1
|
Conduct
of the Companies.
|
53
|
|
5.2
|
Access
to Information Prior to the Closing; Confidentiality.
|
53
|
|
5.3
|
Best
Efforts.
|
53
|
|
5.4
|
Consents.
|
54
|
|
5.5
|
Access
to Books and Records Following the Closing.
|
54
|
|
5.6
|
Members’
Post-Closing Confidentiality Obligation.
|
54
|
|
5.7
|
Expenses.
|
55
|
|
5.8
|
Certain
Closing Payments.
|
55
|
|
5.9
|
No
Solicitation of Competitive Transactions.
|
56
|
|
5.10
|
Personnel.
|
57
|
|
5.11
|
Certain
Tax Matters.
|
57
|
|
5.12
|
Public
Announcements.
|
60
|
A-4
|
5.13
|
Communications
with Customers and Suppliers.
|
60
|
|
5.14
|
Evergreen
Agreement.
|
60
|
|
5.15
|
Covenants
Regarding Management of FAAC.
|
61
|
|
5.16
|
Welfare
Plans
|
61
|
|
5.17
|
Cooperation
in Connection with Proxy Materials.
|
62
|
|
5.18
|
Continuing
Related Party Transactions.
|
62
|
|
5.19
|
Update
of Disclosure Schedules.
|
63
|
|
5.20
|
Threatened
Litigation.
|
64
|
|
ARTICLE
VI Deliveries by All Parties at Closing
|
64
|
|
|
6.1
|
Conditions
to All Parties Obligations.
|
64
|
|
6.2
|
Conditions
to the Members Obligations.
|
65
|
|
6.3
|
Conditions
to FAAC’s Obligations.
|
65
|
|
ARTICLE
VII Deliveries by Members and the Companies at Closing
|
67
|
|
|
7.1
|
Members’
and the Companies’ Closing Certificate.
|
67
|
|
7.2
|
Consents.
|
67
|
|
7.3
|
Estimated
Closing Balance Sheet.
|
68
|
|
7.4
|
Resignations
of Directors and Officers.
|
68
|
|
7.5
|
Termination
of Credit Facility/Facilities.
|
68
|
|
7.6
|
Release
of Liens.
|
68
|
|
7.7
|
Phantom
Membership Interest Releases.
|
68
|
|
7.8
|
Comfort
Letters.
|
68
|
|
7.9
|
Evergreen
Release.
|
68
|
|
7.10
|
Senior
Executive Employment Agreements.
|
68
|
|
7.11
|
Key
Employee Employment Agreements.
|
68
|
A-5
|
7.12
|
Stock
Consideration Documents.
|
69
|
|
7.13
|
Voting
Agreement.
|
69
|
|
7.14
|
Escrow
Agreements.
|
69
|
|
7.15
|
Related
Party Termination Agreements.
|
69
|
|
7.16
|
New
VTC Lease and VTC Lease Appraisal.
|
69
|
|
7.17
|
Further
Instruments.
|
69
|
|
ARTICLE
VIII Deliveries by FAAC at Closing
|
69
|
|
|
8.1
|
Officer’s
Certificate.
|
69
|
|
8.2
|
Closing
Consideration and Escrow Deposits.
|
70
|
|
8.3
|
Stock
Consideration Documents.
|
70
|
|
8.4
|
Senior
Executive Employment Agreement.
|
70
|
|
8.5
|
Key
Employee Employment Agreements.
|
70
|
|
8.6
|
Management
of FAAC.
|
70
|
|
8.7
|
Escrow
Agreements.
|
70
|
|
8.8
|
Employee
Stock Grants.
|
70
|
|
8.9
|
Further
Instruments.
|
70
|
|
ARTICLE
IX Survival and Indemnification
|
71
|
|
|
9.1
|
Survival
of Representations and Warranties.
|
71
|
|
9.2
|
Indemnification.
|
71
|
|
9.3
|
General
Indemnity Escrow Account.
|
76
|
|
9.4
|
Effect
of Investigation.
|
77
|
|
ARTICLE
X Termination
|
77
|
|
|
10.1
|
Termination.
|
77
|
|
10.2
|
Procedure
and Effect of Termination.
|
77
|
A-6
|
ARTICLE
XI Miscellaneous
|
78
|
|
|
11.1
|
Further
Assurances.
|
78
|
|
11.2
|
Notices.
|
78
|
|
11.3
|
Governing
Law.
|
79
|
|
11.4
|
Entire
Agreement.
|
79
|
|
11.5
|
Severability.
|
80
|
|
11.6
|
Amendment.
|
80
|
|
11.7
|
Effect
of Waiver or Consent.
|
80
|
|
11.8
|
Rights
and Remedies Cumulative.
|
80
|
|
11.9
|
Parties
in Interest; Limitation on Rights of Others.
|
80
|
|
11.10
|
Assignability.
|
81
|
|
11.11
|
Dispute
Resolution and Arbitration.
|
81
|
|
11.12
|
Jurisdiction;
Court Proceedings; Waiver of Jury Trial.
|
82
|
|
11.13
|
No
Other Duties.
|
83
|
|
11.14
|
Reliance
on Counsel and Other Advisors.
|
83
|
|
11.15
|
Waiver
of Rights Against Company’s Trust Fund.
|
83
|
|
11.16
|
Counterparts.
|
83
|
A-7
SCHEDULES
|
Schedule
|
Title
|
|
|
1.1
|
Bonds
|
|
|
3.1(b)
|
Jurisdictions
where each
of the Companies is
qualified or licensed to do business; good standing
|
|
|
3.4(a)
|
Consents
|
|
|
3.5(c)
|
Undisclosed
Liabilities
|
|
|
3.5(e)
|
Letters
of Credit and Guarantees
|
|
|
3.5(f)
|
Contingent
or Deferred Acquisition Expenses or Payments
|
|
|
3.6
|
Interest
of Affiliates and Members in Property or Contracts of the
Companies
|
|
|
3.9(a)
|
Cooperative
Business Arrangements
|
|
|
3.9(b)
|
Letters
of Intent and Non-Competition Agreements
|
|
|
3.9(c)
|
Non-Disclosure
Arrangements
|
|
|
3.10(a)
|
Owners
of Equity Interests of the Companies
|
|
|
3.13
|
Assets-In
General
|
|
|
3.14
|
Real
Property Interests
|
|
|
3.15(a)
|
Personal
Property, owned or leased
|
|
|
3.15(b)
|
UCC
Financing Statements
|
|
|
3.16(a)
|
Commercial
Software and Intellectual Property Rights
|
|
|
3.16(b)
|
Intellectual
Property Rights used by, but not owned by the Companies
|
|
|
3.16(c)
|
Rights
of other Persons to Intellectual Property Rights or Intellectual
Property
|
|
|
3.16(d)
|
No
Infringement
|
|
|
3.16(f)
|
Government
Data and Software Rights
|
|
|
3.17(a)
|
List
of Scheduled Contracts
|
|
|
3.17(b)
|
Status
of Scheduled Contracts
|
A-8
|
3.17(c)
|
List
and Status of Bids, Proposals or Quotations
|
|
|
3.18(b)
|
List
of Government Contracts and Government Subcontracts
|
|
|
3.18(c)
|
List
of Bids
|
|
|
3.18(d)
|
List
of Teaming Agreements
|
|
|
3.18(e)
|
List
of Company Subcontracts
|
|
|
3.18(f)
|
List
of Marketing Agreements
|
|
|
3.18(g)
|
Status
of Government Contracts, Subcontracts and Bids
|
|
|
3.18(i)
|
Audits
|
|
|
3.18(j)
|
Financing
Arrangements
|
|
|
3.18(k)
|
Protests
|
|
|
3.18(l)
|
Claims
|
|
|
3.18(m)
|
Multiple
Award Schedules
|
|
|
3.18(n)
|
Government
Furnished Property
|
|
|
3.18(o)
|
Former
Government Officials
|
|
|
3.18(p)
|
Ethics
Policy
|
|
|
3.18(q)
|
Timekeeping
Policy
|
|
|
3.20
|
Backlog
|
|
|
3.23(a)
|
Permits
|
|
|
3.25(a)
|
Litigation
Pending or Threatened
|
|
|
3.25(b)
|
Claims
|
|
|
3.25(c)
|
Indemnification
Obligations
|
|
|
3.26(a)
|
List
and Positions of Personnel
|
|
|
3.26(b)
|
Phantom
Membership Interest Payments
|
|
|
3.26(d)
|
Personnel
Policies and Manuals
|
A-9
|
3.26(e)
|
Personnel
Agreements
|
|
|
3.26(f)
|
Discontinuation
of Employment
|
|
|
3.26(h)
|
Leased
Employees/Independent Contractors
|
|
|
3.28(b)
|
List
of Plans
|
|
|
3.28(g)
|
Filings
|
|
|
3.28(j)
|
Time
of Vesting or Payment
|
|
|
3.28(l)
|
Compliance
|
|
|
3.28(m)
|
Self
Insured Plans
|
|
|
3.29
|
Tax
Matters
|
|
|
3.30(a)
|
Insurance
Policies
|
|
|
3.30(b)
|
Insurance
Claims
|
|
|
3.31
|
Bank
Accounts
|
|
|
3.34
|
Facility
Clearances
|
|
|
3.35
|
No
Unusual Transactions
|
A-10
EXHIBITS
|
A
|
Financial
Statements
|
|
B
|
Form
Convertible Promissory Note
|
|
C
|
Acquisition
Agreement
|
|
D
|
Registration
Rights Agreement
|
|
E
|
Lock
Up Agreement
|
|
F
|
Restricted
Stock Plan
|
|
G
|
Restricted
Stock Agreement
|
|
H-1
|
Balance
Sheet Escrow Agreement
|
|
H-2
|
General
Indemnity Escrow Agreement
|
|
I
|
Phantom
Membership Interest Release
|
|
J
|
Evergreen
Acquisition Agreement
|
|
K1
|
Rosato
Employment Agreement
|
|
K-2
|
Gallagher
Employment Agreement
|
|
L
|
Key
Employee Employment Agreement
|
|
M
|
Voting
Agreement
|
|
N
|
Members/Companies
Closing Certificate
|
|
O
|
FAAC
Closing Certificate
|
A-11
SECOND
AMENDED AND RESTATED
MEMBERSHIP
INTEREST PURCHASE AGREEMENT
SECOND
AMENDED AND RESTATED MEMBERSHIP INTEREST PURCHASE AGREEMENT (“Agreement”),
dated
July 31,
2006
(the “Effective
Date”),
by
and among (i) Fortress America Acquisition Corporation, a Delaware
corporation (“FAAC”);
(ii) VTC, L.L.C., a Maryland limited liability company (“VTC”);
(iii) Vortech, LLC, a Maryland limited liability company (“Vortech”);
Thomas P. Rosato and Gerard J. Gallagher (who together own all of the
outstanding membership interests of both VTC and Vortech (each a “Member”
and
jointly the “Members”));
and
(iv) Thomas P. Rosato in his capacity as the “Members’ Representative” (as
defined in Section 2.6(a)).
RECITALS:
R-1. The
Members are the holders and owners of all of the issued and outstanding
“Equity
Interests” (as hereinafter defined) of each VTC and Vortech (the “Membership
Interests”).
R-2. By
the
terms of a Membership Interest Purchase Agreement dated June 5, 2006, as
amended
by an Amended and Restated Membership Interest Purchase Agreement dated
June 26,
2006 (jointly the “Existing
Agreement”),
FAAC
agreed to purchase from the Members and the Members agreed to sell to FAAC
the
Membership Interests for certain consideration described therein.
R-3. Under
the
terms of the Existing Agreement: (i) pursuant to Section 2.2(d)(iv) of
the
Existing Agreement, 500,000 of the FAAC common shares payable to each of
the
Members are to be held in a “Lock Up Escrow Agreement” and subject to forfeiture
if employment of the applicable member is terminated for various reasons
prior
to July 13, 2008; and (ii) pursuant to Section 2.2(e) of the Existing Agreement
each of the Members is entitled to certain “Earn Out Consideration” as more
particularly described therein.
R-4. FAAC
and
the Members have agreed to modify the Existing Purchase Agreement (i) to
delete
Section 2.2(d)(iv) of the Existing Agreement in its entirety; (ii) to delete
Section 2.2(e) of the Existing agreement in its and entirety (and to amend
the
Employment Agreements of each of the Members to incorporate the right to
FAAC
common shares in the event certain price thresholds are met); and (iii)
to make
certain other modifications.
R-5. The
parties hereto wish to amend and restate the Existing Purchase Agreement
to
reflect the deletion of Sections 2.2(d)(iv) and 2.2(e).
R-6. On
or
before the Effective Date and the “Closing Date” (as hereinafter defined), FAAC
intends to change its name to “Fortress International Group, Inc.”
NOW
THEREFORE, in consideration of the premises and the representations, warranties,
covenants and agreements contained in this Agreement, and intending to
be
legally bound hereby, the parties hereby amend and restate the Initial
Purchase
Agreement in its entirety:
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ARTICLE
I
Definitions
and Rules of Construction
1.1 Definitions.
As
used
in this Agreement, the following terms shall have the meanings as set
forth
below:
“Acquired
Business”
means
the collective operations and business activities of the Companies as conducted
and
existing as of the Closing Date.
“Acquisition
Agreement”
has
the
meaning set forth in Section 2.2(d).
“Acquisition
Proposal”
has
the
meaning set forth in Section 5.9(a).
“Active”
has
the
meaning set forth in Section 3.18(a).
“Adjusted
Closing Net Working Capital”
has
the
meaning set forth in Section 2.4(b).
“Affiliate”
means,
as to any Person, any other Person that, directly or indirectly, is in
control
of, is controlled by, or is under common control with, such Person. For
purposes
of this definition, “control” of a Person means the power, directly or
indirectly, either to (a) vote 10% or more of the securities having
ordinary voting power for the election of directors of such Person or
(b) direct or cause the direction of the management and policies of such
Person, whether by contract or otherwise.
“Agreement”
has
the
meaning set forth in the Preamble.
“Acquisition
Agreement”
has
the
meaning set forth in Section 2.2(d).
“Acquisition
Proposal”
has
the
meaning set forth in Section 5.8.
“Assumed
Debt”
has
the
meaning set forth in Section 2.2(c).
“Audited
Financial Statements”
means
collectively the audited consolidated balance sheets and statements of
income,
changes in shareholders’ equity, and cash flow together with accompanying notes
of the Companies as of December 31, 2003 and December 31, 2004 together
with the
December 31, 2005 Financial Statements.
“Auditor”
has
the
meaning set forth in Section 2.5.
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“Average
Share Value”
shall
mean Five and 46/100 Dollars ($5.46) per share which the undersigned agree
was
the average closing price of a share of FAAC common stock on the Nasdaq
OTC
market for the twenty (20) consecutive trading days prior to public announcement
by FAAC of the contemplated purchase of the Membership Interests pursuant
to
this Agreement (June 5, 2006).
“Balance
Sheet Escrow Account”
has
the
meaning set forth in Section 2.3.
“Balance
Sheet Escrow Agreement”
has
the
meaning set forth in Section 2.3.
“Balance
Sheet Escrow Property”
has
the
meaning set forth in Section 2.3.
“Balance
Sheet Escrow Shares”
has
the
meaning set forth in Section 2.3.
“Base
Net Working Capital Amount”
means
One Million Dollars ($1,000,000).
“Benefit
Arrangement”
has
the
meaning set forth in Section 3.28(a).
“Bid”
has
the
meaning set forth in Section 3.18(a).
“Bonus
Pool”
has
the
meaning set forth in Section 3.26(b).
“Business
Day”
shall
mean any day other than a Saturday, Sunday, or any Federal holiday. If
any
period expires on a day that is not a Business Day or any event or condition
is
required by the terms of this Agreement to occur or be fulfilled on a day
that
is not a Business Day, such period shall expire or such event or condition
shall
occur or be fulfilled, as the case may be, on the next succeeding Business
Day.
“Cash
Consideration”
has
the
meaning set forth in Section 2.4.
“Claimant”
has
the
meaning set forth in Section 11.11(a).
“Claims”
means
jointly all Third-Party Claims and Direct Claims.
“Closing”
has
the
meaning set forth in Section 2.1.
“Closing
Balance Sheet”
has
the
meaning set forth in Section 2.4(d).
“Closing
Date”
has
the
meaning set forth in Section 2.1.
“Closing
Net Working Capital”
has
the
meaning set forth in Section 2.4(b).
“COC”
has
the
meaning set forth in Section 3.18(m).
“Code”
means
the Internal Revenue Code of 1986, as amended from time to time, or
corresponding provisions of subsequent superseding federal revenue
Laws.
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“Commercial
Software”
means
commercially available Software licensed pursuant to a standard license
agreement with a value of more than $1,000 and excluding any software,
as to
which a license is implied by sale of a product.
“Companies”
means
Vortech and VTC together and “Company”
refers
to either of them.
“Companies’
Information”
has
the
meaning set forth in Section 5.17.
“Company
Subcontract”
has
the
meaning set forth in Section 3.18(a).
“Confidentiality
Agreement”
has
the
meaning set forth in Section 5.2.
“Consultant”
means
all persons who (i) are or have been engaged as consultants by either of
the
Companies or (ii) otherwise provide services to either of the Companies
under a
contractual arrangement.
“Contemplated
Transactions”
means
the transactions contemplated by this Agreement and the other Transaction
Documents.
“Continuing
Related Party Transactions”
has
the
meaning set forth in Section 3.6.
“Convertible
Promissory Note”
and
“Convertible
Promissory Notes”
have
the meanings set forth in Section 2.2(b).
“Copyrights”
means
all United States and foreign copyright registrations and applications
therefor.
“Damages”
has
the
meaning set forth in Section 2.6(b).
“December
2005 Balance Sheet”
means
the audited consolidated balance sheets of the Companies as of December
31, 2005
included in the December 2005 Financial Statements.
“December
2005 Financial Statements”
means
the audited consolidated balance sheets and statements of income, changes
in
shareholders’ equity, and cash flow together with accompanying notes of the
Companies as of December 31, 2005, a copy of which is included in the Financial
Statements attached as Exhibit
A.
“Direct
Claim”
and
“Direct
Claims”
mean
any claim or claims (other than Third Party Claims) by an Indemnified Party
against an Indemnifying Party for which the Indemnified Party may seek
indemnification under this Agreement.
“Direct
Claim Notice”
has
the
meaning set forth in Section 9.2(d).
“Direct
Claim Notice Period”
has
the
meaning set forth in Section 9.2(d).
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“Disclosure
Schedules”
has
the
meaning set forth in the definition of “Schedule.”
“Disclosure
Schedule Update Losses”
means
Losses that may be sustained, suffered or incurred by FAAC Indemnitees
and that
are related to facts and circumstances reflected in the Updated Disclosure
Schedules, but not in the Disclosure Schedules dated as of the date of
this
Agreement.
“Dispute
Notice”
has
the
meaning set forth in Section 11.11(a).
“D&O
Indemnification Claims”
means
actions, suits, claims trials, written demands, arbitrations, proceedings
and
actions relating to indemnification under or with respect to indemnification
provisions in the Companies Articles of Organization or Operating Agreements
(collectively, the “D&O
Indemnification Claims”)
“Effective
Date”
has
the
meaning set forth in the Preamble.
“Employee
Bonuses”
has
the
meaning set forth in Section 3.26(b).
“Employee
Stock Grants”
and
“Employee
Stock Grant”
have
the meanings set forth in Section 2.2(g).
“Entity”
means
any general partnership, limited partnership, limited liability partnership,
limited liability company, corporation, joint venture, trust, business
trust,
cooperative, association, foreign trust or foreign business
organization.
“Environmental
Laws”
means
any and all Federal, state, local and foreign statutes, laws (including
case or
common law), regulations, ordinances, rules, judgments, orders, decrees,
codes,
injunctions, permits, concessions, grants, franchises, licenses, or agreements
relating to human health, the environment or omissions, discharges or releases
of pollutants, contaminants, Hazardous Substances or wastes into the environment
including, without limitation, ambient air, surface water, ground water,
facilities, structures, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or
handling of pollutants, contaminants, Hazardous Substances or wastes or
the
investigation, clean-up or other remediation thereof. Without limiting
the
generality of the foregoing, “Environmental Laws” include: (a) the Resource
Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.,
as
amended; (b) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 26 U.S.C. § 4611 and 42 U.S.C. § 9601 et
seq.,
as
amended; (c) the Superfund Amendment and Reauthorization Act of 1984, as
amended; (d) the Clean Air Act, 42 U.S.C. § 7401 et seq.,
as
amended; (e) the Clean Water Act, 33 U.S.C. 5 1251 et
seq.;
(f) the Safe Drinking Water Act, 42 U.S.C. § 300f et seq.;
and
(g) the Occupational Safety and Health Act of 1976, 29 U.S.C.A. § 651, as
amended, and all rules and regulations promulgated thereunder.
A-16
“Environmental
Liabilities”
means
all liabilities, whether vested or unvested, fixed or unfixed, actual or
potential, that arise under or relate to Environmental Laws, as applied
to the
facilities and business of the
Companies, including, without limitation: (i) the investigation, clean-up
or remediation of contamination or environmental degradation or damage
caused by
or arising from the generation, use handling, treatment, storage,
transportation, disposal, discharge, release or emission of Hazardous
Substances; (ii) personal injury, wrongful death or property damage claims;
or (iii) claims for natural resource damages.
“Equity
Interest”
of
any
Person means any and all shares, rights to purchase, warrants or options
(whether or not currently exercisable), participations or other equivalents
of
or interests in (however designated) the equity (including without limitation
common stock, preferred stock and limited liability company, partnership
and
joint venture interests) of such Person.
“ERISA”
has
the
meaning set forth in Section 3.28(a).
“ERISA
Affiliate”
has
the
meaning set forth in Section 3.28(a).
“Escrow
Account”
and
“Escrow
Accounts”
have
the meanings referred to in Section 2.3.
“Escrow
Agent”
means
and refers to SunTrust
Bank.
“Escrow
Agreements”
has
the
meaning set forth in Section 2.3.
“Escrow
Deposits”
has
the
meaning set forth in Section 2.3.
“Escrowed
Property”
has
the
meaning set forth in Section 2.3.
“Estimated
Closing Balance Sheet”
has
the
meaning set forth in Section 2.4(b).
“Estimated
Closing Cash Purchase Price”
has
the
meaning set forth in Section 2.4(a).
“Evergreen”
has
the
meaning set forth in Section 3.33.
“Evergreen
Agreement”
has
the
meaning set forth in Section 3.33.
“Evergreen
Fees”
has
the
meaning set forth in Section 5.14.
“Evergreen
Release”
has
the
meaning set forth in Section 5.14.
“Evergreen
Stock Payment”
has
the
meaning set forth in Section 5.8.
“Evergreen
Stock Payment Amount”
has
the
meaning set forth in Section 5.8.
A-17
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended and the rules and regulations
promulgated thereunder.
“Executive
Employment Agreements”
has
the
meaning set forth in Section 5.10.
“Existing
Purchase Agreement”
has
the
meaning set forth in Recital R-2.
“FAAC”
refers
to Fortress America Acquisition Corporation, a Delaware
corporation.
“FAAC
Indemnitees”
has
the
meaning set forth in Section 9.2(b)(i).
“FAAC
Securities”
has
the
meaning set forth in Section 4.6.
“Financial
Statements”
means
collectively (i) the Audited Financial Statements and (ii) the Interim
Financial
Statements, copies of all of which are attached hereto as Exhibit
A.
“Financing
Statements”
has
the
meaning set forth in Section 3.15(b).
“Forfeited
Shares”
has
the
meaning set forth in Section 2.2(g).
“Form
5500”
means
the Internal Revenue Service Form 5500 Annual Return/ Report of Employee
Benefit
Plan.
“GAAP”
means
generally accepted accounting principles as set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute
of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person
as
may be approved by a significant segment of the accounting profession in
the
United States.
“Gallagher”
refers
to Gerard J. Gallagher.
“General
Indemnity Escrow”
means
the escrow established under the General Indemnity Escrow Agreement to
hold the
General Indemnity Escrow Property.
“General
Indemnity Escrow Account”
has
the
meaning set forth in Section 2.3.
“General
Indemnity Escrow Agreement”
has
the
meaning set forth in Section 2.3.
“General
Indemnity Escrow Property”
has
the
meaning set forth in Section 2.3.
“General
Indemnity Escrow Shares”
has
the
meaning set forth in Section 2.3.
“Governmental
Authority”
means
any nation or government, any foreign or domestic Federal, state, county,
municipal or other political instrumentality or subdivision thereof and
any
foreign or domestic entity or body exercising executive, legislative, judicial,
regulatory, administrative or taxing functions of or pertaining to
government.
A-18
“Government
Contract”
has
the
meaning set forth in Section 3.18(a).
“Government
Contractor”
means
a
prime contractor or subcontractor to a contract or subcontract, at any
tier, as
applicable, issued by a Governmental Authority.
“Government-Furnished
Property”
has
the
meaning set forth in Section 3.18(n).
“Government
Subcontract”
has
the
meaning set forth in Section 3.18(a).
“Hazardous
Substances”
means
any substance that is toxic, ignitable, reactive, corrosive, radioactive,
caustic, or regulated as a hazardous substance, contaminant, toxic substance,
toxic pollutant, hazardous waste, special waste, or pollutant, including,
without limitation, petroleum, its derivatives, by-products and other
hydrocarbons, poly-chlorinated bi-phenyls and asbestos regulated under,
or that
is the subject of, applicable Environmental Laws.
“Indebtedness”
means
(a) indebtedness of either of the Companies for borrowed money (including,
without limitation, any pre-payment penalties and costs associated with
pre-payment of such indebtedness) but excluding the Assumed Debt; (b)
obligations of either of the Companies evidenced by bonds (all of which
performance bonds are shown on Schedule 1.1 of the Disclosure Schedules),
notes,
debentures, bankers acceptances or similar instruments; (c) obligations
of
either of the Companies under installment sales, conditional sale, title
retention or similar agreements or arrangements creating an obligation
with
respect to the deferred purchase price of property or services (other than
customary trade credit); (d) obligations of either of the Companies secured
by a
Lien on any property; and (e) guarantees by either of the Companies in
respect
of Indebtedness.
“Indemnified
Party”
means
and refers to a party that has the right under ARTICLE IX to seek
indemnification from an Indemnifying Party.
“Indemnifying
Party”
means
and refers to a party that has the obligation under ARTICLE IX to indemnify
an Indemnified Party.
“Intellectual
Property”
means
Software and Technology.
“Intellectual
Property Rights”
means
rights that exist under Laws respecting Copyrights, Patents, Trademarks and
Trade Secrets.
“Interim
Financial Statements”
means
the internally prepared unaudited consolidated interim balance sheets and
related interim consolidated statements of operations, changes in Members
equity
and cash flows of the Companies for the period January 1, 2006 through
March 31, 2006, a copy of which is included as part of the Financial Statements
attached as Exhibit
A
hereto.
“IRS”
means
and refers to the Internal Revenue Service.
A-19
“Key
Employee Employment Agreements”
has
the
meaning set forth in Section 5.10(c).
“Key
Employees”
has
the
meaning set forth in Section 5.10(a).
“Knowledge
of the Companies”
means
the actual knowledge of each of Rosato and Gallagher.
“Knowledge
of FAAC”
means
the actual knowledge of Harvey L. Weiss or C. Thomas McMillen.
“Laws”
means
(a) all constitutions, treaties, laws, statutes, codes, regulations,
ordinances, orders, decrees, rules, or other requirements with similar
effect of
any Governmental Authority, (b) all judgments, orders, writs, injunctions,
decisions, rulings, decrees and awards of any Governmental Authority, and
(c) all provisions of the foregoing, in each case binding on or affecting
the Person referred to in the context in which such word is used; “Law” means
any one of them and the words “Laws” and “Law” include Environmental
Laws.
“Lien”
means
any lien, statutory or otherwise, security interest, mortgage, deed of
trust,
priority, pledge, charge, conditional sale, title retention agreement,
financing
lease or other encumbrance or similar right of others, or any agreement
to give
any of the foregoing.
“Lock
Up Agreement”
has
the
meaning set forth in Section 2.2(d)(iv).
“Lock
Up Termination Date”
means
July 13, 2008.
“Losses”
has
the
meaning set forth in Section 9.2(a)(i).
“Material
Adverse Effect”
means
any change, event or effect that is, or would reasonably be expected to
be,
materially adverse to (i) the business, assets (whether tangible or intangible),
liabilities, financial condition, operations, results of operations or
prospects
of the Companies, or (ii) the Companies’ ability to consummate the transactions
contemplated by this Agreement, except, in each case, any change, event
or
effect directly resulting from (A) decreases in working capital
substantially consistent with the Companies’ internal projections; (B) any
adverse conditions, occurring after the date hereof, affecting the Companies
industries as a whole or the U.S. or world economies as a whole, that do
not
disproportionately affect the Companies; or (C) taking any action required
by
this Agreement.
“Material
Negotiations”
has
the
meaning set forth in Section 5.9(b).
“Members”
and
“Member”
have
the meanings referred to in the Preamble.
“Members
Indemnitees”
has
the
meaning set forth in Section 9.2(a).
“Membership
Interests”
means
all of the issued and outstanding Equity Interests of the Companies, all
of
which are owned by the Members.
A-20
“Members’
Proportionate Interests”
means
each of the Members’ proportionate interest relative to the other Members, as
determined by the number of Membership Interests held by each Member on
the
Closing Date over the total number of Membership Interests held by the
Members
in each Company as of the Closing Date. Each of the Members owns fifty
percent
(50%) of each Company and accordingly each member has an aggregate fifty
percent
(50%) interest in the Companies.
“Members’
Representative”
has
the
meaning set forth in Section 2.6.
“Members’
Transaction Costs”
has
the
meaning set forth in Section 5.7.
“Non-Key
Employees”
has
the
meaning set forth in Section 5.10(a).
“New
VTC Lease”
has
the
meaning set forth in Section 5.18.
“Participating
Employees”
has
the
meaning set forth in Section 2.2(g).
“Patents”
means
issued patents, including United States and foreign patents and applications
therefor; divisions, reissues, continuations, continuations-in-part,
reexaminations, renewals and extensions of any of the foregoing; and utility
models and utility model applications.
“Pension
Plan”
has
the
meaning set forth in Section 3.28(a).
“Permits”
has
the
meaning set forth in Section 3.23(a).
“Person”
means
any individual, person, Entity, or Governmental Authority, and the heirs,
executors, administrators, legal representatives, successors and assigns
of the
“Person” when the context so permits.
“Personal
Property”
has
the
meaning set forth in Section 3.15(a).
“Personnel”
has
the
meaning set forth in Section 3.26(a).
“Phantom
Membership Interest Plan”
has
the
meaning set forth in Section 3.26(b).
“Phantom
Membership Interest Release”
has
the
meaning set forth in Section 3.26(b).
“Plan”
has
the
meaning set forth in Section 3.28(a).
“Post-Closing
Tax Period”
has
the
meaning set forth in Section 5.11(c)(ii)(A).
“Pre-Closing
Tax Period”
has
the
meaning set forth in Section 5.11(c)(i).
“Prior
Period Returns”
has
the
meaning set forth in Section 5.11(b).
A-21
“Proposals”
has
the
meaning set forth in Section 3.17(c).
“Proposed
Closing Balance Sheet”
has
the
meaning set forth in Section 2.4(d).
“Proposed
Transaction”
has
the
meaning set forth in Section 5.9(b).
“Proxy
Materials”
has
the
meaning set forth in Section 5.17.
“Public
Disclosure Documents”
has
the
meaning set forth in Section 4.7(a).
“Purchase
Consideration”
has
the
meaning set forth in Section 2.2.
“Real
Property Interests”
has
the
meaning set forth in Section 3.14.
“Registration
Rights Agreement”
has
the
meaning set forth in Section 2.2(b)(vi).
“Related
Party Termination Agreements”
has
the
meaning set forth in Section 6.3(q).
“Related
Party Transactions”
and
“Related
Party Transaction”
have
the meanings set forth in Section 3.6.
“Respondent”
has
the
meaning set forth in Section 11.11(a).
“Representative”
has
the
meaning set forth in Section 5.9(a).
“Rosato”
refers
to Thomas P. Rosato.
“SBIR”
has
the
meaning set forth in Section 3.18(g).
“Schedule”
as
used
in this Agreement together with a numerical designation, means a schedule
contained in the Disclosure Schedules of even date herewith delivered
by the
Companies and/or
the Members in connection with the execution and delivery of this Agreement
(the
“Disclosure
Schedules”).
“Scheduled
Contracts”
has
the
meaning set forth in Section 3.17(a).
“SEC”
means
the United States Securities and Exchange Commission.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules promulgated
thereunder.
“Self
Insured Plan”
and
“Self
Insured Plans”
have
the meaning set forth in Section 3.28(m).
“Senior
Executives”
has
the
meaning set forth in Section 5.10(a).
A-22
“Senior
Executive Employment Agreements”
has
the
meaning set forth in Section 5.10(b).
“Signia
Threatened Litigation”
has
the
meaning set forth in Section 5.20.
“Software”
means
the manifestation, in tangible or physical form, including, but not limited
to,
in magnetic media, firmware, and documentation, of computer programs and
databases, such computer programs and databases to include, but not limited
to,
management information systems, and personal computer programs. The tangible
manifestation of such programs may be in the form of, among other things,
source
code, flow diagrams, listings, object code, and microcode. Software does
not
include any Technology.
“State
Government”
has
the
meaning set forth in Section 3.18(a).
“Stock
Consideration”
has
the
meaning set forth in Section 2.2(d).
“Stock
Consideration Amount”
has
the
meaning set forth in Section 2.2(d).
“Stock
Grant Documents”
has
the
meaning set forth in Section 2.2(g).
“Stock
Grant Shares”
has
the
meaning set forth in Section 2.2(g).
“Stock
Grant Shares Value”
has
the
meaning set forth in Section 2.2(d).
“Straddle
Period”
and
“Straddle
Periods”
have
the meanings set forth in Section 5.11(c)(i).
“Subcontract”
has
the
meaning set forth in Section 3.18(a)(iv).
“Subsidiary”
means
and refers to any corporation, association or other business entity of
which
more than fifty (50) percent of the issued and outstanding shares of capital
stock or equity interests is owned or controlled, directly or indirectly,
by
either of the Companies, or FAAC, as the case may be, and in which either
of the
Companies or FAAC, as the case may be, has the power, directly or indirectly,
to
elect a majority of the directors.
“Survival
Date”
has
the
meaning set forth in Section 9.1.
“Surviving
Representations”
has
the
meaning set forth in Section 9.1.
“Tax”
or
“Taxes
has the
meaning set forth in Section 3.29(d).
“Tax
Return”
and
“Tax
Returns”
has
the
meaning set forth in Section 3.29(d).
“Taxing
Authority”
means
any government or any subdivision, agency, commission or authority thereof,
or
any quasi-governmental or private body having jurisdiction over the assessment,
determination, collection or other imposition of Taxes.
A-23
“Teaming
Agreement”
has
the
meaning set forth in Section 3.18(a).
“Technology”
means
all types of technical information and data, whether or not reduced to
tangible
or physical form, including, but not limited to: know-how; product definitions
and designs; research and development, engineering, manufacturing, process,
test, quality control, procurement, and service specifications, procedures,
standards, and reports; blueprints; drawings; materials specifications,
procedures, standards, and lists; catalogs; technical information and data
relating to marketing and sales activity; and formulae. Technology does
not
include any Software.
“Terminated
at Closing Related Party Transactions”
has
the
meaning set forth in Section 3.6.
“Third-Party
Claims”
means
a
claim made by an Indemnified Party against an Indemnifying Party in connection
with any third party litigation, arbitration, action, suit, proceeding,
claim or
demand made upon the Indemnified Party for which the Indemnified Party
may seek
indemnification from the Indemnifying Party under the terms of this Agreement.
“Trademarks”
means
all United States and foreign trademark and service mark registrations
and
applications therefor.
“Trade
Secrets”
means
information in any form that is considered to be proprietary information
by the
owner, is maintained on a confidential or secret basis by the owner, and
is not
generally known to other parties.
“Transaction
Documents”
has
the
meaning set forth in Section 3.2.
“Uncapped
Non-Threshold Indemnifications”
has
the
meaning set forth in Section 9.2(f).
“Updated
Disclosure Schedules”
has
the
meaning set forth in Section 5.19.
“U.S.
Government”
has
the
meaning set forth in Section 3.17(a).
“VEBA”
has
the
meaning set forth in Section 3.28(d).
“Vortech”
refers
to Vortech, LLC, a Maryland limited liability company.
“VTC”
refers
to VTC, L.L.C., a Maryland limited liability company.
“VTC
Lease Appraisal”
has
the
meaning set forth in Section 5.18.
“VTC
Lease Commitment”
has
the
meaning set forth in Section 5.18.
“Welfare
Plan”
has
the
meaning set forth in Section 3.28(a).
A-24
1.2 Rules
of Construction.
Unless
the context otherwise requires:
(a) A
capitalized term has the meaning assigned to it;
(b) An
accounting term not otherwise defined has the meaning assigned to it in
accordance with GAAP;
(c) References
in the singular or to “him,” “her,” “it,” “itself,” or other like references,
and references in the plural or the feminine or masculine reference, as
the case
may be, shall also, when the context so requires, be deemed to include
the
plural or singular, or the masculine or feminine reference, as the case
may
be;
(d) References
to Articles, Sections and Exhibits shall refer to articles, sections and
exhibits of this Agreement, unless otherwise specified;
(e) The
headings in this Agreement are for convenience and identification only
and are
not intended to describe, interpret, define or limit the scope, extent,
or
intent of this Agreement or any provision thereof;
(f) This
Agreement shall be construed without regard to any presumption or other
rule
requiring construction against the party that drafted and caused this Agreement
to be drafted;
(g) References
to “best efforts” in this Agreement shall require commercially reasonable best
efforts, and not commercially unreasonable expenditures of money, time
or other
resources;
and
(h) A
monetary figure given in United States dollars shall be deemed to refer
to the
equivalent amount of foreign currency when used in a context that refers
to or
includes operations conducted principally outside of the United
States.
ARTICLE
II
Closing;
Purchase Price; Adjustments; Escrow
2.1 Closing.
The
closing (the “Closing”)
of the
Contemplated Transactions shall take place at the offices of Squire, Sanders
& Dempsey L.L.P., 8000 Towers Crescent Drive, Tysons Corner, Virginia
22182-2700, at 10:00 A.M. local time on the third (3rd)
Business Day after the conditions and deliveries referred to in ARTICLES
VI, VII
and VIII have been satisfied, or at such other time, date and place that
shall
be mutually agreed upon by the parties hereto (the “Closing
Date”).
At
the Closing, each of the Members shall sell, transfer, convey or assign
and
deliver to FAAC, and FAAC shall purchase, acquire and accept from the Members,
the Membership Interests, free and clear of any and all Liens or rights
of any
third party (and each of the Members shall thereafter cease to have any
rights
or interests as a member of either of the Companies other than any rights
granted to the Members pursuant to the terms of this Agreement and the
other
Transaction Documents) and FAAC shall (a) deliver to the Members’
Representative on behalf of the Members the Purchase Consideration pursuant
to
Section 2.2 and (b) grant to certain of the Companies’ employees the
Employee Stock Grants pursuant to Section 2.2 below.
A-25
2.2 Purchase
Consideration; Employee Payments and Stock Grants.
As
payment in full for all of the Membership Interests, FAAC shall pay to the
Members’ Representative at Closing the “Purchase
Consideration”
that
shall consist of (a) the “Cash Consideration”; (b) the “Convertible Promissory
Note”; (c) the “Assumed Debt”; and (d) the “Stock Consideration.” Rosato and
Gallagher hereby agree that it is their intention that notwithstanding
that each
of them owns fifty percent (50%) of the Membership Interests the wish to
allocate the Purchase Consideration such that the Purchase Consideration
is
allocated as follows.
|
Cash*
|
Stock**
|
|||||||||
|
General
Indemnity Escrow
|
Balance
Sheet
|
|||||||||
|
Rosato
|
$
|
4,400,000
|
1,492,490
|
43,956
|
||||||
|
Gallagher
|
$
|
6,600,000
|
994,994
|
29,304
|
||||||
|
$
|
11,000,000
|
2,487,484
|
73,260
|
|||||||
* Subject
to adjustment pursuant to Section 2.4.
** Subject
to adjustment for Assumed Debt.
(a) Cash
Consideration.
At the
Closing cash in the amount of the Cash Consideration shall be paid by wire
transfer of immediately available funds to an account or accounts designated
by
the Members’ Representative. The Members’ Representative shall be responsible
for directing the distribution of the Cash Consideration to the Members
(60% to
Gallagher and 40% to Rosato) and FAAC shall be entitled to fully rely on
such
directions.
(b) Convertible
Promissory Note.
Ten
Million Dollars ($10,000,000) of the Purchase Consideration shall be evidenced
by and payable under the terms of two (2) Convertible Notes, each in the
amount of Five Million Dollars ($5,000,000) one payable to Rosato and the
other
to Gallagher in the form attached hereto as Exhibit B
(each a
“Convertible
Promissory Note”
and
collectively the “Convertible Promissory Notes”).
(c) Assumed
Debt.
Up to
One Hundred Sixty One Thousand Dollars ($161,000) of the Purchase Consideration
may be paid and evidenced by long term debt of the Companies that (i) is
assumable by FAAC and (ii) FAAC agrees, in writing, to assume on or before
the Closing Date (the “Assumed
Debt”).
(d) Stock
Consideration.
Subject
to Sections 2.3 and 5.8 a portion of the Purchase Consideration equal to
Seventeen Million Five Hundred Thousand Dollars ($17,500,000) and which
the
parties hereto agree less
(1) the
amount of the Assumed Debt and (2) the value (the “Stock
Grant Shares Value”)
of
Stock Grant Shares, as determined pursuant to Section 2.2(d)(i) below (the
“Stock
Consideration Amount”)
shall
be paid in the form of FAAC’s common stock (“Stock
Consideration”).
A-26
(i) Stock
Grant Shares Value.
The
Stock Grant Shares Value shall be determined by multiplying the number
of Stock
Grant Shares (576,559 shares) by the Average Share Value.
(ii) FAAC
Shares Constituting Stock Consideration.
The
number of FAAC shares of common stock to be issued as Stock Consideration
shall
be determined on the Closing Date by dividing the Stock Consideration Amount
by
the Average Share Value.
(iii) Delivery
of Stock Certificates.
At the
Closing stock certificates evidencing the Stock Consideration shall be
delivered
by FAAC as follows: (A) pursuant to Section 2.3 stock certificates for
(1) the Balance Sheet Escrow Shares and (2) the General Indemnity Escrow
Shares
shall be delivered to the Escrow Agent; and (B) pursuant to Section 5.8(c)
below, 33,913 shares of FAAC common stock otherwise deliverable to Rosato
and
33,912 shares of FAAC common stock otherwise deliverable to Gallagher shall
be
delivered by FAAC, on Rosato’s and Gallagher’s behalf, to Evergreen (or other
recipients identified by Evergreen).
(iv) Acquisition
Agreement; Registration Rights Agreement and Lock Up Agreement.
At the
Closing, each Member and FAAC will execute and deliver (A) an Acquisition
Agreement in the form attached hereto as Exhibit C
(the
“Acquisition
Agreement”);
(B) a Registration Rights Agreement in the form attached hereto as
Exhibit D
(the
“Registration
Rights Agreement”);
and
(C) a Lock Up Agreement in the form attached hereto as Exhibit
E
(the
“Lock
Up Agreement”)
under
the terms of which all of the Stock Consideration is subject to various
restrictions described therein until the Lock Up Termination Date).
(e) Fractional
and Restricted Shares.
(i) Fractional
Shares.
If the
calculation of the number of shares of FAAC common stock to be received
as Stock
Consideration pursuant to Section 2.2(d) would result in the issuance of
fractional shares, then the number of shares of FAAC common stock that
the
Members would otherwise receive as Stock Consideration shall be rounded
down to
the nearest whole number of shares (which shall be the Stock Consideration
payable to the Member(s) and the Member(s) shall receive as cash the amount
attributable to the fractional interest.
(ii) Restricted
Shares.
The
shares of FAAC’s common stock to be issued pursuant to this Agreement as Stock
Consideration (A) have not been, and will not be at the time of issuance,
registered under the Securities Act, and will be issued in a transaction
that is
exempt from the registration requirements of the Securities Act and (B)
will be
“restricted securities” under the federal securities laws and cannot be offered
or resold except pursuant to registration under the Securities Act or an
available exemption from registration. All certificates evidencing the
Stock
Consideration shall bear, in addition to any other legends required under
applicable securities laws, the following legend:
A-27
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OR
PURSUANT
TO AN AVAILABLE EXEMPTION FROM REGISTRATION.”
(f) Employees
Stock Grants.
As
consideration for executing their respective Key Employment Agreements
FAAC
agrees to grant to certain employees to be designated by Rosato (the
“Participating
Employees”)
restricted stock grants for 576,559 FAAC Common Shares (collectively the
“Stock
Grant Shares”)
in
such amounts as determined by Rosato (collectively the “Employee
Stock Grants”
and
each an “Employee
Stock Grant”).
The
Employee Stock Grants shall be made pursuant to a Stock Grant Plan and
Stock
Grant Agreement substantially in the form attached hereto as Exhibits F
and G
respectively (collectively the “Stock
Grant Documents”)
and
under the terms of which the Stock Grant Shares granted thereunder are
subject
to forfeiture to FAAC for various reasons prior to the Lock Up Termination
Date.
If any Stock Grant Shares issued to Employee Participants under the Employee
Stock Grants are forfeited to FAAC on or before the third (3rd)
anniversary of the Closing Date (collectively the “Forfeited
Shares”);
FAAC
shall cause shares of FAAC stock equal in number to the Forfeited Shares
to be
issued equally to Rosato and Gallagher within thirty (30) days after the
effective date of the forfeiture as additional consideration for their
respective Membership Interests. In connection with the issuance to Rosato
or
Gallagher prior to the end of the Lock Up Period, of any FAAC common shares
pursuant to the previous sentence, Rosato and Gallagher will be required
to
execute and deliver a Lock Up Agreement for such shares.
2.3 Escrows.
At the
Closing, FAAC shall deposit with the Escrow Agent the following (collectively
the “Escrow
Deposits”):
(1)
73,260 shares of FAAC common stock having an approximate value (as determined
by
the Average Share Value) equal to Four Hundred Thousand Dollars ($400,000
(collectively the “Balance
Sheet Escrow Shares”))
to be
held by the Escrow Agent in an escrow account (the “Balance
Sheet Escrow Account”)
pursuant to the terms of an escrow agreement substantially in the form
of
Exhibit
H-1
(the
“Balance
Sheet Escrow Agreement”);
and
(2) 2,487,484 shares of FAAC stock having an approximate value (as
determined by the Average Share Value) equal to [Thirteen Million Five
Hundred
Eighty One Thousand Six Hundred Sixty Two ($13,581,662] collectively the
“General
Indemnity Escrow Shares”)) to
be
held by the Escrow Agent in an escrow account (the “General
Indemnity Escrow Account”)
pursuant to the terms of an escrow agreement substantially in the form
of
Exhibit
H-2
(the
“General
Indemnity Escrow Agreement”
and
together with the Balance Sheet Escrow Agreement the “Escrow
Agreements”).
The
escrow accounts set up by the Escrow Agent with respect to each of the
Escrow
Agreements are hereinafter individually referred to as an “Escrow
Account”
and
collectively as the “Escrow
Accounts.”
The
aggregate amount held in the Escrow Accounts by the Escrow Agent at any
time and
from time to time, together with any interest or appreciation thereon,
shall be
referred to as the “Escrowed
Property”
with
that portion of the Escrowed Funds held from time to time in the Balance
Sheet
Escrow Account being hereinafter sometimes referred to as the “Balance
Sheet Escrow Property”
and
that portion of the Escrowed Property held from time to time in the General
Indemnity Escrow Account being hereinafter sometimes referred to as the
“General
Indemnity Escrow Property;”
A-28
(A) The
Balance Sheet Escrow Property shall be released and delivered to FAAC or
the
Members’ Representative, as applicable, pursuant to Section 2.4(e).
(B) The
General Indemnity Escrow Property shall be released and delivered to FAAC
or the
Members’ Representative, as applicable, pursuant to Section 9.3.
2.4 Cash
Consideration and Net Working Capital Adjustments.
(a) Cash
Consideration.
The
“Cash
Consideration”
shall
be an amount equal to Eleven Million Dollars ($11,000,000) (the “Estimated
Closing Cash Purchase Price”)
as
adjusted upward or downward pursuant to Sections 2.4(b) and (c)
below.
(b) Estimated
Closing Balance Sheet.
Not
less than two (2) Business Days prior to the Closing Date, the Members
shall
deliver to FAAC an estimated, unaudited consolidated balance sheet (the
“Estimated
Closing Balance Sheet”)
of the
Companies as of the Closing Date, together with all supporting documentation.
The Estimated Closing Balance Sheet shall be prepared by Members, in accordance
with GAAP and in a manner consistent with the December 2005 Balance Sheet
except
that the Estimated Closing Balance Sheet shall include a calculation of
the
“Adjusted Closing Net Working Capital” (hereinafter defined). For purposes of
this Agreement, the terms “Adjusted Closing Net Working Capital” and “Closing
Net Working Capital” shall have the following meanings.
(i) The
term
“Adjusted
Closing Net Working Capital”
shall
mean the “Closing Net Working Capital” (as hereinafter defined and as adjusted
pursuant to Section 2.4(d) below) of the Companies as shown on the Estimated
Closing Balance Sheet as reduced to reflect: (A) the payment in full of
any and
all outstanding Indebtedness of the Companies (other than the Assumed Debt),
repaid at or prior to Closing pursuant to Section 5.7; (B) the payment
in full
of any and all Members’ Transaction Costs paid, or repaid by FAAC after the
Closing Date or incurred by the Companies and unreimbursed by the Members
at or
prior to the Closing pursuant to Section 5.7; (C) the payment of all sums
due at Closing with respect to the Phantom Membership Interest Plan; (D)
any
portion of the Bonus Pool for which adequate reserves are not otherwise
maintained; or (E) payments made to employees in connection with the
Contemplated Transactions (other than normal compensation or payments with
respect to the Phantom Membership Interest Plan).
(ii) The
term
“Closing
Net Working Capital”
shall
mean the amount as of the Closing Date and as shown by the Closing Balance
Sheet
by which the Companies’ current assets (including without limitation unbilled
receivables, security deposits and prepaid expenses and excluding all assets
which, in the normal course of business, will not be converted to cash
in one
year and all intangible assets) exceed their current liabilities (excluding
all
liabilities, which in the normal course of business, will not be due in
one year
or less), as such terms are defined under GAAP consistently
applied.
A-29
(c) Adjustments
to Estimated Closing Cash Purchase Price.
The
Estimated Closing Cash Purchase Price will be adjusted (i) downwards on
a
dollar-for-dollar basis to the extent that the Adjusted Closing Net Working
Capital, as shown on the Estimated Closing Balance Sheet, is below the
Base Net
Working Capital Amount and (ii) upwards on a dollar-for-dollar basis to
the
extent that the Adjusted Closing Net Working Capital is above the Base
Net
Working Capital Amount.
(d) Closing
Balance Sheet and Adjusted Closing Net Working Capital.
Promptly following the Closing, FAAC will cause Grant Thornton, LLP (or
an
equivalent firm selected by FAAC) to
review
the Estimated Closing Balance Sheet, including the Adjusted Closing Net
Working
Capital, the Closing Net Working Capital as reflected thereon. Based on
such
review, FAAC will deliver a proposed Closing Balance Sheet, prepared in
a manner
consistent with Section 2.4(b) above together with all related work papers,
to
the Members’ Representative within sixty (60) days after the later of (i) the
Closing Date, or (ii) the date of receipt by FAAC of all information sufficient
for FAAC to complete its review of all aspects of the Estimated Closing
Balance
Sheet, but in no event more than One Hundred Fifty (150) days after the
Closing
Date (the “Proposed
Closing Balance Sheet”).
If
within thirty (30) days
following delivery of the Proposed Closing Balance Sheet, the Members’
Representative has not given FAAC notice of his objection to the Proposed
Closing Balance Sheet (which notice must contain a statement in reasonable
detail of the basis of any such objection), then such Proposed Closing
Balance
Sheet shall constitute the “Closing
Balance Sheet,”
and
the Adjusted Closing Net Working Capital and Closing Net Working Capital
amounts
included therein shall constitute the “Adjusted Closing Net Working Capital” and
“Closing Net Working Capital.” If the Members’ Representative gives notice of an
objection, the parties shall use their respective best efforts to resolve
any
dispute by negotiation. If such dispute cannot be settled by negotiation
within
thirty (30) days
after receipt by FAAC of the Members’ Representative’s notice, the dispute shall
be resolved in accordance with the Financial Issue Resolution Process set
forth
in Section 2.5.
(e) Final
Adjustment to the Estimated Closing Cash Purchase Price.
If the
Adjusted Closing Net Working Capital is such that Sections 2.4(d) and/or
2.5 do
not require an adjustment to the Estimated Closing Cash Purchase Price,
then the
Escrow Agent shall disburse to the Members’ Representative the Balance Sheet
Escrow within five (5) days after the finalization of the Closing Balance
Sheet
pursuant to Sections 2.4(d) and/or 2.5. If the Adjusted Closing Net Working
Capital is such that Sections 2.4(d) or 2.5 require an adjustment to the
Estimated Closing Cash Purchase Price, any amount due to the Members by
FAAC in
excess of the Balance Sheet Escrow shall be paid by FAAC to the Members’
Representative, and any amount due to FAAC from the Members shall be satisfied
from the Balance Sheet Escrow Property with the FAAC common stock then
in the
Balance Sheet Escrow valued at the Average Share Value. If the amount due
FAAC
is in excess of the Balance Sheet Escrow Property, then such excess shall
be
paid to FAAC by the Members within five (5) days after the finalization
of the
Closing Balance Sheet pursuant to Sections 2.4(d) and/or 2.5. In the event
that
the Members for any reason fails to make the payment contemplated in the
previous sentence, then FAAC may bring an indemnification claim under ARTICLE
IX
and the Members shall be jointly and severally liable for that payment.
Any
earnings on the Balance Sheet Escrow Property, net of escrow expenses and
taxes,
shall be paid, pro rata, to the parties receiving distributions from the
Balance
Sheet Escrow Account. All sums payable by the Escrow Agent to the Members’
Representative under this Section 2.4(e) shall be paid by the Escrow Agent
to an
account or accounts designated by the Members’ Representative. The Members’
Representative shall be responsible for directing the distribution of the
Balance Sheet Escrow (60% to Gallagher and 40% to Rosato) and the Escrow
Agent
shall be entitled to fully rely on such directions.
A-30
2.5 Financial
Issue Resolution Process.
Disputes
between FAAC and the Members’ Representative, that cannot be resolved by
negotiation within thirty (30) days after receipt by FAAC of the Members’
Representative’s notice in accordance with Section 2.4(d) shall be referred no
later than such 30th day for decision to a nationally recognized independent
public accounting firm mutually selected by the Members’ Representative and FAAC
(the “Auditor”)
who
shall act as arbitrator and determine, based solely on presentations by
the
Members’ Representative and FAAC and only with respect to the remaining
differences so submitted. If such accounting firm cannot be identified
within
ten (10) business days after the identification of the need for dispute
resolution, the dispute shall be resolved in accordance with Section 11.11.
The
Auditor shall deliver its written determination to FAAC and the Members’
Representative no later than the 30th day after the remaining differences
underlying the dispute are referred to the Auditor, or such longer period
of
time as the Auditor determines is necessary. The Auditor’s determination shall
be conclusive and binding upon the parties. The fees and disbursements
of the
Auditor shall be allocated equally between FAAC and the Members’ Representative.
FAAC and the Members shall make readily available to the Auditor all relevant
information, books and records and any work papers relating to the dispute
and
all other items reasonably requested by the Auditor. In no event may the
Auditor’s resolution of any difference be for an amount that is outside the
range of FAAC’s and the Members’ Representative’s disagreement.
2.6 Members’
Representative.
(a) Thomas
P.
Rosato is hereby appointed as the Members’ true and lawful representative,
proxy, agent and attorney-in-fact (the “Members’
Representative”)
for a
term that shall be continuing and indefinite and without a termination
date
except as otherwise provided herein, to act for and on behalf of the Members
in
connection with or relating to the Transaction Documents and the Contemplated
Transactions, including, without limitation, to give and receive notices
and
communications, to receive and accept service of legal process in connection
with any proceeding arising under the Transaction Documents or in connection
with the Contemplated Transactions, receive and deliver amounts comprising
the
Purchase Consideration, to authorize delivery of stock from each of the
Escrow
Accounts, to object to or accept any claims against or on behalf of the
Members
pursuant to ARTICLE IX, to agree to, negotiate, enter into settlements
and
compromises of, and demand arbitration and comply with orders of courts
and
awards of arbitrators with respect to such amounts or claims, and to take
all
actions necessary or appropriate in the sole opinion of the Members’
Representative for the accomplishment of the foregoing. Such agency may
be
changed at any time and from time to time by the action of Members holding
more
than fifty percent (50%) of the issued and outstanding Membership Interests
just
prior to the Closing, and shall become effective upon not less than thirty
(30)
days prior written notice to FAAC. Any change in the Members’ Representative
shall become effective only upon delivery of written notice of such change
to
FAAC. The Members’ Representative shall not receive compensation for his or her
services. Notices, deliveries or communications to or from the Members’
Representative by or to any of the parties to the Transaction Documents
shall
constitute notices, deliveries or communications to or from the
Members.
A-31
(b) The
Members’ Representative shall not be liable for any act done or omitted
hereunder in his capacity as Members’ Representative in the absence of gross
negligence or willful misconduct on his or her part. The Members shall
jointly
and severally indemnify the Members’ Representative and hold the Members’
Representative harmless from and against any and all damages, actions,
proceedings, demands, liabilities, losses, taxes,
fines,
penalties, costs, claims and expenses (including, without limitation, reasonable
fees of counsel) of any kind or nature whatsoever (whether or not arising
out of
third-party claims and including all amounts paid in investigation, defense
or
settlement of the foregoing) (“Damages”)
that
may be sustained or suffered by the Members’ Representative in connection with
the administration of its duties hereunder, except where such Damages arise
from
or are the result of the Members’ Representative’s gross negligence or willful
misconduct.
(c) Any
decision, act, consent or instruction taken or given by the Members’
Representative pursuant to this Agreement shall be and constitute a decision,
act, consent or instruction of the Members and shall be final, binding
and
conclusive upon the Members. The Escrow Agent and FAAC may rely upon any
such
decision, act, consent or instruction of the Members’ Representative as being
the decision, act, consent or instruction of the Members and shall have
no duty
to inquire as to the acts and omissions of the Members’ Representative. The
Escrow Agent and FAAC are hereby relieved from any liability to any Person
for
any acts done by them in accordance with such decision, act, consent or
instruction of the Members’ Representative.
(d) Notices
given to the Members’ Representative in accordance with Section 11.2 shall
constitute notice to the Members for all purposes under this
Agreement.
(e) This
Section 2.6 shall survive the termination or expiration of the Agreement
or any
one or more of the Escrow Agreements.
ARTICLE
III
Representations
and Warranties of the Members and the Companies
Except
as
set forth in the Disclosure Schedules, the Members and the Companies jointly
and
severally represent and warrant to FAAC that each of the statements contained
in
this ARTICLE III is true and correct as of the date of this Agreement and
will
be true and correct as of the Closing Date as though made on the Closing
Date:
3.1 Organization
and Power.
(a) Members.
Each of
the Members has the full power and authority to execute, deliver and perform
this Agreement and the other Transaction Documents to which it is a party
and to
consummate the Contemplated Transactions.
(b) Companies.
Each of
the Companies (i) is a limited liability company duly organized and validly
existing and in good standing under the laws of the State of Maryland,
(ii) has all requisite corporate power and authority to own or lease and to
operate its properties and carry out the businesses in which it is engaged,
and
(iii) is duly qualified or licensed to do business as a foreign corporation
in good standing in every jurisdiction where its ownership of property,
or the
conduct of its business, requires such qualification, other than jurisdictions
in which the failure to so qualify, individually or in the aggregate, would
not
have a material adverse effect on it. Schedule 3.1(b) of the Disclosure
Schedules lists each of the jurisdictions in which each of the Companies
is
qualified or licensed to do business as a foreign limited liability company.
Each of the Companies is in good standing in each jurisdiction listed on
Schedule 3.1(b) of the Disclosure Schedules.
A-32
(c) No
Subsidiaries.
Neither
of the Companies has any Subsidiaries.
3.2 Authorization
and Enforceability.
(a) This
Agreement has been, and each of the other documents, agreements and instruments
to be executed and delivered at Closing (collectively with this Agreement,
the
“Transaction
Documents”)
will
be,
duly authorized, executed and delivered by the Members and the Companies
and
constitutes, or in the case of each Transaction Document other than this
Agreement, as of the Closing Date will constitute, a valid and legally
binding
agreement of the Members and the Companies enforceable in accordance with
its
terms, subject to bankruptcy, insolvency, reorganization and other laws
of
general applicability relating to or affecting creditors’ rights and to general
equitable principles.
3.3 No
Violation.
Neither
the execution, delivery or performance of this Agreement or any of the
other
Transaction Documents by the Companies and the Members, nor the consummation
of
the Contemplated Transactions will:
(a) conflict
with or violate any provision of the certificate or articles of organization
or
operating agreement of either of the Companies;
(b) result
in
the creation of, or require the creation of, any Lien upon any
(i) Membership Interests or (ii) property of either of the
Companies;
(c) result
in
(i) the termination, cancellation, modification, amendment, violation,
or
renegotiation of any contract, agreement, indenture, instrument, or commitment,
or (ii) the acceleration or forfeiture of any term of payment;
(d) give
any
Person the right to (i) terminate, cancel, modify, amend, vary, or
renegotiate any contract, agreement, indenture, instrument, or commitment,
or
(ii) to accelerate or forfeit any term of payment
either
of which would have a Material Adverse Effect; or
(e) violate
any Law applicable to the Companies or by which their properties are bound
or
affected which would have a Material Adverse Effect.
3.4 Consents.
Except
as
set forth on Schedule 3.4(a) of the Disclosure Schedules, neither the execution,
delivery or performance of this Agreement by the Companies and the Members,
nor
the consummation of the Contemplated Transactions or compliance with the
terms
of the Transaction Documents, will require (a) the consent or approval
under any
agreement or instrument or (b) the Members or the Companies to obtain the
approval or consent of, or make any declaration, filing (other than
administrative filings with Taxing Authorities, foreign companies registries
and
the like) or registration with, any Governmental Authority and all such
consents
or approvals have been obtained or waived.
A-33
3.5 Financial
Statements.
(a) In
General.
The
Audited Financial Statements were prepared in accordance with GAAP and
the
Interim Financial Statements were and the Estimated Closing Balance Sheet
will
be internally prepared by the Companies in a manner consistent with past
practices for such internally prepared unaudited financial statements.
Throughout the periods involved, the Financial Statements fairly and accurately
present the consolidated financial position of the Companies, as of the
dates
thereof, and the consolidated statements of operations, changes in Members’
equity and cash flows for the periods then ended.
(b) Financial
Books and Records.
The
financial books and records of the Companies have been maintained in accordance
with sound business practices, including an adequate system of internal
control,
and fairly and accurately reflect, in accordance with applicable Law and
GAAP,
and on a basis consistent with past periods and throughout the periods
involved,
(i) the financial position of the Companies and (ii) all transactions of
the
Companies. Neither of the Companies has received any advice or notification
from
their respective independent certified public accountants that they
have used
any
improper accounting practice that would have the effect of not reflecting
or
incorrectly reflecting in the books and records of the
Companies any properties, assets, liabilities, revenues, or
expenses.
(c) No
Undisclosed Liabilities; Etc.
Except
as set forth on Schedule 3.5(c) of the Disclosure Schedules,
neither of
the
Companies has
any
liabilities or obligations of any nature (whether known or unknown and
whether
absolute, accrued, contingent, or otherwise), except for amounts of liabilities
or obligations reflected or reserved against in the Financial
Statements.
(d) Accounts
Receivable.
All
receivables (including intercompany and unbilled receivables) reflected
in the
Financial Statements or recorded on the books of each of the Companies
resulted
from the ordinary course of business, have been properly recorded in the
ordinary course of business and subject to the reserves reflected in the
Financial Statements, which reserves are adequate and determined in accordance
with GAAP applied on a basis consistent with prior periods and throughout
the
periods involved, and are good and collectible (subject to the reserves
reflected in the Financial Statements) in full without any discount, setoff
or
valid counterclaim (net of recovery from vendors or subcontractors), in
amounts
equal to not less than the aggregate face amounts thereof.
(e) No
Letters of Credit or Guarantees.
Except
as reflected in the Financial Statements or as set forth on Schedule 3.5(e)
of
the Disclosure Schedules, none of the Companies (i) has any letters of
credit outstanding as to which the Companies have any actual or contingent
reimbursement obligations; (ii) is a party to or bound, either absolutely
or on
a contingent basis, by any agreement of guarantee, indemnification or any
similar commitment with respect to the liabilities or obligations of any
other
Person (whether accrued, absolute, or contingent); or (iii) is a party to
any swap, hedge, derivative, or similar instrument.
A-34
(f) Contingent
or Deferred Acquisition Expenses or Payments.
Except
as otherwise disclosed on Schedule 3.5(f) of the Disclosure Schedules,
neither
of the Companies is obligated or otherwise liable for the payment of any
contingent or deferred acquisition payments relating to the direct or indirect
acquisition of any business, enterprise, or combination.
3.6 Relationships
with Affiliates.
Except
as
set forth on Schedule 3.6
of the
Disclosure Schedules, no Member or any Affiliate of any Member or the Companies
has, or has had, any interest in any property (real, personal, or mixed
and
whether tangible or intangible), used in or pertaining to the business
of the
Companies. No Member or any Affiliate of any Member, or the Companies is,
or has
owned (of record or as a beneficial owner) an equity interest or any other
financial or a profit interest in, a Person that has (a) had business
dealings or a material financial interest in any transaction with the Companies
or (b) engaged in competition with the Companies with respect to any line
of the products or services of the
Companies in
any
market presently served by the
Companies. Except as set forth on Schedule 3.6
of the
Disclosure Schedules, no Member or any Affiliate of any Member, or Company
is a
party to any contract or agreement with any of the Companies.
The
various contracts, agreements and relationships shown on Schedule 3.6 of
the
Disclosure Schedules (a) are hereinafter collectively referred to as the
“Related
Party Transactions”
and
individually as a “Related
Party Transaction”
and
(b)
as shown on Schedule 3.6 of the Disclosure Schedules are comprised of (i)
Related Party Transactions that are to be terminated at or before Closing
(collectively the “Terminated
at Closing Related Party Transactions”)
and
(ii) Related Party Transactions that are to continue after the Closing
(the
“Continuing
Related Party Transactions”).
3.7 Indebtedness
to/from Officers, Directors, Members and Employees.
Except
as
set forth on Schedule 3.7 of the Disclosure Schedules, neither of the Companies
is indebted, directly or indirectly, to any Person who immediately prior
to the
Closing was a Member, officer or director of a Company in any amount whatsoever,
other than for salaries for services rendered or reimbursable business
expenses.
No Member, officer, director, or employee is indebted to either of the
Companies
except for advances made to employees of the Companies in the ordinary
course of
business to meet reimbursable business expenses anticipated to be incurred
by
such obligor.
3.8 No
Adverse Change.
Since
December 31, 2005, there has not been any change in the businesses, operations,
properties or condition, financial or otherwise of the Companies that has
had a
Material Adverse Effect, nor has any event, condition or contingency occurred
that is reasonably likely to result in such an adverse change.
A-35
3.9 Conduct
of the Business.
(a) Cooperative
Business Arrangements.
Except
as set forth on Schedule 3.9(a) of the Disclosure Schedules none of the
business
of the Companies has been conducted through any joint venture, teaming
agreement
or relationship, partnership or other entity.
(b) Letters
of Intent, Non-Competition Agreements and Non-Disclosure
Agreements.
Except
as set forth in Schedule 3.9(b) of the Disclosure Schedules, neither of
the
Companies is a party to any letters of intent, memoranda of understanding,
non-competition arrangements, non-disclosure agreements or confidentiality
agreements that remain in effect.
3.10 Capital
Structure; Equity Interests.
(a) Capital
Structure.
The
capitalization and record owners of all of the Equity Interests of the
Companies
are as set forth on Schedule 3.10(a) of the Disclosure Schedules and the
Membership Interests of the Members as shown on Schedule 3.10(a) of the
Disclosure Schedules constitute the only issued and outstanding Equity
Interests
in the Companies and neither of the Companies (i) has any outstanding securities
convertible into or exchangeable or exercisable for any Equity Interests
or (ii)
has outstanding any rights to subscribe for or to purchase, or any agreements
providing for the issuance (contingent or otherwise), of, or any calls
against,
commitments by or claims against it of any character relating to, any shares
of
its Equity Interests or any securities convertible into or exchangeable
or
exercisable for any shares of its Equity Interests. The capitalization
and
record owners of all the Equity Interests as shown on Schedules 3.10(a)
of the
Disclosure Schedules accurately list the names of each of the Members,
their
principal addresses, and the number of Membership Interests owned.
(b) All
Equity Interests in the Companies previously issued and now cancelled were
duly
authorized and issued in compliance with the applicable Maryland law, the
Securities Act of 1933, as amended, and any applicable state “Blue Sky” laws or
exemptions therefrom. All outstanding Membership Interests are duly authorized
have been validly issued, and owned beneficially and of record by the Members,
free and clear of any Lien, and were issued in compliance with the Securities
Act of 1933, as amended, and any applicable state “Blue Sky” laws or exemptions
therefrom. None of the Members has granted any proxy, or entered into any
voting
trust, voting agreement or similar arrangement, with respect to his or
her
Membership Interests.
3.11 Title
to Membership Interests.
The
Members own the Membership Interests of record and beneficially in the
amounts
set forth on Schedule 3.10(a), free and clear of any Liens, and upon completion
of the Closing FAAC will own all of the issued and outstanding Membership
Interests of the Company free and clear of any Liens.
A-36
3.12 Articles,
Operating Agreements and Records.
True
and
complete copies of the Articles of Organization and Operating Agreements,
as
amended through the date hereof, minute books and membership interest record
books of the Companies (i) have been provided or made available to FAAC
prior to
the execution of this Agreement, and (ii) are complete and correct in all
material respects. Such minute books contain a true and complete record
of all
actions taken at all meetings and by all written consents in lieu of meetings
of
the directors, member and committees of the boards of directors of the
Companies
from their respective dates of incorporation through the date hereof. Neither
of
the Companies is in violation of any provisions of its respective certificate
of
organization or operating agreement.
3.13 Assets
- In General.
Except
as
set forth on Schedule 3.13
of the
Disclosure Schedules, the assets and rights of the Companies include
(a) all of the assets and rights of the Companies that were used in the
conduct of their businesses as of December 31, 2005, subject to such changes
as
have occurred in the ordinary course of business since December 31, 2005,
and
(b) all assets reflected in the December 2005 Financial Statements, subject
to such changes as have occurred in the ordinary course of business since
December 31, 2005. Except as set forth on Schedule 3.13
of the
Disclosure Schedules, each of the Companies, has good and marketable title
to
all of their respective assets, free and clear of any Lien. Except as set
forth
on Schedule 3.13
of the
Disclosure Schedules, all assets necessary for the conduct of the business
of
the Companies in accordance with past practice are (a) in good operating
condition and repair, ordinary wear and tear excepted, (b) not in need of
maintenance or repair, except for ordinary routine maintenance or repairs
that
are not material in nature or cost, and (c) adequate and sufficient for the
continuing conduct of the businesses of the Companies as conducted prior
to the
date hereof.
3.14 Real
Property Interests.
Except
as
set forth on Schedule 3.14
of the
Disclosure Schedules, neither of
the
Companies now
owns,
or has ever owned, any real property. Schedule 3.14
of the
Disclosure Schedules sets forth a list and summary description of all leases,
subleases, or other occupancies used by the
Companies or to which any of them is a party (the “Real
Property Interests”).
Except as set forth on Schedule 3.14
of the
Disclosure Schedules, each of the Real Property Interests listed and described
on Schedule 3.14
of the
Disclosure Schedules is in full force and effect, and there is no default
by either
of
the Companies under any such Real Property Interests.
3.15 Personal
Property.
(a) Set
forth
on Schedule 3.15(a)
of
the Disclosure Schedules is a list of all material equipment, machinery,
motor
vehicles, and other tangible personal property owned or leased by the Companies
(the “Personal
Property”).
Each
of the Companies has good title to all of their respective Personal Property,
free and clear of any Lien.
A-37
(b) Schedule
3.15(b) of the Disclosure Schedules is a true and correct list of all of
the
Uniform Commercial Code Financing Statements filed and in force in the
indicated
jurisdictions with respect to the Companies (the “Financing
Statements”).
Except for those Financing Statements indicated on Schedule 3.15(b) that
are
with respect to Indebtedness that shall be repaid at Closing (and are to
be
terminated upon the repayment of that Indebtedness) the Financing Statements
relate only to leased property. The only Financing Statements in force
with
respect to the Companies relate to leased property.
3.16 Intellectual
Property Rights.
(a) Schedule
3.16(a) of the Disclosure Schedules includes a true and complete list of
all
Commercial Software used by or in connection with the businesses of each
of the
Companies. Schedule 3.16(a) of the Disclosure Schedules also includes a
true and
complete list of (i) all Copyrights, Patents and Trademarks of the Companies
used by or in connection with the businesses of each of the Companies and
(ii)
all pending applications for Copyrights, Patents and Trademarks filed by
or on
behalf of the
Companies and used by or in connection with the businesses of the
Companies as presently conducted. None of such rights is or has been opposed
or
held unenforceable. Each of the aforesaid Intellectual Property Rights
is valid,
subsisting and enforceable. Each of the aforesaid registered or issued
Intellectual Property Rights is duly registered in the name of the applicable
Company, as appropriate.
(b) Except
as
set forth on Schedule 3.16(b) of the Disclosure Schedules, the business
of the
Companies as presently conducted does not require or use any Intellectual
Property Rights not owned by or licensed to the
Companies. The Companies are the owners or have the right to use the
Intellectual Property Rights listed on Schedule 3.16(a) of the Disclosure
Schedules without making any payment to others or granting rights to others
in
exchange therefor.
(c) Except
as
set forth on Schedule 3.16(c) of
the
Disclosure Schedules, (i) no Person (other than the
Companies) has any right to use any Intellectual Property Rights owned
by the
Companies and (ii) no member, director, officer or employee of, or
Consultant to, the
Companies has any right to use, other than in connection with the business
activities of the
Companies as presently conducted, any of the Intellectual Property or
Intellectual Property Rights.
(d) The
operation of the business of the Companies in the normal course of business
prior to the Effective Date does not infringe in any respect upon the
Intellectual Property Rights of any Person, and no Person who does not
have the
right to use the Intellectual Property Rights has claimed or asserted the
right
to use any Intellectual Property Rights or to deny the right of either
of the
Companies the right to use same. No proceeding alleging infringement of
the
Intellectual Property Rights of any Person is pending or threatened against
either of the Companies.
(e) With
respect to each Trade Secret of the Companies, the documentation relating
to
such Trade Secret is current, accurate and in sufficient detail and content
to
identify and explain it and allow its full and proper use without reliance
on
the knowledge or memory of any individual. The Companies have taken all
reasonable precautions to protect the secrecy, confidentiality, and value
of
their respective Trade Secrets. Such Trade Secrets are not part of the
public
knowledge or literature, and have not been used, divulged, or appropriated
either for the benefit of any Person (other than the Companies) or to the
detriment of the Companies.
A-38
(f) Schedule
3.16(f) of the Disclosure Schedules includes a true and complete list of
any
rights (e.g. unlimited, limited, restrictive, government purpose license
rights,
and march-in) that any Governmental Authority has in any copyrights, patents,
trademarks, Technology, or Software that the
Companies use in their respective businesses. Except as set forth in Schedule
3.16(f) of the Disclosure Schedules, neither of
the
Companies has developed any item, component, process or software as a
requirement of any Government Contract, or for which any Governmental Authority
paid some or all of the cost of development.
3.17 Scheduled
Contracts and Proposals.
(a) Scheduled
Contracts.
Schedule 3.17(a) of the Disclosure Schedules is a true and complete list
of all
“Scheduled Contracts” (as hereinafter defined) to which either of the Companies
is a party, by which it is bound, or which otherwise pertain to the businesses
of the Companies. For the purposes of this Section 3.17(a), the term
“Scheduled
Contracts”
shall
mean the following written or oral contracts, agreements, indentures,
instruments, commitments and amendments thereof with suppliers, customers,
producers, consumers, lenders of the Companies and other third parties
that are
currently in effect:
(i) loan
and
credit agreements, revolving credit agreements, security agreements, guarantees,
notes, agreements evidencing any lien, conditional sales agreements, factoring
agreements, leasing agreements, sale and leaseback and synthetic lease
agreements, or title retention agreements;
(ii) hedging
and similar agreements;
(iii) contracts
that involve the sale by the
Companies of goods, materials, supplies, or services (other than Government
Contracts) providing for payments over the life of the contract greater
than
$50,000;
(iv) agreements
relating to Intellectual Property Rights listed on Schedule 3.16(a) of
the
Disclosure Schedules;
(v) contracts,
agreements, indentures, instruments or commitments by and between the
Companies and Persons with whom the
Companies is not dealing at arm’s length;
(vi) agreements
listed on Schedule 3.9(a) of the Disclosure Schedules;
(vii) franchise,
distribution, license or consignment contracts or agreements;
(viii) sales,
agency or advertising contracts, agreements, or commitments providing for
payments over the life of the contract greater than $50,000;
A-39
(ix) leases
under which either of the Companies is the lessor or lessee other than
operating
leases that require future payments by either of the Companies of more
than
$10,000 per annum;
(x) management
or service contracts or agreements, and contracts (other than agreements
with
Consultants and agreements with independent contractors and sub-contractors)
and
commitments providing for payments over the life of the company greater
than
$50,000;
(xi) contracts
or agreements with Consultants to the extent not otherwise disclosed on
Schedule
3.26(e) of the Disclosure Schedules;
(xii) agreements
of any kind with any Affiliate of the
Companies;
(xiii) agreements
of any kind relating to the business of the
Companies to which employees of the
Companies, or entities controlled by them, are parties; and
(xiv) discount
policies and practices, if any.
(b) Status
of Scheduled Contracts.
Except
as otherwise disclosed on Schedule 3.17(b) of the Disclosure Schedules,
as of
the Effective Date, (x) each of the Scheduled Contracts is in full force
and
effect; (y) a true and complete copy of each written Scheduled Contract
(and all
amendments thereto); and (z) there are no oral modifications or amendments
to
any of the Scheduled Contracts. In addition:
(i) All
of
the Scheduled Contracts have been legally awarded and are binding on the
parties
thereto, and each of the Companies, as the case may be, is in material
compliance with all terms and conditions in such Scheduled
Contracts;
(ii) Neither
of the Companies has received any written notice of deficient performance
or
administrative deficiencies relating to any Scheduled Contract;
(iii) Neither
of the Companies has received any notice of any stop work orders, terminations,
cure notices, show cause notices or notices of default or breach under
any of
the Scheduled Contracts, nor has any such action been threatened or
asserted;
(iv) Each
Scheduled Contract was entered into in the ordinary course of business
and,
based upon assumptions that the Companies’ management believes to be reasonable
and subject to such assumptions being fulfilled;
(v) There
are
no Scheduled Contracts for the provision of goods or services by either
of the
Companies that include a liquidated damages clause or unlimited liability
by the
Companies, or liability for consequential damages;
A-40
(vi) There
are
no Scheduled Contracts for the provision of goods or services by either
of the
Companies that require the applicable Company to post a surety, performance
or
other bond or to be an account party to a letter of credit or bank
guarantee;
(vii) There
are
no written claims of any type, or requests for equitable adjustments outstanding
or, to the Knowledge of the Companies, threatened under any Scheduled Contracts
in process
and no
money presently due to either of the Companies on any Scheduled Contract
has
been withheld or set off or subject to attempts to withhold or setoff;
and
(viii) No
party
to a Scheduled Contract has notified either of the Companies that a Company
has
breached or violated any Law or any certification, representation, clause,
provision or requirement of any Scheduled Contract.
(c) Proposals.
Schedule 3.17(b) of the Disclosure Schedules sets forth a true and accurate
summary of all bids, proposals, offers, or quotations made by the
Companies that were outstanding as of the date of this Agreement (collectively
the “Proposals”),
true
and complete copies of which have been made available to FAAC. Schedule
3.17(b)
of the Disclosure Schedules identifies each Proposal by the party to whom
such
bid, proposal, or quotation was made, the subject matter of such bid, proposal,
or quotation and the proposed price.
3.18 Government
Contracting.
(a) Definitions.
The
following capitalized terms, when used in this Section 3.18, shall have
the
respective meanings set forth below:
(i) “Active”,
whether or not capitalized, when used to modify any Government Contract,
or
Government Subcontract, means that final payment has not been made on such
Government Contract, or Government Subcontract and when used to modify
any
Teaming Agreement, “active” means that such Teaming Agreement has not terminated
or expired.
(ii) "Bid"
means
any bid, proposal, offer or quotation made by either of the Companies or
by a
contractor team or joint venture, in which either of the Companies is
participating, that, if accepted, would result in the award of a Government
Contract or a Government Subcontract.
(iii) “Company
Subcontract”
means
any subcontract, basic ordering agreement, letter subcontract, purchase
order,
task order, delivery order, consulting agreement or other written agreement
issued by either of the Companies or entered into between either of the
Companies and to any Person in support of either of the Companies’ performance
of a Government Contract or Government Subcontract.
(iv) “Government
Contract”
means
any prime contract, multiple award schedule contract, basic ordering agreement,
letter contract, and otherwise to include any purchase order, task order
or
delivery order issued thereunder between either of the Companies and either
the
U.S. Government or a State Government.
A-41
(v) “Government
Subcontract”
means
any subcontract issued to either of the Companies by a Government prime
contractor, including any basic ordering agreement, letter subcontract,
and
otherwise any purchase order, task order or delivery order between one
of the
Companies and any prime contractor to either the U.S. Government or a State
Government.
(vi) “State
Government”
means
any state, territory or possession of the United States or any department
or
agency of any of the above with statewide jurisdiction and
responsibility.
(vii) “Teaming
Agreement”
has
the
same meaning as the term, “Contractor team arrangement,” as defined in Federal
Acquisition Regulation (“FAR”) 9.601.
(viii) “U.S.
Government”
means
the United States Government or any department, agency or instrumentality
thereof.
(b) Government
Contracts and Subcontracts.
Schedule 3.18(b) of the Disclosure Schedules separately lists and identifies,
in
each case as of the Effective Date:
(i) Each
active Government Contract and Government Subcontract identified by contract
number, customer and date of award to the extent such information can be
provided consistent with national security (true and complete copies of
which,
including all modifications and amendments thereto, have been provided
to FAAC);
and
(ii) Each
active Government Contract and Government Subcontract that was negotiated
(or
modification thereto was negotiated) based on cost and pricing data that
either
of the Companies certified as being current, complete and accurate pursuant
to
the Truth in Negotiations Act (10 U.S.C. § 2306a; 41 U.S.C. §
256b).
(c) Bids.
Schedule 3.18(c) of the Disclosure Schedules separately lists and identifies
as
of the Effective Date each outstanding Bid, identified by the Person to
whom
such Bid was made, the date submitted, the subject matter of such Bid,
and, to
the Knowledge of the Companies, the anticipated award date and whether
any such
Bid is dependent, in whole or in part, on the “small business” or other status
of the Companies under Applicable Law.
(d) Teaming
Agreements.
Schedule 3.18(d) of the Disclosure Schedules separately lists and identifies
each active Teaming Agreement as of the Effective Date to which either
of the
Companies is a party (true and complete copies of which, including all
modifications and amendments thereto, have been provided to FAAC).
(e) Company
Subcontracts.
(i) To
the
Knowledge of the Company, each active Company Subcontract is in full force
and
effect and is binding on the Companies, or either of them and, to the Knowledge
of the Companies, the other party thereto, except to the extent any such
failure
to be in full force and effect and binding would not result in a Material
Adverse Effect.
A-42
(ii) To
the
Knowledge of the Company, each of the Companies has substantially complied
with
all material terms and conditions of each active Company Subcontract, except
to
the extent either Company’s failure so to have complied would not result in a
Material Adverse Effect.
(iii) There
are
no outstanding claims against either of the Companies arising out of or
relating
to any active Company Subcontract, and to the Knowledge of the Companies,
there
are not facts that might give rise to or result in such a claim, except,
in
either case, for claims that would not result in a Material Adverse Effect
if
asserted against and paid by either of the Companies.
(iv) There
are
no disputes between either of the Companies and any other party arising
out of
or relating to any active Company Subcontract, and to the Knowledge of
the
Companies, there are not facts that might give rise to or result in such
a
dispute, except, in either case, for disputes that would not result in
a
Material Adverse Effect if resolved. There are no outstanding claims against
either of the Companies arising out of or relating to any active Company
Subcontract, and to the Knowledge of the Companies, there are not facts
that
might give rise to or result in such a claim, except in either case for
claims
that would not result in a Material Adverse Effect if they were asserted
against
and paid by either of the Companies against either of the
Companies.
(f) Marketing
Agreements.
Schedule 3.18(f) of the Disclosure Schedules separately lists and identifies
as
of the Effective Date each sales representation, consulting and other agreement
regarding marketing and selling the Companies’ products and services to the U.S.
Government, any State Government or any foreign government (or department,
agency or instrumentality thereof), to which either of the Companies is
(or has
been at any time since December 31, 2003) a party (true and complete copies
of
which, including all modifications and amendments thereto, have been provided
to
FAAC).
(g) Status.
Except
as set forth on Schedule 3.18(g) of the Disclosure Schedules, as of the
Effective Date:
(i) To
the
Knowledge of the Companies, each active Government Contract and Government
Subcontract is in full force and effect, has been legally awarded and is
binding
on the Companies, or either of them and, to the Knowledge of the Companies,
the
other party thereto.
(ii) To
the
Knowledge of the Companies, each active Teaming Agreement is in full force
and
effect and is binding on the Companies and, to the Knowledge of the Companies,
the other party thereto.
(iii) To
the
Knowledge of the Companies, each of the Companies has substantially complied
with all material terms and conditions of each active Government Contract,
Government Subcontract and Teaming Agreement, including all clauses, provisions
and requirements incorporated therein expressly, by reference or by operation
of
Applicable Law.
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(iv) To
the
Knowledge of the Companies, all representations and certifications executed,
acknowledged or set forth in or pertaining to any Bid submitted by either
of the
Companies or to any Government Contract or Government Subcontract awarded
to
either of the Companies, in each case since December 31, 2003, were current,
accurate and complete in all material respects as of their respective effective
dates, and each of the Companies has complied in all material respects
with all
such representations and certifications.
(v) Neither
the U.S. Government, any State Government nor any prime contractor,
subcontractor or other Person has notified either of the Companies that
it has
breached or violated any Applicable Law or any certification or representation
pertaining to any Bid, Government Contract or Government
Subcontract.
(vi) To
the
Knowledge of the Companies, no active Government Contract was awarded to
either
of the Companies pursuant to the Small Business Innovative Research
(“SBIR”)
program or any set-aside program (small business, small disadvantaged business,
8(a), woman owned business, etc.) or as a result of either of the Companies’
“small business” or other status under Applicable Law.
(vii) To
the
Knowledge of the Companies, no active Government Subcontract was awarded
to
either of the Companies as a result of its’ “small business” or other preferred
status.
(viii) No
active
Government Contract or Government Subcontract or outstanding Bid includes
a
liquidated damages clause or any requirement to post a surety, performance
or
other bond or to be an account party to a letter of credit or bank
guarantee.
(ix) The
cost
accounting practices that each of the Companies is using (and has used
since
December 31, 2003) to estimate and record costs in connection with the
submission of Bids and performance of Government Contracts and Government
Subcontracts are (and have been) in substantial compliance with Applicable
Law,
including but not limited to, the FAR Cost Principles (48 C.F.R. Part 31)
and
Cost Accounting Standards (48 C.F.R. Chap. 99), and have been properly
disclosed
to the U.S. Government (if required to be disclosed by Applicable
Law).
(x) To
the
Knowledge of the Companies, neither of the Companies nor any of their respective
directors, officers or employees is (or has been at any time since December 31,
2003)
suspended or debarred from doing business with the U.S. Government or any
State
Government, or is (or has been at any time since December 31,
2003)
deemed nonresponsible or ineligible for U.S. Government or State Government
contracting; and to the Knowledge of the Companies, there are no circumstances
that would warrant in the future the institution of suspension or debarment
proceedings, criminal or civil fraud or other criminal or civil proceedings
or a
determination of nonresponsibility or ineligibility against either of the
Companies or any of their respective directors, officers or
employees.
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(xi) Since
December 31, 2003, no Government Contract or Government Subcontract has
been terminated for convenience or default, no stop work order, cure notice,
show cause notice or other notice threatening termination or alleging
noncompliance with any material term has been issued to either of the Companies
with respect to any Government Contract or Government Subcontract, and
to the
Knowledge of the Companies, no event, condition or omission has occurred
or
exists that would constitute grounds for any such action with respect to
any
active Government Contract or Government Subcontract.
(xii) No
money
presently due to either of the Companies on any active Government Contract
or
Government Subcontract has been, or to the Knowledge of the Companies threatened
or likely to be, withheld or set off or subject to attempts to withhold
or
setoff.
(xiii) To
the
Knowledge of the Companies, neither of the Companies is performing “at risk”
under any anticipated Government Contract or Government Subcontract or
any
anticipated option exercise or modification thereof prior to award, option
exercise or modification, or has made any expenditures or incurred costs
or
obligations in excess of any applicable limitation of government liability,
limitation of cost, limitation of funds or other similar clause(s) limiting
the
U.S. Government’s liability on any active Government Contract or Government
Subcontract.
(xiv) Each
of
the Companies and their respective employees hold such security clearances
as
are required to perform Government Contracts and Government Subcontracts
of the
type performed prior to the date of this Agreement by each of them; to
the
Knowledge of the Companies, there are no facts or circumstances that could
reasonably be expected to result in the suspension or termination of such
clearances or that could reasonably be expected to render either of the
Companies ineligible for such security clearances in the future; and each
of the
Companies has complied in all respects with all security measures required
by
the Government Contracts, Government Subcontracts or Applicable
Law.
(h) Investigations.
(i) To
the
Knowledge of the Companies, neither of the Companies, nor any of their
respective directors, officers or employees or any of its agents or consultants
is (or has been since December 31, 2003) under administrative, civil
(including, but not limited to, claims made under the False Claims Act,
18
U.S.C.§ 287) or criminal investigation, indictment or information, audit or
internal investigation with respect to any alleged irregularity, misstatement,
act or omission arising under or relating to any Government Contract or
Government Subcontract;
(ii) To
the
Knowledge of the Companies, neither of the Companies has made a voluntary
disclosure to the U.S. Government or any State Government with respect
to any
alleged irregularity, misstatement or omission arising under or relating
to a
Government Contract or Government Subcontract; and
A-45
(iii) To
the
Knowledge of the Companies, there is no irregularity, misstatement, act
or
omission arising under or relating to any Government Contract or Government
Subcontract that has led or could reasonably be expected to lead, either
before
or after the Closing Date, to any of the consequences set forth in (i)-(ii)
above, or to any other damage, penalty assessment, recoupment of payment,
or
disallowance of cost.
(i) Audits.
(i) Schedule
3.18(i) of the Disclosure Schedules lists and identifies as of the Effective
Date each audit report, including without limitation reports issued by
the
Defense Contract Audit Agency and any inspector general, and each notice
of cost
disallowance received by either of the Companies since January 1, 2000
relating
to any Bid, Government Contract or Government Subcontract (true and complete
copies of which have been provided to FAAC).
(ii) Since
December 31, 2003, no cost in excess of $25,000 or group, type or class of
cost in excess of $125,000 in the aggregate and which was incurred or invoiced
by either of the Companies on any active Government Contract or Government
Subcontract has been disallowed or is otherwise the subject of a formal
dispute
(excluding requests for clarification or back-up documentation, or correction
of
good faith invoice errors).
(iii) Neither
of the Companies has incurred any material costs on any active cost-reimbursable
Government Contract or Government Subcontract that are not “allowable” costs
pursuant to FAR § 31.201-2 (48 CFR § 31.201-2) and any other applicable law or
regulation and that have not been properly recorded as such in the Companies’
cost accounting books and records.
(iv) The
reserves established by the Companies with respect to possible adjustments
to
the indirect and direct costs incurred by the Companies on any active Government
Contract or Government Subcontract are reasonable and are adequate to cover
any
potential adjustments resulting from audits of any such Government Contract
or
Government Subcontract.
(j) Financing
Arrangements.
Except
as set forth on Schedule 3.18(j) of the Disclosure Schedules, there exist
no
financing arrangements (e.g., an assignment of moneys due or to become
due) with
respect to any active Government Contract or Government
Subcontract.
(k) Protests.
Except
as set forth on Schedule 3.18(k) of the Disclosure Schedules, no outstanding
Bid
or active Government Contract or Government Subcontract as of the Effective
Date
is subject to any protest to a procuring agency, the United States Government
Accountability Office, the United States Small Business Administration
or any
other agency or court (whether one of the Companies is the protestor, an
interested party or neither), and to
the
Knowledge of the Companies, no outstanding Bid or active Government Contract
or
Government Subcontract will become subject to such a protest.
(l) Claims.
Except
as set forth on Schedule 3.18(l) of the Disclosure Schedules, as of the
Effective Date:
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(i) Neither
of the Companies has any interest in any pending or potential claim or
request
for equitable adjustment against the U.S. Government, any State Government
or
any prime contractor, subcontractor or vendor arising under or relating
to any
Government Contract, Government Subcontract, Bid or Teaming
Agreement.
(ii) There
are
no outstanding claims against either of the Companies, either by the U.S.
Government, any State Government or any prime contractor, subcontractor,
vendor
or other third party, arising out of or relating to any Government Contract,
Government Subcontract, Bid or Teaming Agreement, and to the Knowledge
of the
Companies, there are no facts that might give rise to or result in such
a
claim.
(iii) There
exist no disputes between either of the Companies and the U.S. Government,
any
State Government, or any prime contractor, subcontractor, vendor or other
third
party, arising out of or relating to any active Government Contract, Government
Subcontract, Company, Teaming Agreement or outstanding Bid, and to the
Knowledge
of the Companies, there are no facts that might give rise to or result
in such a
dispute.
(m) Multiple
Award Schedules.
(i) With
respect to each active multiple award schedule Government Contract as of
the
Effective Date, to the Knowledge of the Companies, the Companies have (1)
provided to the U.S. Government all information required by the applicable
solicitation or otherwise requested by the Government; (2) submitted information
that was current, accurate, and complete within the meaning of applicable
law
and regulation; and (3) made all required disclosures of any changes in
the
Companies’ respective commercial pricelist(s), discounts or discounting policies
prior to the completion of negotiations with the U.S. Government.
(ii) With
respect to each active multiple award schedule Government Contract as of
the
Effective Date, Schedule 3.18(m) of the Disclosure Schedules identifies
the
basis of award, customer (or category of customer(s) (“COC”))
and
the Government’s price or discount relationship to the identified COC as agreed
to by GSA and the Companies, or either of them, at time of award of such
multiple award schedule Government Contract.
(iii) Neither
of the Companies has been notified or has any reason to believe that it
has not
complied with the notice and pricing requirements of the Price Reduction
clause
in each active multiple award schedule Government Contract listed on Schedule
3.18(a) of the Disclosure Schedules, and, to the Knowledge of the Companies,
there are no facts or circumstances that could reasonably be expected to
result
in a demand by the U.S. Government for a refund based upon either of the
Companies’ failure to comply with the Price Reductions clause.
(iv) To
the
Knowledge of the Companies, each of the Companies has filed all reports
related
to and paid all industrial funding fees required to be paid by the Companies
under any active multiple award schedule Government Contract.
A-47
(v) Neither
of the Companies has
received notice or otherwise has reason to believe that any
active
orders issued to either of the Companies pursuant to each active multiple
award
schedule Government Contract are within the scope of such Government
Contract.
(n) Government
Furnished Property.
Schedule 3.18(n) of the Disclosure Schedules identifies as of the Effective
Date
all personal property, equipment and fixtures loaned, bailed or otherwise
furnished to either of the Companies by or on behalf of the U.S. Government
for
use in the performance of an active Government Contract or Government
Subcontract (“Government-Furnished
Property”)
and
the active Government Contracts or Government Subcontracts to which each
item of
Government-Furnished Property relates. To the Knowledge of the Companies,
the
Companies have complied in all material respects with all of its obligations
relating to the Government-Furnished Property.
(o) Former
Government Officials.
Except
as set forth on Schedule 3.18(o) of the Disclosure Schedules, neither of
the
Companies employ any former government officials in key management positions
or
as consultants.
3.19 Clients.
Neither
of the Companies has received any notice, or has any reason to believe,
that any
supplier, producer, consumer, financial institution or other party to any
Scheduled Contract will not do business with the
Companies on substantially the same terms and conditions subsequent to
the
Closing Date as before such date.
3.20 Backlog.
Schedule 3.20
of the
Disclosure Schedules sets forth the contract backlogs of the Companies,
as of
March 31, 2006. Schedule 3.20
of the
Disclosure Schedules includes with respect to each contract listed thereon
(a)
the name of each customer, (b) a reference as to whether the applicable
contract
is for a fixed price or other type of contract, (c) the periods of performance,
(d) the contract revenue for 2004, 2005 and the first quarter 2006, (e)
the
dollar value of the contract, (f) the contract revenue from inception,
and (g)
the dollar amount of the backlog.
3.21 Compliance
with Laws.
Each
of
the Companies has been and is in compliance with each Law that is or was
applicable to it or the conduct or operation of its business or the ownership
or
use of any of its assets, except where any such failure to be in compliance
with
such Law would not reasonably be expected to have a Material Adverse Effect
on
either or both of the Companies. No event has occurred or circumstance
exists
that (with or without notice or lapse of time) (a) would constitute or
result in a material violation by either of the Companies of (or failure
on the
part of either of the Companies to comply in all material respects with)
any
such applicable Law, or (b) would give rise to any obligation on the part
of the Companies to undertake, or to bear all or any portion of the cost
of, any
remedial action of any nature under any such applicable Law. Neither of
the
Companies has received, at any time during the past three years, any notice
or
other communication (whether oral or written) from any Governmental Authority
regarding (a) any actual, alleged, or potential violation of, or failure to
comply with, any such applicable Law, or (b) any actual, alleged, or
potential obligation on the part of a Company to undertake, or to bear
all or
any portion of the cost of, any remedial action of any nature under any
such
applicable Law.
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3.22 Environmental
Matters.
To
the
Knowledge of the Companies, each of the Companies has complied with, and
is in
compliance with, all applicable Environmental Laws and has no Environmental
Liabilities.
3.23 Licenses
and Permits.
(a) Each
of
the Companies has all licenses, permits and other authorizations from
Governmental Authorities necessary for the conduct of their respective
business
as conducted in the normal course of business prior to and as of the date
hereof
(collectively “Permits”),
except for where the failure to obtain such Permits would not have a Material
Adverse Effect on them. Schedule 3.23(a) of the Disclosure Schedules sets
forth a list of all Permits held by each of the Companies.
(b) To
the
Knowledge of the Companies and except as set forth on Schedule 3.23(a)
of the
Disclosure Schedules and except as would not have a Material Adverse Effect,
(i) each of the Permits is in full force and effect, (ii) each of the
Companies is in full compliance with the terms, provisions and conditions
thereof, (iii) there are no outstanding violations, notices of
noncompliance, judgments, consent decrees, orders or judicial or administrative
actions, investigations or proceedings adversely affecting any of said
Permits,
and (iv) no condition (including, without limitation, this Agreement and
the Contemplated Transactions) exists and no event has occurred that (whether
with or without notice, lapse of time or the occurrence of any other event)
would reasonably be expected to result in the suspension or revocation
of any of
said Permits other than by expiration of the term set forth therein, except
in
each case where such a suspension or revocation would not reasonably be
expected
to have a Material Adverse Effect on the
Companies.
3.24 Absence
of Certain Business Practices.
To
the
Knowledge of the Companies, neither of the
Companies, nor any officer, employee or agent of the
Companies, or any other Person acting on their behalf has, directly or
indirectly, since the formation of the Companies, given, offered, solicited
or
agreed to give, offer or solicit any contribution, gift, bribe, rebate,
payoff,
influence payment, kickback or other payment, regardless of form and whether
in
money, property or services, to any customer, supplier, governmental employee
or
other Person who is or may be in a position to help or hinder the
Companies in connection with the design, development, manufacture, distribution,
marketing, use, sale, acceptance, maintenance or repair of their respective
products and services (or assist the
Companies in connection with any actual or proposed transaction relating
to the
products and services of the
Companies) (a) that subjected or might have subjected either
of the
Companies to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) that, if not given in the past, might have
had a Material Adverse Effect as it relates to the products and services
of the
Companies, (c) that, if not continued in the future, might have a Material
Adverse Effect, or subject the
Companies to suit or penalty in any private or governmental litigation
or
proceeding, (d) for any purposes described in Section 162(c) of the Code,
or (e) for the purpose of establishing or maintaining any concealed fund or
concealed bank account.
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3.25 Litigation.
(a) Except
as
set forth on Schedule 3.25(a) of the Disclosure Schedules, there are
no:
(i) actions,
suits, claims, trials, written demands, investigations, arbitrations, or
other
proceedings (whether or not purportedly on behalf of the businesses of
the
Companies), pending or threatened against or with respect to the Companies,
or
their respective properties or businesses, but in all events including
D&O
Indemnification Claims pending or threatened against or with respect to
the
Companies or their respective properties or businesses; or
(ii) outstanding
judgments, orders, decrees, writs, injunctions, decisions, rulings or awards
against or with respect to the
Companies, or their respective properties or businesses.
(b) Neither
of the Companies (nor the businesses of either of them) are in default
with
respect to any judgment, order, writ, injunction, decision, ruling, decree
or
award of any Governmental Authority. Except as set forth on Schedule 3.25(b)
of
the Disclosure Schedules, there is no reasonable basis for a claim against
the
Companies relating to defective design, material, or performance.
(c) Schedule
3.25(c) of the Disclosure Schedules contains a true and complete description
of
all indemnification obligations of the Companies, including a description
in
reasonable detail of any such obligation for which the indemnitee has given
notice of a claim or in connection with which there exits any facts that
would
reasonably cause it to believe an indemnification claim will be
made.
3.26 Personnel
Matters.
(a) True,
accurate, and complete lists of all of the directors, officers, and employees
of
each of the Companies, as of May 4, 2006 (collectively, “Personnel”)
and
their positions are included on Schedule 3.26(a) of the Disclosure Schedules.
True and complete information concerning the respective salaries, wages,
and
other compensation paid by the applicable Company during 2004 and 2005
as well
as dates of employment, and date and amount of last salary increase, of
such
Personnel has been provided previously to FAAC.
(b) All
bonuses and other compensation owed by the Companies to their respective
employees and consultants for periods prior to December 31, 2005, have
been paid
in full and all compensation owed and due by the Companies to their respective
employees and Consultants for periods after December 31, 2005 is paid and
current (other than bonuses).
(i) A
bonus
pool (the “Bonus
Pool”)
for
fiscal year 2006 has been established (which is shown and accrued for with
adequate revenues on the Interim Financials) from which bonuses are to
be paid
to certain employees of the
Companies if
and
when such bonuses are determined by the Companies’ management at the end of the
Companies’ 2006 fiscal year (the “Employee Bonuses”).
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(ii) Certain
employees of the Companies are entitled to “Phantom Membership Interest
Appreciation Rights” that are due and payable in full on the Closing Date (the
“Phantom
Membership Interest Plan”).
Schedule 3.26(b) of the Disclosure Schedules shows the employees participating
in the Phantom Membership Interest Plan and the amounts payable at Closing
for
each such participant. At Closing the Companies shall be responsible for
paying
all sums due under the Phantom Membership Interest Plan and deliver to
FAAC
releases for each participant in the Phantom Membership Interest Plan in
the
form allocated hereafter as Exhibit I
(the
“Phantom
Membership Interest Release”).
(iii) The
Estimated Closing Balance Sheet shall include reserves for the Bonus Pool
and
the payment of all sums due at Closing under the Phantom Membership Interest
Plan.
(c) There
are
no disputes, grievances, or disciplinary actions pending, or, to the Knowledge
of the Companies, threatened, by or between either of the Companies and
any
Personnel.
(d) All
personnel policies and manuals of the Companies are listed on Schedule
3.26(d)
of the Disclosure Schedules, and true, accurate, and complete copies of
all such
written personnel policies and manuals have been provided to FAAC.
(e) Except
for the Employee Bonuses or as otherwise listed on Schedule 3.26(e) of
the
Disclosure Schedules, neither of the Companies is a party to any:
(i) management,
employment, consulting, or other agreement with any Personnel or other
person
providing for employment or payments over a period of time or for termination
or
severance benefits, whether or not conditioned upon a change in control
of the
Companies;
(ii) bonus,
incentive, deferred compensation, severance pay, profit-sharing, stock
purchase,
stock option, benefit, or similar plan, agreement, or arrangement, whether
written or unwritten;
(iii) collective
bargaining agreement or other agreement with any labor union or other Personnel
organization (and no such agreement is currently being requested by, or
is under
discussion by management with, any Personnel or others); or
(iv) other
employment contracts, non-competition agreement, or other compensation
agreement
or arrangement affecting or relating to Personnel or former Personnel of
the
Companies, whether written or unwritten.
(f) To
the
Knowledge of the Companies and except as otherwise disclosed on Schedule
3.26(f)
of the Disclosure Schedules, there do not exist any facts that would give
reasonable cause to believe that there will occur a discontinuation after
the
Closing Date of any currently existing employment situation of any executive
and
managerial Personnel with respect to either of the Companies on the currently
existing terms.
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(g) No
officer, director, agent or employee of, or Consultant to, either of the
Companies is bound by any contract or agreement that purports to limit
the
ability of such officer, director, agent, employee, or Consultant to
(i) engage in or continue in any conduct, activity, or practice relating to
the business of either of the Companies or (ii) assign to the
Companies or
to any
other Person any rights to any Intellectual Property or any Intellectual
Property Right.
(h) Except
as
otherwise disclosed on Schedule 3.26(h) of the Disclosure Schedules, no
leased
employee, as defined in Code Section 414(n), or independent contractor
performs
service for either of the Companies.
3.27 Labor
Matters.
(a) Neither
of the Companies is obligated by, or subject to, any order of the National
Labor
Relations Board or other labor board or administration, or any unfair labor
practice decision.
(b) Neither
of the Companies is a party or subject to any pending or, to the Knowledge
of
the Companies, threatened labor or civil rights dispute, controversy or
grievance or any unfair labor practice proceeding with respect to claims
of, or
obligations of, any employee or group of employees. Neither of the Companies
has
received any notice that any labor representation request is pending or
is
threatened with respect to any employees of either of the
Companies.
(c) Each
of
the Companies is in compliance with all applicable Laws and affirmative
action
programs respecting employment and employment practices, terms and conditions
of
employment and wages and hours, including but not limited to Executive
Order
11246, as amended, the Workers’ Adjustment Retraining Notification Act and the
Service Contract Act. This Section 3.27 does not extend to “ERISA” as defined in
Section 3.28.
(d) No
present or former employee of the
Companies has any claim against the
Companies (whether under Federal or state law, pursuant to any employment
agreement, or otherwise) on account of, or for: (i) overtime pay, other
than for the current payroll period; (ii) wages or salary (excluding
bonuses and amounts accruing under any pension or profit-sharing plan,
including
but not limited to any Pension Plan or Welfare Plan (as such terms are
defined
in Section 3.28))
for a
period other than the current payroll period; (iii) vacation, time off or
pay in lieu of vacation or time off, other than vacation or time off (or
pay in
lieu thereof) earned in respect of the current or past fiscal year or accrued
on
the most recent balance sheet for the Companies, or (iv) payment under
any
applicable workers’ compensation law.
3.28 ERISA.
(a) Capitalized
terms used in this Section 3.28 that are not otherwise defined in this
Agreement
shall have the meanings set forth below:
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(i) “Benefit
Arrangement”
means
any compensation or employment program (other than a Pension Plan or Welfare
Plan), including but not limited to, any fringe benefit, incentive compensation,
bonus, severance, deferred compensation and supplemental executive compensation
plan that either of the Companies maintains or to which either of the Companies
or any ERISA Affiliate contributes or has any obligation to contribute,
or with
respect to which either of the Companies or any ERISA Affiliate has any
liability.
(ii) “ERISA”
means
the Employee Retirement Income Security Act of 1974, as the same may be
amended
from time to time, as well as any rules and regulations promulgated thereunder
by any Governmental Authority, as from time to time in effect.
(iii) “ERISA
Affiliate”
means
a
corporation that is a member of a controlled group of corporations with
either
of the Companies within the meaning of Code Section 414(b), a trade or
business
that is under common control with either of the Companies within the meaning
of
Code Section 414(c), or a member of an affiliated service group with either
of
the Companies within the meaning of Code Sections 414(m) or (o), including
any
such Entity that was an ERISA Affiliate at any time.
(iv) “PBGC”
means
the Pension Benefit Guaranty Corporation.
(v) “Pension
Plan”
means
any employee pension benefit plan (as defined in ERISA Section 3(2)) either
Company or
an
ERISA Affiliate maintains or to which either of the Companies or an ERISA
Affiliate contributes or has any obligation to contribute, or with respect
to
which either of the Companies or an ERISA Affiliate has any
liability.
(vi) “Plan”
means
any Pension Plan, any Welfare Plan, and any Benefit Arrangement.
(vii) “Welfare
Plan”
means
any employee welfare benefit plan (as defined in ERISA Section 3(1))
that either
Company or
an
ERISA Affiliate maintains or to which either
Company or
an
ERISA Affiliate contributes or has any obligation to contribute, or with
respect
to which either
Company or
an
ERISA Affiliate has any liability.
(b) Schedule
3.28(b) of the Disclosure Schedules sets forth a list of: (i) each Pension
Plan;
(ii) each Welfare Plan; and (iii) each Benefit Arrangement.
(c) the
Companies have delivered to FAAC true, accurate and complete copies of
(i) the
documents comprising each Plan (or, with respect to any Plan that is unwritten,
a detailed written description of eligibility, participation, benefits,
funding
arrangements, assets and any other matters that relate to the obligations
of the
Companies or any ERISA Affiliate); (ii) all trust agreements, insurance
contracts or any other funding instruments related to the Plans; (iii)
all
rulings, determination letters, no-action letters or advisory opinions
from the
IRS, the U.S. Department of Labor, the PBGC or any other Governmental Authority
that pertain to each Plan and any open requests therefor; (iv) the most
recent
actuarial and financial reports (audited and/or unaudited) and the annual
reports filed with any Governmental Authority with respect to the Plans
during
the most recent three years; and (v) all summary plan descriptions, summaries
of
material modifications, and memorandum, employee handbooks and other written
communications regarding the Plans.
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(d) Neither
of the Companies has, at any time within six (6) years prior to the Effective
Date, sponsored, maintained or contributed to a Pension Plan subject to
Title IV
of ERISA, a multiemployer plan (as defined in ERISA Section 3(37)), or
a
voluntary employees’ beneficiary association, as defined in Code Section
501(c)(9) (a “VEBA”).
(e) Full
payment has been made of all amounts that are required under the terms
of each
Plan to be paid as contributions with respect to all periods prior to the
Effective Date and any such amounts that are not required to be so paid
under
any Welfare Plan, including any vacation pay plan, have been accrued on
the
Financial Statements.
(f) No
prohibited transaction within the meaning of ERISA Section 406 or Code
Section
4975 has occurred with respect to any Pension Plan as of the date of this
Agreement, other than a transaction to which a statutory or administrative
exemption has been granted.
(g) Except
as
set forth on Schedule 3.28(g) of the Disclosure Schedules, the form of
each
Pension Plan and Welfare Plan is in compliance with the applicable terms
of
ERISA, the Code, and any other applicable laws, including, but not limited
to,
the Americans with Disabilities Act of 1990, the Family Medical Leave Act
of
1993, the Health Insurance Portability and Accountability Act of 1996,
the
Uruguay Round Agreements Act, the Small Business Job Protection Act of
1996, the
Uniformed Services Employment and Reemployment Rights Act of 1994, the
Taxpayer
Relief Act of 1997, the Internal Revenue Service Restructuring and Reform
Act of
1998, the Community Renewal Tax Relief Act of 2000, and the Economic Growth
and
Tax Relief Reconciliation Act of 2001, and such plans have been operated
in
compliance with such laws and the written Plan documents. Neither of
the
Companies, nor, any fiduciary of a Pension Plan has violated the requirements
of
Section 404 of ERISA. Except as set forth on Schedule 3.28(g) of the Disclosure
Schedules, all required reports and descriptions of the Plans (including
Internal Revenue Service Form 5500 Annual Reports, Summary Annual Reports
and
Summary Plan Descriptions and Summaries of Material Modifications) have
been
(when required) timely filed with the IRS, the U.S. Department of Labor
or other
Governmental Authority and distributed as required, and all notices required
by
ERISA or the Code or any other Laws with respect to the Pension Plans and
Welfare Plans have been appropriately given.
(h) Each
Pension Plan that is intended to be qualified under Section 401(a) of the
Code
is subject to a favorable determination letter from the IRS, and to the
Knowledge of the Companies there are no circumstances that will or could
result
in revocation of any such favorable determination letter. Each trust created
under any Pension Plan has been determined to be exempt from taxation under
Section 501(a) of the Code, and, to the Knowledge of the Companies, there
is no
circumstance that will result in a revocation of such exemption.
(i) No
charge, complaint, action, suit, proceeding, hearing, investigation, claim
or
demand with respect to a Plan or to the administration or the investment
of the
assets of any Plan that either of the Companies or any ERISA Affiliate
maintains
or has maintained, or to which either of the Companies or any ERISA Affiliate
contributes or has contributed, for the benefit of any current or former
employee (other than routine claims for benefits) is pending or, to the
Knowledge of the Companies, threatened that could reasonably be expected
to
result in a material liability to either of the Companies or any ERISA
Affiliate
or to such Plan or a fiduciary of such Plan.
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(j) Except
as
required by the Code, the consummation of the transactions contemplated
by this
Agreement will not accelerate the time of vesting or the time of payment,
or
increase the amount of compensation due to any director, employee, officer,
former employee or former officer of either
Company or
an
ERISA Affiliate.
(k) No
written or oral representations have been made to any employee, former
employee,
or director of either
Company or
any
ERISA Affiliate at any time promising or guaranteeing any employer payment
or
funding for the continuation of medical, dental, life or disability coverage
for
any period of time (except to the extent of coverage required under COBRA
or
other applicable Law).
(l) All
nonqualified deferred compensation plans maintained by either
or
both Companies, to the extent such plans are maintained for the benefit
of
individuals that are subject to United States Taxes, satisfy the requirements
of
Section 409A of the Code.
(m) Schedule
3.28(m) of the Disclosure Schedules identifies (i) all Welfare Plans
that either
or
both Companies self insure (each a “Self
Insured Plan”
and
collectively the “Self
Insured Plans”);
(ii)
the administrator of each of the Self Insured Plans, (iii) the limits for
each
of the Self Insured Plans and (iv) the plan year for each of the Self Insured
Plans.
(i) Each
of
the Self Insured Plans has been maintained in compliance, in all material
respects, with its terms.
(ii) There
are
no actions, suits, or claims (other than routine claims for benefits in
the
ordinary course) pending or, to the Knowledge of the Companies, threatened,
and
to the Knowledge of the Companies, there are no facts that reasonably could
be
expected to give rise to any such claims.
(iii) To
the
Knowledge of the Companies, there are no benefit claims that either individually
or in the aggregate are significantly greater than what the Companies generally
experienced in the past.
(n) No
act or
omission has occurred, with respect to any Plan that would result in any
penalty, tax or liability of any kind imposed upon either
of
the Companies under
applicable Law, and to the Knowledge of the Companies, no condition exists
that
reasonably could be expected to give rise to any such penalty, tax or
liability.
3.29 Tax
Matters.
Except
as
set forth Schedule 3.29 of the Disclosure Schedules:
(a) Each
of
the Companies (i) is a limited liability company under Maryland law, taxable
as
a partnership under Subchapter K of the Code, (ii) has never made an election
to
be taxable as a corporation for federal or state income tax purposes, and
(iii)
has never been a “publicly traded partnership” as defined in Section 7704(b) of
the Code. Each member of the Companies has timely reported on their individual
income tax returns their share of the items of income and deductions of
the
Companies as reported to them on the Form K-1’s that they receive from the
Companies;
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(b) The
fiscal year of each of the Companies ends on December 31;
(c) Each
of
the Members of the Companies is a United States citizen and is a resident
of the
State of Maryland;
(d) Each
of
the Companies has duly and timely filed all federal, state, local and foreign
Tax reports, statements, documents and returns required to be filed by
them (the
“Tax
Returns”)
and
has timely paid all taxes and other charges of any kind whatsoever due
and
payable to federal, state, local or foreign taxing authorities (including,
without limitation, those due and payable in respect of the sales, use,
properties, income, franchises, licenses, foreign jurisdictions, levies,
imposts, occupation, transfers, ad valorem, customs, goods and services,
withholding or payrolls of the Companies, including any interest and penalties
thereon and additions thereto) (“Taxes”).
The
Companies are not currently the beneficiary of any extension of time within
which to file any Tax Return;
(e) The
reserves for Taxes reflected in the December 2005 Balance Sheets of the
Companies are adequate and reflect all liability of the Companies for Taxes.
Since December 31, 2005, the Companies have not incurred any liability
for Taxes
outside the ordinary course of business or otherwise inconsistent with
past
custom and practice;
(f) There
are
no Tax liens upon any property or assets of the Companies except liens
for
current Taxes not yet due and payable;
(g) All
Tax
Returns and amendments thereof filed by the Companies are true, correct
and
complete in all material respects;
(h) All
Taxes
that the Companies are or were required by law to withhold or collect have
been
withheld or collected and, to the extent required, have been timely paid
to the
proper governmental body or other person;
(i) There
are
no Tax allocation, indemnity, sharing or similar arrangements with respect
to or
involving the Companies, and, after the date hereof, the Companies shall
not be
bound by any such tax sharing agreements or similar arrangements or have
any
liability thereunder for amounts due in respect of periods on or prior
to the
Closing Date;
(j) The
Companies (i) have never been a partner for Tax purposes with respect to
any
joint venture, partnership, or other arrangement or contract which is treated
as
a partnership for income Tax purposes, (ii) do not own a single member
limited
liability company which is treated as a disregarded entity, (iii) are not
a
shareholder of a “controlled foreign corporation” as defined in Section 957 of
the Code (or any similar provision of state, local or foreign law), and
(iv) are
not a shareholder of a “passive foreign investment company” within the meaning
of Section 1297 of the Code;
(k) The
Companies do not have and have not had a permanent establishment in any
foreign
country, as defined in any applicable Tax treaty or convention between
the
United States of America and such foreign country;
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(l) The
Companies have not entered into any transaction identified as a “listed
transaction” for purposes of Treasury Regulations section 1.6011-4(b)(2) or
301.6111-2(b)(2) and have not engaged in any reportable transaction within
the
meaning of Sections 6111 and 6112 of the Code;
(m) There
is
no contract, plan or arrangement, including but not limited to the provisions
of
this Agreement, covering any employee or former employee of the Companies
that,
individually or collectively, could give rise to the payment of any amount
that
would not be deductible pursuant to the Code;
(n) There
is
no pending or threatened claim, audit, action, suit, proceeding or investigation
against or with respect to (i) Taxes due and payable or claimed to be due
by the
Companies, or (ii) any Tax Return;
(o) No
deficiencies for any Tax relating to the Companies have been claimed, proposed,
asserted or assessed (tentatively or definitively) by any governmental
or taxing
authority, including, without limitation, any sales and/or use Taxes due;
and no
governmental or taxing authority in any jurisdiction in which either of the
Companies does not file Tax Returns has asserted that either of the Companies
are, or may be, subject to Tax in that jurisdiction. There are no matters
under
discussion
with any Tax Authority, or known to either of the Companies, with respect
to
Taxes that are likely to result in an additional liability for Taxes with
respect to either of the Companies. The Companies have delivered or made
available to Buyer complete and accurate copies of federal, state and local
income Tax Returns of the Companies and its predecessors, if any, for the
years
ended December 31, 2001, 2002, 2003, 2004 and 2005, and complete and accurate
copies of all examination reports and statements of deficiencies assessed
against or agreed to by the Companies or any predecessors since December
31,
2001, with respect to Taxes of any type. Neither
the Companies nor any predecessor has waived any statute of limitations
in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency, nor has any request been made in writing for
any such
extension or waiver;
(p) No
power
of attorney to deal with Tax matters of the Companies is currently in
force;
(q) The
relevant statute of limitations for the assessment or proposal of a deficiency
against the Companies for Taxes has expired for taxable periods ending
prior to
December 31, 2003;
(r) Any
“nonqualified deferred compensation plan” (within the meaning of Section 409A of
the Code) to which the Companies are a party has at all times since the
effective date of Section 409A of the Code complied in form and in operation
with the requirements of paragraphs (2), (3), and (4) of Section 409A(a)
of the
Code. No event has occurred since the effective date of Section 409A of
the Code
that would be treated by Section 409A(b) of the Code as a transfer of property
for purposes of Section 83 of the Code; and
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(s) The
Companies have disclosed on its federal income Tax Returns all positions
taken
therein that could give rise to a substantial understatement of federal
income
Tax within the meaning of Section 6662 of the Code.
3.30 Insurance.
(a) The
Companies maintain the general liability, professional liability, product
liability, fire, casualty, motor vehicle, workers’ compensation, and other types
of insurance shown on Schedule 3.30(a) of the Disclosure Schedules, which
insurance is comprised of the types and in the amounts customarily carried
by
businesses of similar size in the same industry and which are reasonably
necessary to adequately insure and protect the assets of the Companies.
A list
of all claims against such insurance since January 1, 2006 that individually
exceed $5,000 in amount and the outcomes or status of such claims is set
forth
on Schedule 3.29
of the
Disclosure Schedules.
(b) The
Companies maintain life insurance on those persons in the amounts as indicated
on Schedule 3.30(b) of the Disclosure Schedules. With respect to each of
the
foregoing life insurance policies (i) VTC
is
the designated beneficiary and (ii) all premiums are current as of the
date
hereof and there are no premiums due and unpaid as of the date
hereof.
3.31 Bank
Accounts.
Schedule 3.31
of the
Disclosure Schedules sets forth (i) the name of each Person with
whom the
Companies maintains accounts or safety deposit boxes, (ii) the address
where
each such account or safety deposit box is maintained, and (iii) the names
of
all Persons authorized to draw thereon or to have access thereto.
3.32 Powers
of Attorney.
(a) Neither
of the Companies has given any irrevocable power of attorney (other than
such
powers of attorney given in the ordinary course of business with respect
to
routine matters or as may be necessary or desirable in connection with
the
consummation of the Contemplated Transactions) to any Person for any purpose
whatsoever.
(b) Each
of
the Members jointly and severally represents and warrants to FAAC that
such
Shareholder has not given any irrevocable power of attorney (other than
pursuant
to Section 2.6 hereof or other than such powers of attorney given in the
ordinary course of business with respect to routine matters or as may be
necessary or desirable in connection with the consummation of the Contemplated
Transactions) to any Person for any purpose whatsoever with respect to
the
Companies.
3.33 No
Broker.
Except
for Evergreen Capital LLC (“Evergreen”),
which
was retained by the Companies under two separate fee agreements both dated
April
6, 2006 (jointly, the “Evergreen
Agreement”),
neither the Members nor the Companies (or any of their respective Affiliates,
directors, officers, employees or agents) has employed or incurred any
liability
to any broker, finder or agent for any brokerage fees, finder’s fees,
commissions or other amounts with respect to this Agreement or the Contemplated
Transactions.
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3.34 Security
Clearances.
To
the
Knowledge of the Companies, each of the Companies have the proper procedures
to
conduct business of a classified nature up to the level of their current
clearances. The levels and locations of facility clearances are set forth
on
Schedule 3.34 of the Disclosure Schedules. Schedule 3.34 of the
Disclosure Schedules identifies as of the Effective Date any employees
whose
security clearance, to the Knowledge of the Companies, has been lost or
downgraded in the last twenty-four (24) months. Each of the Companies is
in
compliance in all material respects with applicable agency security
requirements, as appropriate, and has in place proper procedures, practices
and
records to maintain security clearances necessary to perform their current
contracts.
3.35 No
Unusual Transactions.
Except
as
expressly contemplated by this Agreement, or as set forth in Schedule 3.35
of
the Disclosure Schedules, since December 31, 2005, each of the Companies
has
conducted its business in the ordinary course and in a manner consistent
with
past practice and, without limiting the generality of the foregoing, neither
of
the Companies has:
(a) incurred
or discharged any secured or any unsecured liability or obligation (whether
accrued, absolute or contingent) other than liabilities and obligations
disclosed in the December 2005 Balance Sheet or the Estimated Closing Balance
Sheet and liabilities and obligations incurred since December 31, 2005
in the
ordinary course of business and in a manner consistent with past
practices;
(b) waived
or
cancelled any claim, account receivable or trade account involving amounts
in
excess of $25,000 in the aggregate;
(c) made
any
capital expenditures in excess of $25,000 in the aggregate;
(d) sold
or
otherwise disposed of or lost any capital asset or used any of its assets
other
than, in each case, for proper corporate purposes and in the ordinary course
of
business and in a manner consistent with past practices;
(e) issued
any options to purchase any shares of its Equity Interests, or sold or
otherwise
disposed of any shares of its Equity Interests or any warrants, rights,
bonds,
debentures, notes or other security;
(f) entered
into any transaction, contract, agreement, indenture, instrument or commitment
involving amounts in excess of $25,000 in
the
aggregate other than in the ordinary course of business and in a manner
consistent with past practices or in connection with the Contemplated
Transactions;
(g) suffered
any extraordinary losses whether or not covered by insurance;
(h) modified
its charter, bylaws or capital structure;
A-59
(i) redeemed,
retired, repurchased, purchased, or otherwise acquired its Equity Interests,
options to purchase such stock, or any of its other corporate
securities;
(j) suffered
any material shortage or any material cessation or interruption of inventory
shipments, supplies or ordinary services;
(k) entered
into an employment agreement or made (i) (A) any increase in the rate or
change
in the form of compensation or remuneration payable to or to become payable
to
any of its directors or officers, or (B) any increase in the rate or change
in
the form of compensation or remuneration payable to or to become payable
to any
of its employees, licensors, licensees, franchisors, franchisees, distributors,
agents, or suppliers, other than such increases or changes in the ordinary
course of business and consistent with past practices, or (ii) any bonus
or
other incentive payments or arrangements with any of its, directors, officers,
employees, licensors, licensees, franchisors, franchisees, distributors,
agents,
suppliers, or customers;
(l) removed
any director or terminated any officer except those directors and officers
who
will resign in accordance with Section 7.8;
(m) entered
into, terminated, cancelled, amended or modified any material contract,
other
than in the ordinary course of business or in connection with the Contemplated
Transactions;
(n) made
any
change in its accounting policies, practices and calculations as utilized
in the
preparation of the December 2005 Financial Statements;
(o) voluntarily
permitted any Person to subject the Membership Interests or the properties
of the
Companies to
any
additional Lien;
(p) (i)
made
any loan or advance to, or (ii) assumed, guaranteed, endorsed or otherwise
become liable with respect to the liabilities or obligations of, any
Person;
(q) purchased
or otherwise acquired any corporate security or other equity interest in
any
Person;
(r) changed
its pricing, credit, or payment policies;
(s) incurred
any Indebtedness other than to trade creditors and financial institutions
in the
ordinary course of business and in a manner consistent with past
practices;
(t) except
as
otherwise required by Law, entered into, amended, modified, varied, altered,
or
otherwise changed any of the Plans;
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(u) changed
its banking arrangements and signatories or granted any powers of
attorney;
(v) purchased,
sold, leased, or otherwise disposed of any of its properties or any right,
title
or interest therein other than in the ordinary course of business;
(w) failed
to
maintain its books in a manner that fairly and accurately reflects its
income,
expenses and liabilities in accordance with applicable accounting standards,
including, without limitation, GAAP, and using accounting policies, practices
and calculations applied on a basis consistent with past periods and throughout
the periods involved;
(x) failed
to
maintain in full force and effect insurance policies on all of its properties
providing coverage and amounts of coverage comparable to the coverage and
amounts of coverage provided under its policies of insurance as shown on
Schedule 3.30(a) of the Disclosure Schedules;
(y) failed
to
perform duly and punctually in all material respects all of its contractual
obligations in accordance with the terms thereof, except where the failure
to do
so would not have a Material Adverse Effect as to the Companies;
(z) failed
to
maintain and keep its properties in good condition and working order, except
for
ordinary wear and tear;
(aa) materially
modified or changed its business organization or materially and adversely
modified or changed its relationship with its suppliers, customers and
others
having business relations with it;
(bb) entered
into any contract, or agreement, or arrangement of any kind with a Member
or any
Affiliate of any Member or the Companies; or modified, amended or expanded
any
Related Party Transaction without the prior written consent of FAAC;
or
(cc) authorized,
agreed or otherwise committed to any of the foregoing.
3.36 Full
Disclosure.
Neither
this Agreement nor any Section, agreement, document or certificate delivered
pursuant hereto contains any untrue statement of a material fact or omits
to
state a material fact necessary in order to make the statements contained
herein
or therein, in light of the circumstances under which such statements were
made.
All documents and other papers delivered by or on behalf of the Members
and the
Companies in connection with this Agreement are true, complete and correct
in
all material respects.
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ARTICLE
IV
Representations
and Warranties of FAAC
FAAC
represents and warrants to the Members:
4.1 Organization
and Power.
(a) FAAC
is a
corporation duly organized, validly existing and in good standing under
the laws
of Delaware and has full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate
the
Contemplated Transactions.
(b) FAAC
has
all requisite corporate power to own or lease and operate its
properties.
4.2 Authorization
and Enforceability.
FAAC’s
Board of Directors has duly authorized and approved the execution and delivery
of this Agreement and, subject to the approval of FAAC’s shareholders, the
execution and delivery of the other Transaction Documents and the consummation
of the Contemplated Transactions. As
of the
Closing Date (a) FAAC will have duly authorized the execution and delivery
of
and the performance of its obligations under the Transaction Documents
and (b)
the Transaction Documents will constitute the legal, valid and binding
obligation of FAAC and shall be enforceable against FAAC in accordance
with its
and their terms, respectively, subject to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting creditors’
rights and to general equity principles.
4.3 No
Violation.
None
of
the execution, delivery or performance of this Agreement or any of the
other
Transaction Documents by FAAC and the consummation of the Contemplated
Transactions will:
(a) conflict
with or violate any provision of the certificate of incorporation, any
bylaw or
any corporate charter or document of FAAC;
(b) result
in
the creation of, or require the creation of, any Lien upon any (i) shares
of shares of stock of FAAC or (ii) property of FAAC;
(c) result
in
(i) the termination, cancellation, modification, amendment, violation,
or
renegotiation of any contract, agreement, indenture, instrument, or commitment
pertaining to the business of FAAC, or (ii) the acceleration or forfeiture
of any term of payment;
A-62
(d) give
any
Person the right to (i) terminate, cancel, modify, amend, vary, or
renegotiate any contract, agreement, indenture, instrument, or commitment
pertaining to the business of FAAC, or (ii) to accelerate or forfeit any
term of payment; or
(e) violate
any Law applicable to FAAC or by which its properties are bound or
affected.
4.4 Consents.
None
of
the execution, delivery or performance of this Agreement by FAAC, nor
consummation of the Contemplated Transactions or compliance with the terms
of
the Transaction Documents will require (a) the consent or approval under
any
agreement or instrument or (b) FAAC to obtain the approval or consent of,
or
make any declaration, filing (other than administrative filings with Taxing
Authorities, foreign companies registries and the like) or registration
with,
any Governmental Authority.
4.5 Authorization
of Stock Consideration.
The
shares of FAAC common stock to be issued pursuant to Section 2.2 to the
Members
as Stock Consideration, when issued sold and delivered at Closing in accordance
with the terms of this Agreement, will (a) be duly authorized, validly
issued,
fully paid and nonassessable, (b) not be subject to preemptive rights created
by
statute, FAAC’s certificate of incorporation or bylaws or any agreement to which
FAAC is a party or by which FAAC is bound and (c) be free of restrictions
on
transfer or Liens, other than restrictions on transfer under applicable
state
and federal securities laws or restrictions or Liens imposed thereon by
the
Members after the Closing.
4.6 Capitalization.
The
authorized capital stock of FAAC consists, and as of Closing will consist,
of
50,000,000 shares of common stock and 1,000,000 shares of preferred stock,
par
value $0.0001 per share, of which, (a) 9,550,000 shares of FAAC’s common stock
were issued and outstanding as of May 1, 2006, all of which were duly
authorized, validly issued, fully paid and nonassessable, (b) no shares
of FAAC
common stock were held in the treasury of FAAC, and (c) no shares of FAAC’s
preferred stock were outstanding. As of the Effective Date hereof, and
as of
Closing, except as described in this Section or on Schedule 4.6, (a) there
are
no outstanding (i) shares of capital stock or other voting securities of
FAAC,
(ii) securities of FAAC convertible into or exchangeable for shares of
capital
stock or voting securities of FAAC, (iii) options or other rights to acquire
from FAAC, or obligations of FAAC to issue, any capital stock, voting securities
or securities convertible into or exchangeable for capital stock or voting
securities of FAAC, and (iv) equity equivalents, interests in the ownership
or
earnings of FAAC or other similar rights (collectively “FAAC
Securities”),
and
(b) there are no outstanding obligations of FAAC to repurchase, redeem
or
otherwise acquire any FAAC Securities.
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4.7 Public
Disclosure Documents.
(a) FAAC
has
timely filed with, or furnished to, the SEC each form, proxy statement
or report
required to be filed with, or furnished to, the SEC by FAAC pursuant to
the
Exchange Act (collectively, with FAAC’s prospectus filed with the SEC on July
13, 2005, as amended to date, the “Public
Disclosure Documents”).
The
Public Disclosure Documents, as amended prior to the date hereof, complied,
as
of the date of their filing with the SEC, as to form in all material respects
with the requirements of the Exchange Act and Securities Act, as applicable.
The
information contained or incorporated by reference in the Public Disclosure
Documents was true, complete and correct in all material respects as of
the
respective dates of the filing thereof with the SEC; and, as of such respective
dates, the Public Disclosure Documents did not contain any untrue statement
of a
material fact or omit to state a material fact required to be stated therein
or
necessary to make the statements therein, in light of the circumstances
under
which they were made, not misleading.
(b) The
financial statements of FAAC included in the Public Disclosure Documents
have
been prepared in accordance with the published rules and regulations of
the SEC
and in conformity with GAAP applied on a consistent basis throughout the
periods
indicated therein, except as may be indicated therein or in the notes thereto,
and presented fairly, in all material respects, the consolidated financial
position of FAAC as of the dates indicated, and the consolidated results
of the
operations and cash flows of FAAC for the periods therein specified (except
in
the case of quarterly financial statements for the absence of footnote
disclosure and subject, in the case of interim periods, to normal year-end
adjustments).
4.8 Litigation.
There
is
no action, suit, proceeding, arbitration, claim, investigation or inquiry
pending or, to FAAC’s Knowledge, threatened by or before any governmental body
or other forum against the FAAC that (i) would reasonably be expected to
have a Material Adverse Effect as to FAAC,
(ii)
that questions the validity of this Agreement or (iii) that seeks to prohibit,
enjoin or otherwise challenge the Contemplated Transactions.
4.9 Brokers.
FAAC
has
not entered into any contract or other understanding with any Person, which
may
result in the obligation of FAAC to pay any finder’s fee, commission or other
like payment in connection with this Agreement and the Contemplated
Transactions.
4.10 Full
Disclosure.
Neither
this Agreement nor any Section, agreement, document or certificate delivered
pursuant hereto contains any untrue statement of a material fact or omits
to
state a material fact necessary in order to make the statements contained
herein
or therein, in light of the circumstances under which such statements were
made.
All documents and other papers delivered by or on behalf of the FAAC in
connection with this Agreement are true, complete and correct in all material
respects.
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ARTICLE
V
Covenants
5.1 Conduct
of the Companies.
Except
as
contemplated by this Agreement, during the period from the Effective Date
to the
Closing Date, the Members will cause the Companies to conduct their business
and
operations in the ordinary course and, to the extent consistent therewith,
to
use reasonable efforts to preserve their respective current relationships
with
customers, employees, suppliers and others having business dealings with
them.
Accordingly, and without limiting the generality of the foregoing, during
the
period from the date of this Agreement to the Closing Date, without the
prior
written consent of FAAC, neither the Companies or the Members will take,
and the
Members will not permit the Companies to take, any action that would cause
the
representations set forth in Section 3.35 not to be true as of the Closing
Date,
except as expressly contemplated by this Agreement.
5.2 Access
to Information Prior to the Closing; Confidentiality.
(a) During
the period from the Effective Date through the Closing Date, the Members
will
cause the Companies to give FAAC and its authorized representatives reasonable
access during regular business hours to all offices, facilities, books
and
records of the Companies as FAAC may reasonably request; provided,
however,
that
(i) FAAC and its representatives shall take such action as is deemed necessary
in the reasonable judgment of the Members to schedule such access and visits
through a designated officer(s) of the Companies and in such a way as to
avoid
disrupting the normal business of the Companies, (ii) the Companies shall
not be
required to take any action that would constitute a waiver of the
attorney-client or other privilege and (iii) the Companies need not supply
FAAC
with any information that, in the reasonable judgment of the
applicable Company is
under
a contractual or legal obligation not to supply, including, without limitation,
as a result of any governmental or defense industrial security clearance
requirement or program requirements of any Governmental Authority prohibiting
certain persons from sharing information; provided,
however,
each of
the Companies and the Members will use their respective reasonable efforts
to
enable FAAC to receive such information.
(b) FAAC
will
hold and will cause its employees, agents, affiliates, consultants,
representatives and advisors to hold any information that it or they receive
in
connection with the activities and transactions contemplated by this Agreement
in strict confidence in accordance with and subject to the terms of the
Confidentiality Agreement dated as of January 16, 2006 between FAAC, the
Members and the Companies (the “Confidentiality
Agreement”).
5.3 Best
Efforts.
Subject
to the terms and conditions of this Agreement, each of the parties hereto
will
use its best efforts to take, or cause to be taken, all actions, and to
do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate the transactions contemplated by this
Agreement at the earliest practicable date.
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5.4 Consents.
Without
limiting the generality of Section 5.3 hereof, each of the parties hereto
will
use its best efforts to obtain all licenses, permits, authorizations, consents
and approvals of all third parties and governmental authorities necessary
in
connection with the consummation of the transactions contemplated by this
Agreement prior to the Closing. Each of the parties hereto will make or
cause to
be made all filings and submissions under laws and regulations applicable
to it
as may be required for the consummation of the transactions contemplated
by this
Agreement. FAAC, the Members and the
Companies will
coordinate and cooperate with each other in exchanging such information
and
assistance as any of the parties hereto may reasonably request in connection
with the foregoing.
5.5 Access
to Books and Records Following the Closing.
Following
the Closing, FAAC shall permit the Members and their authorized representatives,
during normal business hours and upon reasonable notice, to have reasonable
access to, and examine and make copies of, all books and records of the
Companies and/or FAAC that relate to transactions or events occurring prior
to
the Closing or transactions or events occurring subsequent to the Closing
that
are related to or arise out of transactions or events occurring prior to
the
Closing; provided,
however,
(a)
that the Members and their representatives shall take such action as is
deemed
necessary in the reasonable judgment of FAAC and the Companies to schedule
such
access and visits through a designated officer of the
Companies and
in
such a way as to avoid disrupting the normal business of FAAC and/or the
Companies, (b) neither FAAC nor the Companies shall be required to take
any
action that would constitute a waiver of the attorney-client or other privilege
and (c) neither FAAC nor the Companies need supply the Members, or their
representatives, with any information which, in the reasonable judgment
of FAAC
or the Companies (as the case may be) is under a contractual or legal obligation
not to supply, including, without limitation, as a result of any governmental
or
defense industrial security clearance requirement or program requirements
of any
Governmental Authority prohibiting certain persons from sharing information.
FAAC agrees that it shall retain and shall cause the Companies to retain
all
such books and records for a period of seven years following the Closing,
or for
such longer period following the Closing as may be required by applicable
Law.
5.6 Members’
Post-Closing Confidentiality Obligation.
Following
the Closing, except as otherwise expressly provided in this Agreement or
in
other agreements delivered in connection herewith, the Members shall, and
shall
cause their respective Affiliates, officers agents and representatives,
as
applicable to, (a) maintain the confidentiality of, (b) not use, and (c)
not
divulge, to any Person any confidential or proprietary information of the
Companies, except with the prior written consent of FAAC or to the extent
that
such information is required to be divulged by legal process, except as
may
reasonably be necessary in connection with the performance of any
indemnification obligations under this Agreement or except as may be required
by
Law; provided,
however,
that
the foregoing limitations shall not apply to information that (i) otherwise
becomes lawfully available to the Members, or their respective Affiliates,
officers agents and representatives after the Closing Date on a nonconfidential
basis from a third party who is not under an obligation of confidentiality
to
FAAC or the Companies or (ii) is or becomes generally available to the
public
without breach of this Agreement by the Members, or their respective Affiliates,
officers agents and representatives.
5.7 Expenses.
(a) Except
as
otherwise provided in this Section 5.7, each of the parties shall bear
its own
expenses related to the Contemplated Transactions. Notwithstanding the
foregoing, all compensation due Evergreen and other third-party costs of
the
Members or the Companies with respect to the Contemplated Transactions
and other
the amounts referred to on Schedule 5.7 of the Disclosure Schedules, including,
but not limited to all payments under the Phantom Membership Interest Plan
due
at Closing and otherwise to terminate the Phantom Membership Interest Plan
(collectively, the “Members’
Transaction Costs”)
shall
be the responsibility of the Members and, to the extent payable at Closing,
and
not otherwise paid by the Members, shall be paid at Closing in accordance
with
Section 5.8(a).
(b) Notwithstanding
the foregoing, the obligation to pay Taxes shall be allocated pursuant
to
Section 5.11 rather than this Section 5.7.
5.8 Certain
Closing Payments.
(a) The
Members shall be obligated to repay all Indebtedness of the Companies as
of the
Closing (other than the Assumed Debt). In connection with the Closing,
FAAC
shall repay out of the Cash Consideration, on behalf of the Members, (i)
all
Indebtedness of the Companies remaining outstanding (other than the Assumed
Debt), and (ii) all Members’ Transaction Costs. To the extent the amount of any
such payment can be determined, and paid, at or prior to the Closing, then
a
downward adjustment shall be made in the Cash Consideration paid at Closing
equal to such amount. In the event any such payment cannot be determined
or paid
at or prior to Closing, then (i) the parties to the Escrow Agreements shall
instruct the Escrow Agent to pay any such amount (from the Balance Sheet
Escrow
to the extent of any Balance Sheet Escrow Property and then from the General
Indemnity Escrow) to FAAC within three (3) Business Days of determination
(which
may be through delivery of an invoice) and (ii) the Members hereby agree
and
covenant that they shall be jointly and severally responsible for and shall
immediately deposit in the General Indemnity Escrow cash in the amount
of the
distributions made from the Escrowed Property to cover costs the Members
are
responsible for under this Section 5.8.
(b) It
is the
intent of the parties that all Members shall be deemed to have repaid any
and
all loans outstanding and owing by any of the Members to the
Companies as of the Closing Date. Notwithstanding anything in this Agreement
to
the contrary, the Members’ Representative shall be permitted to make, or direct,
non-pro rata distributions of the Cash Consideration to the Members in
order to
account for any such deemed repayments.
(c) The
Members hereby instruct FAAC and FAAC hereby agrees that 67,825 shares
of FAAC
common stock (the “Evergreen
Stock Payment Amount”)
otherwise payable to Gallagher and Rosato pursuant to Section 2.2(d) above,
shall be issued, on Rosato’s and Gallagher’s behalf, to Evergreen, or such other
recipients as may be identified in writing by Evergreen on or before the
Closing
Date as partial payment of the fees due Evergreen under the Evergreen Agreement
(the “Evergreen
Stock Payment”).
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(i) As
a
condition to receiving the Evergreen Stock Payment, Evergreen and any other
recipients identified by Evergreen, shall be required to sign a Lock Up
Agreement and Acquisition Agreement in the form attached hereto as Exhibit
J.
(ii) The
shares of FAAC’s common stock to be issued pursuant to this Agreement as the
Evergreen Stock Payment (A) have not been, and will not be at the time
of
issuance, registered under the Securities Act, and will be issued in a
transaction that is exempt from the registration requirements of the Securities
Act and (B) will be “restricted securities” under the federal securities laws
and cannot be offered or resold except pursuant to registration under the
Securities Act or an available exemption from registration. All certificates
evidencing the Stock Consideration shall bear, in addition to any other
legends
required under applicable securities laws, the following legend:
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OR
PURSUANT
TO AN AVAILABLE EXEMPTION FROM REGISTRATION.”
5.9 No
Solicitation of Competitive Transactions.
From
the
date of this Agreement until the Closing, or, if earlier, the termination
of
this Agreement in accordance with its terms, each of the Companies and
each of
the Members agrees that they will not, directly or indirectly, through
any
officer, director, employee, representative or agent or any of their affiliates,
(i) solicit, initiate, entertain or encourage any inquiries or proposals
that
constitute, or could lead to, a proposal or offer for a merger, consolidation,
business combination, recapitalization, sale of substantial assets, sale
of a
substantial percentage of shares of capital stock (including, without
limitation, by way of a public offering or private placement), joint venture
or
similar transactions involving the Companies or any of its subsidiaries,
other
than a transaction with FAAC and/or its affiliates (any of the foregoing
inquiries or proposals being referred to herein as an “Acquisition
Proposal”),
(ii)
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Proposal,
or
(iii) agree to, approve or recommend any Acquisition Proposal. The Members
will
notify FAAC immediately (and not later than twenty-four (24) hours) after
receipt of any Acquisition Proposal or any request for non-public information
in
connection with an Acquisition Proposal or for access to the properties,
books
or records of the Companies by any person or entity that informs the Members
or
the Companies that it is considering making or has made an Acquisition
Proposal.
Such notice shall be made orally (and shall be confirmed in writing) and,
subject to existing confidentiality, nondisclosure or other similar agreements,
shall indicate the identity of the party making the proposal and the material
terms and conditions of such proposal, inquiry or contract. The Members
and the
Companies will prevent, as applicable any of their respective directors,
officers, affiliates, representatives or agents (each a “Representative”)
from
taking any action prohibited hereby if taken by the Members or the Companies.
If
the Members or either of the Companies learns of any such action taken
by a
Representative, the Member(s) or Companies will immediately advise FAAC
and
provide the information specified herein.
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5.10 Personnel.
(a)Except
as
otherwise provided in Section 5.10(e), FAAC intends that all Personnel
employed
by the Companies as of the Closing Date, shall have the opportunity to
continue
as an employee of FAAC following the Closing Date. For purposes of this
Agreement, the Companies’ Personnel as of the Closing Date shall be categorized
sometimes as (i) the senior executives (consisting of Thomas P. Rosato
and
Gerard J. Gallagher, the “Senior
Executives”),
(ii) the “Key
Employees”
(which
shall mean and refer to those employees identified by FAAC on a written
list
previously provided to the Companies and Members) and (iii) the “Non-Key
Employees”
(which
shall refer to all personnel other than the Senior Executives and the Key
Personnel).
(b)Simultaneously
with the execution of this Agreement, each of the Senior Executives shall
enter
into employment agreements with FAAC in the form attached hereto as Exhibits K-1
and K-2
(jointly, the “Senior
Executives Employment Agreements”)
with
effectiveness contingent only on Closing.
(c) Not
less
than fifty percent (50%) of the Key Employees shall enter into employment
agreements with FAAC in the form attached hereto as Exhibit
L (the
“Key
Employee Employment Agreement”)
with
effectiveness contingent only upon Closing.
(d) From
and
after the Closing Date, the Senior Executives, any Key Employee who signs
a Key
Employee Employment Agreement and the Non-Key Employees shall be given
(to the
extent he or she elects to participate and it is permitted by Law), credit
for
past service with either
of
the Companies for
purposes of participation and vesting in any employee benefit plan offered
by
FAAC.
5.11 Certain
Tax Matters.
(a) Purchase
Price allocation.
The
Purchase Consideration, as adjusted, and other amounts treated as purchase
price
for income tax purposes will be allocated among the assets of the Companies
shall be mutually agreed to by FAAC and the Members within thirty (30)
days
after the Closing. FAAC, the Companies and the Members shall use this allocation
to prepare and file Internal Revenue Service Form 8594 and any other tax
returns, and no party to this Agreement may take any inconsistent position.
The
parties to this Agreement shall cooperate in preparing, executing and filing
with the Internal Revenue Service all necessary information returns required
by
Section 1060 of the Code. On or before the 60th
day
after the Closing Date, FAAC shall send the Members a draft of Internal
Revenue
Service Form 8594 containing FAAC’s proposed allocation of the Purchase Price
among the Transferred Assets, defined under Section 1060 of the Tax Code.
Within
10 days after receipt of Form 8594, the Members’ Representative shall notify
FAAC whether it disagree with the proposed allocation and, if the Members’
Representative disagrees, the parties to this Agreement shall make a good
faith
attempt to reach an agreement.
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(b) Tax
Periods Ending on or Before the Closing Date.
The
Members shall prepare, or cause to be prepared, and file, or cause to be
filed,
on a timely basis (in each case, at their sole cost and expense) and on
a basis
reasonably consistent with past practice, all Tax Returns with respect
to the
Companies for taxable periods ending on or prior to the Closing Date and
required to be filed thereafter (the “Prior Period Returns”). The Members shall
provide a draft copy of such Prior Period Returns to FAAC for its review
at
least fifteen (15) Business Days prior to the due date thereof. FAAC shall
provide its comments to the Members at least five Business Days prior to
the due
date of such returns and the Members shall make all changes requested by
FAAC in
good faith (unless the Members are advised in writing by the independent
outside
accountants or attorneys that such changes (i) are contrary to applicable
Law,
or (ii) will, or are likely to, have a material adverse effect on the Members
(provided that the Members agree to make any such changes notwithstanding
the
application of this clause (ii) if the changes are consistent with applicable
Law and past practices of the Companies)). Except as provided in Section
5.11(c), and only to the extent such Taxes have not been accrued or otherwise
reserved for on the Closing Balance Sheets (and specifically reflected
in
Closing Net Working Capital), the Members shall pay, or cause to be paid,
all
Taxes with respect to the Companies shown to be due on such Prior Period
Returns. In the event that the Members for any reason fail to make the
payment
contemplated in the previous sentence, then FAAC may bring an indemnification
claim under ARTICLE IX.
(c) Tax
Periods Beginning Before and Ending After the Closing Date.
(i) FAAC
shall prepare or cause to be prepared and file or cause to be filed, on
a basis
reasonably consistent with past practice, any Tax Returns of the Companies
for
Tax periods that begin before the Closing Date and end after the Closing
Date
(collectively, the “Straddle
Periods”
and
each
a “Straddle
Period”).
FAAC
shall permit the Members’ Representative to review and comment on each such Tax
Return described in the preceding sentence prior to filing, and FAAC shall
make
all changes reasonably requested by the
Companies in good faith (unless FAAC is (A) advised in writing by its
independent outside accountants or attorneys that such changes are contrary
to
applicable Law or (B) will, or are likely to, have a material adverse effect
on
FAAC or any of its Affiliates (provided that FAAC agrees to make any such
changes notwithstanding the application of this clause (B) if the changes
are
consistent with applicable Law and past practices of the Companies)). Within
fifteen (15) days after the date on which FAAC pays any Taxes of the Companies
with respect to any Straddle Period, the Members shall, to the extent such
Taxes
have not been accrued or otherwise reserved for on the Closing Balance
Sheets
(and specifically reflected in the Closing Net Working Capital), pay to
FAAC the
amount of such Taxes that relates to the portion of such Straddle Period
ending
on the Closing Date (the “Pre-Closing
Tax Period”).
In
the event that the Members for any reason fail to make the payment contemplated
in the previous sentence, then FAAC may bring an indemnification claim
under
ARTICLE IX.
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(ii) For
purposes of this Agreement:
(A) In
the
case of any gross receipts, income, or similar Taxes that are payable with
respect to a Straddle Period, the portion of such Taxes allocable to (1)
the
Pre-Closing Tax Period and (2) the portion of the Straddle Period beginning
on
the day next succeeding the Closing Date (the “Post-Closing
Tax Period”)
shall
be determined on the basis of a deemed closing at the end of the Closing
Date of
the books and records of the Companies.
(B) In
the
case of any Taxes (other than gross receipts, income, or similar Taxes)
that are
payable with respect to a Straddle Period, the portion of such Taxes allocable
to the portion of the Straddle Period prior to the Closing Date shall be
equal
to the product of all such Taxes multiplied by a fraction the numerator
of which
is the number of days in the Straddle Period from the commencement of the
Straddle Period through and including the Closing Date and the denominator
of
which is the number of days in the entire Straddle Period; provided,
however,
that
appropriate adjustments shall be made to reflect specific events that can
be
identified and specifically allocated as occurring on or prior to the Closing
Date (in which case the Members shall be responsible for any Taxes related
thereto) or occurring after the Closing Date (in which case, FAAC shall
be
responsible for any Taxes related thereto).
(ii) FAAC
shall be responsible for (A) any and all Taxes with respect to the Pre-Closing
Tax Period of any applicable Straddle Period to (but only to) the extent
such
Taxes have been accrued or otherwise reserved for on the Closing Balance
Sheet
and (B) any Taxes with respect to the Post-Closing Tax Period of the
Straddle Periods.
(d) Cooperation
on Tax Matters.
(i) FAAC
and
the Members shall cooperate fully, as and to the extent reasonably requested
by
any party, in connection with the filing of Tax Returns pursuant to this
Section
and any audit, litigation, or other proceeding with respect to Taxes. Such
cooperation shall include the retention and (upon the other party’s request) the
provision of records and information reasonably relevant to any such audit,
litigation, or other proceeding and making their respective employees,
outside
consultants and advisors available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder.
FAAC
and the Members agree (A) to retain all books and records with respect
to Tax
matters pertinent to the Companies relating to any taxable period beginning
before the Closing Date until the expiration of the statute of limitations
(and,
to the extent notified by FAAC or the Members’ Representative, any extensions
thereof) of the respective taxable periods, and to abide by all record
retention
agreements entered into with any taxing authority, and (B) to give the
other
reasonable written notice prior to transferring, destroying or discarding
any
such books and records and, if the other so requests, FAAC or the Members,
as
the case may be, shall allow one of the others to take possession of such
books
and records.
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(ii) FAAC
and
the Members further agree, upon request, to use their best efforts to obtain
any
certificate or other document from any Governmental Authority or any other
Person as may be necessary to mitigate, reduce or eliminate any Tax that
could
be imposed (including, but not limited to, with respect to the transactions
contemplated hereby).
(iii) FAAC
and
the Members further agree, upon request, to provide the other party with
all
information that either party may be required to report pursuant to Section
6043
of the Code and all Treasury Department Regulations promulgated
thereunder.
(e) Certain
Taxes.
All
transfer, documentary, sales, use, stamp, registration and other such Taxes
and
fees (including any penalties and interest) incurred in connection with
the
Contemplated Transactions (including any transfer or similar tax imposed
by any
governmental authority) shall be shared equally between FAAC on the one
hand and
the Members on the other, and each shall be responsible for one-half of
such
Taxes. The party required by Law to do so will file all necessary Tax Returns
and other documentation with respect to all such transfer, documentary,
sales,
use, stamp, registration and other Taxes and fees, and, if required by
applicable Law, the other parties will join in the execution of any such
Tax
Returns and other documentation.
(f) Indemnification
and Tax Contests.
FAAC’s
and the Members’ indemnification obligations with respect to the covenants in
this Section 5.11 together with the procedures to be observed in connection
with
any Tax Contest shall be governed by ARTICLE IX.
5.12 Public
Announcements.
None
of
FAAC, the Companies or the Members, will issue any press release or make
any
public statement with respect to this Agreement or the Contemplated
Transactions, or disclose the existence of this Agreement to any Person
or
entity, prior to the Closing and, after the Closing, will not issue any
such
press release or make any such public statement without the prior consent
of the
other parties (which consent shall not be unreasonably withheld or delayed),
subject to any applicable disclosure obligations pursuant to Applicable
Law
provided that if FAAC proposes to issue any press release or similar public
announcement or communication in compliance with any such disclosure obligations
and related to the Contemplated Transactions, FAAC shall use commercially
reasonable efforts to consult in good faith with the Members’ Representative
before doing so.
5.13 Communications
with Customers and Suppliers.
The
Members’ Representative and FAAC will mutually agree upon all communications
with suppliers and customers of the
Companies relating
to this Agreement and the Contemplated Transactions prior to the Closing
Date.
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5.14 Evergreen
Agreement.
All
compensation due Evergreen with respect to the Contemplated Transactions
(collectively, the “Evergreen
Fees”),
whether under the Evergreen Agreement or otherwise, is the Members’
responsibility. The Members’ shall deliver to FAAC at the Closing a release
signed by Evergreen and in form reasonably satisfactory to FAAC (the
“Evergreen
Release”)
confirming that the Evergreen Fees have been paid in full and releasing
the
Companies and FAAC from all liability with respect to the Evergreen Agreement.
The Members hereby agree to indemnify and hold FAAC harmless from and against
any indemnification claims brought by Evergreen (or any person or entity
bringing an indemnification claim through Evergreen) under or with respect
to
the Evergreen Agreement.
5.15 Covenants
Regarding Management of FAAC.
(a) Amended
and Restated Bylaws; Senior Management as of Closing.
As of
the Closing Date (i) FAAC’s Bylaws shall be amended and restated to expand the
Board of Directors to nine (9) directors
serving three-year staggered terms and (ii) the following people shall
have been
appointed to the various senior management positions in FAAC indicated
to the
right of their name:
|
Harvey
L. Weiss
|
Chairman
of the Board of Directors
|
|
C.
Thomas McMillen
|
Vice
Chairman of the Board of Directors
|
|
Thomas
P. Rosato
|
Chief
Executive Officer
|
|
Gerard
J. Gallagher
|
President/Chief
Operating Officer
|
(b) Voting
Agreement.
At
Closing, the Members agree to sign a Voting Agreement in the form attached
hereto as Exhibit
M
under
the terms of which the Members, C. Thomas McMillen and Harvey L. Weiss
agree
(through the date of FAAC’s 2008 annual Shareholders meeting) to vote their
respective shares so as to:
(i) to
keep
in place the following individuals in the various management positions
referenced in Section 5.15(a) above; and
(ii) to
support the nomination of and to vote their shares for the appointment
of
certain directors as described in the Voting Agreement.
Notwithstanding
anything to the contrary, contained in this Agreement or the Voting Agreement,
the Members acknowledge that decisions with respect to who shall serve
as a
director of FAAC are subject to the vote of all shareholders and that the
appointment of officers is reserved to directors of the corporation exercising
their fiduciary responsibility and business judgment and that the Voting
Agreement does not guarantee or ensure that the positions for which the
shares
are to be voted under the Voting Agreement will prevail.
(c) Equity
Incentive Plan.
Simultaneously with the Closing,
FAAC
will establish an equity incentive plan that will allow for the issuance
of
equity rights to key employees of FAAC and the Companies (including the
Stock
Grant Shares) representing 2,100,000 shares of FAAC common stock (subject
to
equitable adjustment in the event of a stock split, issuance of additional
shares or similar event(s) prior to Closing).
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5.16 Welfare
Plans
(a) The
Estimated Closing Balance Sheet will reflect a reserve, estimated on the
basis
of past experience and experience through the Closing Date, which will
reflect
the estimated cost of the Companies’ self-insurance under the Self Insured Plans
through the Closing Date. The Companies will fully disclose to FAAC the
basis of
the computation of the reserves for the Self Insured Plans reflected in
the
Estimated Closing Balance Sheet. The Companies are in the process of replacing
the Self Insured Plans with fully insured plans. In connection with this
replacement, the Companies will be required to purchase an insurance “tail” for
run-off liability. The Members shall jointly and severally indemnify FAAC,
subject to the limitations set forth in ARTICLE IX on the indemnification
obligations of the Members, for the amount of medical claims and related
administrative costs arising in respect of the run-off period to the extent
they
exceed accrued reserves therefor as of the Closing Date and are not covered
by
the “tail” or “stop loss” insurance.
(b) Each
of
the Companies shall cease to be a participating employer under the Plans
sponsored by Chesapeake Tower Systems, Inc. or an Affiliate as of the Closing
Date and, prior to the Closing, shall provide Purchaser with written
documentation thereof satisfactory to Purchaser.
5.17 Cooperation
in Connection with Proxy Materials.
The
Companies and the Members will, and will cause their respective Representatives
to fully cooperate with FAAC in connection with the preparation of proxy
materials, to be filed with the SEC and mailed to the shareholders of FAAC
seeking approval of the Contemplated Transactions by the FAAC shareholders
(such
proxy materials, in the form mailed to the FAAC shareholders, the “Proxy
Materials”).
Without limiting the generality of the foregoing, the
Companies and the Members shall cause the Companies (a) to provide, as
soon as
reasonably possible after the Effective Date all information required to
be
disclosed under Item 7 of Form S-4 under the Securities Act in a form that
is
customarily included in proxy statements (the “Companies’
Information”)
and
(b) to promptly review the Proxy Material when provided by FAAC. The Members
represent and warrant that the Companies’ Information shall not contain any
untrue statement of material fact or omit a material fact necessary to
make the
statements in the Companies’ Information not misleading. Further, the
Companies will
cause McGladrey & Pullen LLP to deliver to FAAC, as of the date of the Proxy
Materials and at the expense of FAAC, letters, addressed to FAAC, in form
and
substance satisfactory to FAAC and consistent with SAS No. 72, containing
statements and information of the type customarily included in auditors’
“comfort letters” with respect to the audited financial statements, unaudited
interim financial statements, unaudited pro forma financial information
and
other financial information of the
Companies included
in the Proxy Materials.
5.18 Continuing
Related Party Transactions.
(a) To
the
extent that any Continuing Related Party Transactions are modified, amended,
or
expanded in any fashion, (including, but not limited to the award of new
business by either VTC or Vortech) after the Closing, all such modifications,
amendments, or expansions shall be expressly contingent upon the prior
written
approval of the independent members of the FAAC Board of Directors.
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(b) Prior
to
the Closing (i) the lease commitment between VTC and TPR Realty Group III
L.L.C.
to lease office space for a new corporate headquarters for VTC in Columbia,
Maryland (the “VTC
Lease Commitment”)
shall
be reduced to a Deed of Lease (the “New
VTC Lease”)
in
form satisfactory to FAAC in its sole discretion and (ii) the Members shall
cause to be obtained from a real estate appraiser an appraisal (the
“VTC
Lease Appraisal”)
indicating that the economic terms of the New VTC Lease are at or below
the
“market terms” (the appraiser and the VTC Lease Appraisal to be acceptable to
FAAC, in its sole discretion). If for any reason (i) the VTC Lease Commitment
is
not reduced to a Deed of Lease acceptable to FAAC in its sole discretion,
or
(ii) the Members are unable to produce, prior to Closing, a VTC Lease Appraisal
acceptable to FAAC; then the VTC Lease Commitment and New VTC Lease shall
be
terminated prior to Closing.
(c) The
following Continuing Related Party Transactions shall be terminated on
or before
the dates specified below:
(i) As
soon
as possible, but in all events, no later than March 31, 2007, Rosato will
cease
to own any interest of any kind in Chesapeake Tower Systems, Inc. If for
any
reason Rosato continues to own any interest in Chesapeake Tower Systems,
Inc.
after March 31, 2007, any and all contracts between the Companies and Chesapeake
Tower Systems, Inc. shall be terminable at will by FAAC, or the Companies
without penalty, fee, or damages of any kind or nature.
(ii)
As soon
as possible, but in all events, no later than December 31, 2007, Rosato
will
cease to own any interest of any kind in L.H. Cranston Acquisition Group,
Inc.
If for any reason Rosato continues to own any interest in L.H. Cranston
Acquisition Group, Inc. after December 31, 2007, any and all contracts
between
the Companies and L.H. Cranston Acquisition Group, Inc. shall be terminable
at
will by FAAC, or the Companies without penalty, fee, or damages of any
kind or
nature.
(iii) As
soon
as possible, but in all events, no later than March 31, 2007, Rosato will
cease
to own any interest of any kind in Telco Power and Cable LLC. If for any
reason
Rosato continues to own any interest in Telco Power and Cable LLC after
March
31, 2007, any and all contracts between the Companies and Telco Power and
Cable
LLC shall be terminable at will by FAAC, or the Companies without penalty,
fee,
or damages of any kind or nature.
(d) The
Members shall jointly and severally indemnify FAAC for any and all liability,
of
any kind or nature related to any Continuing Related Party Transactions
that (i)
do not conform in all respect to the requirements of Section 5.18(a) or
(ii)
that are terminated on or before the time provided and otherwise pursuant
to
Section 5.18(c).
(e) The
Members shall jointly and severally indemnify FAAC for any and all liability,
of
any kind and nature, under or with respect to that certain Corporate Guaranty
of
Lease dated October 26, 2004 by which Vortech Consulting, L.L.C. guaranteed
the
obligations of S3 Integration, L.L.C. under the terms of a Lease dated
October
25, 2004 by and between S3 Integration, L.L.C. and MIE Properties Inc.,
as
amended by a First Amendment dated August 22, 2005.
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5.19 Update
of Disclosure Schedules.
The
Members and the Companies may, at their option, but no later than three
(3)
Business Days prior to the Closing, deliver to FAAC the Disclosure Schedules
updated to the date of Closing (the “Updated
Disclosure Schedules”).
Any
Updated Disclosure Schedules shall be prepared in a manner such that the
Updated
Disclosure Schedules clearly indicate differences between the Disclosure
Schedules as delivered on the Effective Date and the Updated Disclosure
Schedules. To the extent that that there are Disclosure Schedule Update
Losses,
the FAAC Indemnitees shall be entitled to indemnification pursuant to Section
9.2, subject to the limitations of Section 9.2(f).
5.20 Threatened
Litigation.
As
disclosed on Schedule 5.25 of the Disclosure Schedules the Members and
either or
both of the Companies have been threatened with litigation by Signia Solutions,
Inc. and/or Martin C. Licht (the “Signia Threatened Litigation”). The Members
shall jointly and severally indemnify FAAC for any and all liability, of
any
kind or nature related to the Signia Threatened Litigation (the forgoing
indemnification to be deemed to be and treated as an Uncapped and Non-Threshold
Indemnification for purposes of Section 9.2(f).
ARTICLE
VI
Deliveries
by All Parties at Closing
6.1 Conditions
to All Parties Obligations.
The
obligations of the parties to consummate the Contemplated Transactions
are
subject to the fulfillment prior to or at the Closing of each of the following
conditions (any or all of which may be waived by the parties):
(a) Injunctions.
There
shall be no order or injunction of a foreign or United States federal or
state
court or other Governmental Authority of competent jurisdiction in effect
precluding, restraining, enjoining or prohibiting consummation of the
Contemplated Transactions or otherwise materially limiting or restricting
ownership or the operation of the Acquired Business;
(b) Statutes;
Consents.
No
statute, rule, order, decree or regulation shall have been enacted or
promulgated after the date hereof by any Governmental Authority of competent
jurisdiction which prohibits the consummation of the Contemplated Transactions
or otherwise materially limits or restricts ownership or operation of the
business of the Companies and all foreign or domestic governmental consents,
orders and approvals required for the consummation of the Contemplated
Transactions as set forth on Schedule 6.1(b) of the Disclosure Schedules,
shall
have been obtained and shall be in effect at the Closing and shall not
materially limit or restrict ownership or the operation of the business
of the
Companies;
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(c) Escrow
Agreements.
Each of
the parties hereto, together with the Escrow Agent, shall have entered
into the
Escrow Agreements; and
(d) Litigation.
No
litigation regarding this Agreement or the Contemplated Transactions shall
have
commenced or be pending or threatened.
6.2 Conditions
to the Members Obligations.
The
obligations of the Members to consummate the Contemplated Transactions
are
subject to the fulfillment at or prior to the Closing of each of the following
conditions (any or all of which may be waived in whole or in part by the
Members’ Representative).
(a) Representations
and Warranties.
The
representations and warranties of FAAC in this Agreement shall be true
and
correct in all material respects as of the date when made and at and as
of the
Closing Date as though such representations and warranties were made at
and as
of the Closing Date, except for changes permitted under or contemplated
by this
Agreement.
(b) Performance.
FAAC
shall have performed and complied with all agreements, obligations, covenants
and conditions required by this Agreement to be so performed or complied
with by
FAAC at or prior to the Closing.
(c) Deliveries.
The
Members shall have received the deliveries contemplated by ARTICLE
VIII.
6.3 Conditions
to FAAC’s Obligations.
The
obligations of FAAC to consummate the Contemplated Transactions are subject
to
the fulfillment at or prior to the Closing of each of the following conditions
(any or all of which may be waived in whole or in part by FAAC).
(a) Representations
and Warranties.
The
representations and warranties of the Members and the Companies in this
Agreement shall be true and correct in all material respects as of the
date when
made and at and as of the Closing Date as though such representations and
warranties were made at and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which will be true and correct in all material respects only as of
such
date), and except for changes permitted under or contemplated by this
Agreement.
(b) Performance.
The
Members and the Companies shall have performed and complied with all agreements,
obligations, covenants and conditions required by this Agreement to be
so
performed or complied with by the Members and the Companies at or prior
to the
Closing.
(c) No
Material Adverse Effect.
From
December 31, 2005 until the Closing Date, there shall have been no Material
Adverse Effect, or the occurrence of an event that has resulted or can
reasonably be expected to result in such a change, in the business, operations,
properties, contracts, customer relations or condition, financial or otherwise,
of either or both of the Companies, other than changes expressly permitted
under
or contemplated by this Agreement.
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(d) Deliveries.
FAAC
shall have received the deliveries contemplated by
ARTICLE VII.
(e) Matters
Referred to in Disclosure Schedules.
All
matters, if any, referred to in the Disclosure Schedules as being taken,
in
process, or intended to be taken shall have been completed to the reasonable
satisfaction of FAAC.
(f) Approval
by FAAC Shareholders. Approval
of the Contemplated Transactions by the FAAC shareholders.
(g) Phantom
Membership Interest Plan.
The
Phantom Membership Interest Plan is terminated and Phantom Membership Interest
Releases for every participant in the Phantom Membership Interest Plan
shall
have been executed and delivered to FAAC.
(h) Certain
Indebtedness.
All
Indebtedness of the Companies and their Subsidiaries (including, but not
limited
to, Indebtedness owed by any one or more of the Companies to officers and
directors of the Companies), and all Indebtedness owed by any officers
and
directors to the Companies, shall be paid in full.
(i) Members’
Transaction Costs.
Pursuant to Section 5.8, the Members’ Transaction Costs shall be paid in
full.
(j) Comfort
Letters.
FAAC
shall have received “comfort letters,” in customary form, from McGladrey &
Pullen LLP dated the date of the Proxy Materials and the Closing Date (or
such
other date or dates reasonably acceptable to FAAC) with respect to certain
financial statements and other financial information included in the Proxy
Statement as contemplated by Section 5.17.
(k) Evergreen
Release.
The
execution and delivery to FAAC of the signed Evergreen Release.
(l) Senior
Executive Employment Agreements.
The
execution and delivery of the Senior Executive Employment
Agreements.
(m) Key
Employee Employment Agreements.
The
execution and delivery of the Key Employee Employment Agreements from not
less
than fifty percent (50%) of the Key Employees.
(n) Stock
Consideration.
The
execution and delivery of the Acquisition Agreements, the Registration
Rights
Agreement, and the Lock Up Agreement.
(o) Voting
Agreement.
The
execution and delivery of the Voting Agreement.
(p) Fairness
Opinion.
Delivery of an opinion letter, in a form satisfactory to FAAC, issued by
FAAC’s
financial advisor to the effect that the Contemplated Transactions are
fair from
a financial point of view.
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(q) Termination
of Related Party Contracts.
The
termination of each of the Terminated at Closing Related Party Transactions
pursuant to one or more Termination Agreements (collectively the “Related
Party Termination Agreements”)
acceptable to FAAC.
(r) New
VTC Lease and VTC Lease Appraisal.
Execution, delivery and approval by FAAC of the New VTC Lease and delivery
to
and approval by FAAC of the VTC Lease Appraisal; or if either the New VTC
Lease
or VTC Lease Appraisal are not acceptable to FAAC, the termination of the
VTC
Lease Commitment and New VTC Lease.
ARTICLE
VII
Deliveries
by Members and the
Companies at
Closing
On
the
Closing Date, the Members and/or the Companies shall deliver or cause to
be
delivered to FAAC:
7.1 Members’
and the Companies’ Closing Certificate.
A
certificate in the form attached hereto as Exhibit
N,
dated
as of the Closing Date, signed by the Members and the Companies certifying
that:
(i) the
Members and the Companies respectively have performed and complied with
all
agreements, obligations, covenants and conditions required by this Agreement
to
be so performed or complied with by each of them, as applicable at or prior
to
the Closing;
(ii) from
the
Effective Date until the Closing Date, there has been no Material Adverse
Effect, or the occurrence of an event that has resulted or can reasonably
be
expected to result in such a change, in the business, operations, properties,
contracts, customer relations or condition, financial or otherwise, or
prospects
of each of the Companies, other than changes expressly permitted under
or
contemplated by this Agreement;
(iii) no
suit,
action, investigation or other proceeding is pending or threatened before
any
Governmental Authority that seeks to restrain, prohibit or obtain damages
or
other relief in connection with this Agreement or consummation of the
Contemplated Transactions or that questions the validity or legality of
such
transactions;
(iv) this
Agreement, the execution and delivery of all of the Transaction Documents
and
the consummation of the Contemplated Transactions have been approved by
all
necessary Members and company actions on the part of each of the Companies
(with
copies of all resolutions to be attached to the certificate and to be certified
as true and correct in the certificate); and
(v) the
representations and warranties of the Members and the Companies set forth
in
this Agreement are true and correct as of the Closing Date (unless the
representation or warranty by its terms is made as of a specific
date).
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7.2 Consents.
Copies
or
other evidence reasonably satisfactory to FAAC of the consents and approvals
referred to in Section 6.1(b).
7.3 Estimated
Closing Balance Sheet.
The
Estimated Closing Balance Sheet not less than two (2) Business Days prior
to the
Closing Date pursuant to Section 2.3(b).
7.4 Resignations
of Directors and Officers.
Written
resignations, dated as of the Effective Date, of all directors, officers
and
managers of each of the Companies.
7.5 Termination
of Credit Facility/Facilities.
Evidence
satisfactory to FAAC that all amounts outstanding under any credit or loan
agreements between SunTrust Bank and related agreements and notes have
been paid
in full or will be paid in full from proceeds of the Contemplated Transaction
and that documentation providing for the release of all Liens on the assets
of
the Companies is available for filing immediately after the
Closing.
7.6 Release
of Liens.
Except
as
otherwise contemplated by Section 7.5, evidence satisfactory to FAAC that
all
Liens on the Companies’ assets have been released or terminated, as the case may
be.
7.7 Phantom
Membership Interest Releases.
Delivery
of the fully executed Phantom Membership Interest Releases.
7.8 Comfort
Letters.
Delivery
of “Comfort letters” in customary form, from McGladrey & Pullen LLP dated
the date of the Proxy Materials and the Closing Date (or such other date,
or
dates reasonably acceptable to FAAC) with respect to certain financial
statements and other financial information included in the Proxy Statement
as
contemplated by Section 5.17.
7.9 Evergreen
Release.
Delivery
of the fully executed Evergreen Release.
7.10 Senior
Executive Employment Agreements.
Delivery
of fully executed Senior Executive Employment Agreements.
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7.11 Key
Employee Employment Agreements.
Delivery
of fully executed Key Employee Employment Agreements from not less than
fifty
percent (50%) of the Key Employees.
7.12 Stock
Consideration Documents.
Delivery
of the following documents fully executed by each of the Members: Acquisition
Agreements, Registration Rights Agreement and Lock Up Agreement.
7.13 Voting
Agreement.
Delivery
of fully executed Voting Agreement.
7.14 Escrow
Agreements.
Delivery
of fully executed Escrow Agreements.
7.15 Related
Party Termination Agreements.
Delivery
of fully executed Related Party Termination Agreements for each of the
Terminated At Closing Related Party Transactions.
7.16 New
VTC Lease and VTC Lease Appraisal.
Delivery
of the New VTC Lease and VTC Lease Appraisal in form acceptable to FAAC;
or if
either the New VTC Lease or VTC Lease Appraisal are not acceptable to FAAC,
then
documents acceptable to FAAC terminating the VTC Lease Commitment and the
New
VTC Lease.
7.17 Further
Instruments.
Such
further instruments of assignments, conveyance or transfer or other documents
of
further assurance as FAAC may reasonably request.
ARTICLE
VIII
Deliveries
by FAAC at Closing
On
the
Closing Date, FAAC shall deliver or cause to be delivered to the Members,
or to
the Escrow Agent, as applicable:
8.1 Officer’s
Certificate.
A
certificate in the form attached hereto as Exhibit
O,
dated
as of the Closing Date, signed by a senior officer of FAAC certifying
that:
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(a) FAAC
has
performed its obligations and complied to the extent applicable with all
agreements, obligations, covenants and conditions required by this Agreement
to
be so performed or complied with by FAAC at or prior to the Closing;
(b) no
suit,
action, investigation or other proceeding is pending or threatened before
any
Governmental Authority that seeks to restrain, prohibit or obtain damages
or
other relief in connection with this Agreement or consummation of the
Contemplated Transactions or that questions the validity or legality of
such
transactions;
(c) this
Agreement, the execution and delivery of all of the Transaction Documents
and
the consummation of the Contemplated Transactions have been approved by
FAAC’s
board of directors (with copies of all resolutions to be attached to the
certificate and to be certified as true and correct in the
certificate);
and
(d) the
representations and warranties of FAAC set forth in this Agreement are
true and
correct as of the Closing Date (unless the representation or warranty is
made as
of a specific date).
8.2 Closing
Consideration and Escrow Deposits.
Pursuant
to Section 2.2, the Closing Consideration shall be delivered to the Members’
Representative and the Escrow Deposits shall be delivered to the Escrow
Agent.
8.3 Stock
Consideration Documents.
Delivery
of the following documents fully executed by FAAC: Acquisition Agreements;
Registration Rights Agreement; and Lock Up Agreement.
8.4 Senior
Executive Employment Agreement.
Delivery
of the Senior Executive Employment Agreement fully executed by
FAAC.
8.5 Key
Employee Employment Agreements.
Delivery
of the Key Employee Employment Agreements fully executed by FAAC.
8.6 Management
of FAAC.
Delivery
by FAAC of Amended and Restated Bylaws and various resolutions of FAAC’s Board
of Directors implementing the provisions of Sections 5.15(a).
8.7 Escrow
Agreements.
Delivery
of the Escrow Agreements fully executed by FAAC.
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8.8 Employee
Stock Grants.
Delivery
of the Employee Stock Grants.
8.9 Further
Instruments.
Such
documents of further assurance as the Members may reasonably
request.
ARTICLE
IX
Survival
and Indemnification
9.1 Survival
of Representations and Warranties.
(a) Except
for the Surviving Representations, the representations and warranties of
the
Members and the Companies on the one hand, and FAAC, on the other hand,
in this
Agreement or in any certificate or document delivered on or before the
Closing
Date, and subsections (a), (b) and (c) of Section 5.16, shall survive any
due
diligence investigation by or on behalf of the parties hereto and the Closing
and shall remain effective until eighteen (18) months following the Closing
Date
(the “Survival
Date”).
After
the expiration of such period, the representations and warranties shall
expire
and be of no further force and effect except to the extent that a claim
or
claims shall have been asserted by FAAC or the Members, as the case may
be, with
respect thereto on or before the expiration of such period, provided however
that the following representations and warranties (collectively the
“Surviving
Representations”)
shall
survive the Survival Date until the date specified below.
(i) Claims
for indemnification based on breaches of representations and warranties
of the
Members in Section 3.11(a) (Title to Membership Interests) shall survive
the
Survival Date and claims for indemnification based on breaches of such
representations and warranties may be made at any time following the
Closing.
(ii) Claims
for indemnification based on breaches of representations and warranties
of the
Members and the Companies in Sections 3.21 (Compliance with Laws), 3.22
(Environmental Matters), 3.24 (Absence of Certain Business Practices),
3.28
(ERISA) and 3.29 (Tax Matters) shall survive the Survival Date and claims
for
indemnification based on breaches of such representations and warranties
may be
made up to the date that is three (3) months after the expiration of the
applicable statute of limitations.
(iii) Claims
for indemnification based on breaches of representations and warranties
of the
Members and the Companies in Section 3.18 (Federal and State Government
Contracts) with respect to cost reimbursable Government Contracts shall
survive
the Survival Date and claims based on breaches of such representations
and
warranties may be made up to the date thirty (30) days after the applicable
Governmental Authority has agreed on final indirect cost rates for any
fiscal
year that began prior to the Closing Date.
(b) The
undersigned acknowledge and agree that the covenants contained in this
Agreement, including, but not limited to the covenants contained in ARTICLE
V
above shall survive Closing and are unaffected by this Section 9.1.
9.2 Indemnification.
(a) By
FAAC.
(i) Subject
to Section 9.2(g), FAAC shall protect, defend, indemnify and hold harmless
the
Members and their respective agents, representatives, successors and assigns,
estates and heirs (“Members
Indemnitees”)
from
and against any losses, damages and expenses (including, without limitation,
except as provided in Section 9.2(d), reasonable counsel fees, costs and
expenses incurred in investigating and defending against the assertion
of such
liabilities (collectively “Losses”))
that
may be sustained, suffered or incurred by the Members Indemnities, and
that are
related to (A) any breach by FAAC of its representations and warranties
in this
Agreement, (B) any breach by FAAC of its covenants, agreements or obligations
in, or under, this Agreement, (C) Taxes as provided in paragraph (ii) of
this Section 9.2(a) or (D) any liabilities of the
Companies following the Closing other than those liabilities for which
the
Members have agreed to indemnify FAAC pursuant to Section 9.2(b) of this
Agreement.
(ii) The
obligations of FAAC under paragraph (i) of this Section 9.2(a) shall extend
to
(A) all Taxes with respect to taxable periods beginning after the Closing
Date
(including any Taxes with respect to transactions properly treated as occurring
on the day after the Closing Date pursuant to Treasury Regulations
Section 1.1502-76(b)(1)(ii)(B) or any similar provision of state, local or
foreign law) and (B) all Taxes (other than federal income Taxes) with
respect to Straddle Periods.
(b) By
the
Members.
(i) Subject
to Sections 9.2(e), 9.2(f), 9.2(h), 9.2(i) and 9.3 the Members jointly
and
severally shall protect, defend, indemnify and hold harmless FAAC, and
the
Companies and their respective Affiliates, and their officers, directors,
employees, agents, representatives, successors and assigns (“FAAC
Indemnitees”)
from
and against any Losses that may be sustained, suffered or incurred by FAAC
Indemnitees and that are related to (A) any breach by the Members or the
Companies of their respective representations and warranties in this Agreement
(including Disclosure Schedule Update Losses), (B) any breach by the Members
or
the Companies of covenants and obligations in or under this Agreement,
including, but not limited to the Members obligations to make payments
to FAAC
pursuant to Sections 2.2 and 2.4(e)
and the
Members’ or the Companies’ obligations pursuant to ARTICLE V (including but not
limited to Members’ obligations under Sections 5.7, 5.8, 5.11(b), 5.11(c)
and 5.14) (C) Taxes as provided in paragraph (ii) of this Section
9.2(b), to the extent such Taxes have not been accrued or otherwise reserved
for
on the Closing Balance Sheet (it being the intent of the parties that all
of the
provisions of this Agreement shall be interpreted to avoid requiring the
Members
to pay (or receive a reduction in the Purchase Consideration) twice for
the same
Tax).
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(ii) The
obligations of the Members under paragraph (i) of this Section 9.2(b) shall
extend to (A) all Taxes with respect to taxable periods ending on or prior
to
the Closing Date and (B) all Taxes with respect to Straddle Periods to
the
extent that such Taxes (1) are allocable to the period prior to Closing
pursuant
to Section 5.11(c) and (2) have not been accrued or otherwise reserved
for on
the Closing Balance Sheet. Such obligations shall be without regard to
whether
there was any breach of any representation or warranty under ARTICLE III
with
respect to such Tax or any disclosures that may have been made with respect
to
ARTICLE III or otherwise. The indemnification obligations under this paragraph
(ii) shall apply even if the additional Tax liability results from the
filing of
a return or amended return with respect to a pre-Closing Date transaction
or
period (or portion of a period) by FAAC. FAAC shall not cause or permit
the
Companies to file an amended Tax Return with respect to any taxable period
ending on or prior to the Closing Date or any Straddle Period unless
(y) the Members’ Representative consents in its sole discretion or (z) FAAC
obtains a legal opinion (in form and content reasonably acceptable to the
Members’ Representative) from counsel reasonably acceptable to the Members’
Representative that such amendment is legally required to be filed (provided,
further, that such legal opinion may not assume any facts that are disputed
in
good faith by the Members’ Representative).
In the
event of any conflict between the provisions of this Section 9.2(b)(ii)
and any
other provision of this Agreement, the provisions of this Section shall
control.
(c) Procedure
for Third-Party Claims.
(i) If
any
Third-Party Claims shall be commenced, or any claim or demand shall be
asserted
(other than audits or contests with Taxing Authorities relating to Taxes),
in
respect of which the Indemnified Party proposes to demand indemnification
by
Indemnifying Party under Sections 9.2(a) or 9.2(b), the Indemnified Party
shall
notify the Indemnifying Party in writing of such demand and the Indemnifying
Party shall have the right to assume the entire control of the defense,
compromise or settlement thereof (including the selection of counsel),
subject
to the right of the Indemnified Party to participate (with counsel of its
choice), but the fees and expenses of such additional counsel shall be
at the
expense of the Indemnified Party. The Indemnifying Party will not compromise
or
settle any such action, suit, proceeding, claim or demand (other than,
after
consultation with Indemnified Party, an action, suit, proceeding, claim
or
demand to be settled by the payment of money damages and/or the granting
of
releases, provided
that no
such settlement or release shall acknowledge the Indemnified Party’s liability
for future acts or obligate FAAC with respect to activities of the Companies
or
the Members) without the prior written consent of the Indemnified Party,
which
consent shall not be unreasonably withheld, or delayed.
(ii) Notwithstanding
anything to the contrary contained in this Section 9.2(c), FAAC at its
expense
shall have the sole right to control and make all decisions regarding interests
in any Tax audit or administrative or court proceeding relating to Taxes,
including selection of counsel and selection of a forum for such contest,
provided,
however,
that in
the event such audit or proceeding relates to Taxes for which the Members
are
responsible and have agreed to indemnify FAAC, (A) FAAC, the Companies,
and the
Members shall cooperate in the conduct of any audit or proceeding relating
to
such period, (B) the Members, acting through the Members’ Representative, shall
have the right (but not the obligation) to participate in all facets of
such
audit or proceeding at the Members’ expense (including, but not limited to, the
right to be present at all meetings and on all telephone conversations
and to
receive copies of all correspondence, emails and other forms of nonverbal
communications related to the Taxes in question), (C) FAAC shall not enter
into
any agreement with the relevant taxing authority pertaining to such Taxes
without the written consent of the Members’ Representative, which consent shall
not unreasonably be withheld, and (D) FAAC may, without the written consent
of
the Members, enter into such an agreement provided that FAAC shall have
agreed
in writing to accept responsibility and liability for the payment of such
Taxes
and to forego any indemnification under this Agreement with respect to
such
Taxes.
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(iii) The
parties will keep each other informed as to matters related to any audit
or
judicial or administrative proceedings involving Taxes for which indemnification
may be sought hereunder, including, without limitation, any settlement
negotiations. Refunds of Tax relating to periods ending prior to the Closing
Date (or to that portion of a Straddle Period that is prior to Closing
under the
principles of Section 5.11(c)) shall be the property of the Members, but
only to
the extent that such refunds are not attributable to (A) net operating
loss or
other carrybacks from periods ending after the Closing Date, or (B) refund
claims that are initiated by FAAC (provided
that
FAAC gives the Members’ Representative prior notice of such possible claim and
the Members decline to pursue such refund at its or their own expense);
provided,
however,
that
FAAC shall in no event have an obligation to file or cause to be filed
a claim
for refund with respect to any Taxes relating to any period.
(iv) Any
indemnity payment or payment of Tax by the Members or its or their Affiliates
as
a result of any audit or contest shall be reduced by the present value
of the
correlative amount, if any, by which any Tax of FAAC or its Affiliates
is or
will be reduced for periods ending after the Closing Date as a result thereof.
(v) The
Indemnified Party shall cooperate fully in all respects with the Indemnifying
Party in any defense, compromise or settlement, subject to this Section
9.2(c)
including, without limitation, by making available all pertinent books,
records
and other information and personnel under its control to the Indemnifying
Party.
(d) Procedure
for Direct Claims.
(i) Any
Direct Claim shall be asserted by written notice given by the Indemnified
Party
to the Indemnifying Party (each a “Direct
Claim Notice”).
The
Indemnifying Party shall have a period of twenty (20) Business Days from
the
date of receipt (the “Direct
Claim Notice Period”)
within
which to respond to a Direct Claim Notice. If the Indemnifying Party does
not
respond in writing within the Direct Claim Notice Period, then the Indemnifying
Party shall be deemed to have accepted responsibility for the claimed
indemnification and shall have no further right to contest the validity
of that
claim. If the Indemnifying Party does respond in writing within the Direct
Claim
Notice Period, and rejects the claim in whole or in part, the Indemnified
Party
shall be free to pursue all remedies under Section 11.11. To the extent
that any
FAAC Indemnitees prevail in a Direct Claim (or the Members’ Representative
concedes (on behalf of the Members), or otherwise does not timely respond
to a
Direct Claim Notice made by FAAC) then the Direct Claim shall be satisfied
from
the General Indemnity Escrow (and the Escrow Agent shall pay to FAAC from
the
General Indemnity Escrow the amount of the Direct Claim) with no further
action
required by the Members, or the Members’ Representative. Direct Claims shall be
satisfied from the General Indemnity Escrow Property in the General Indemnity
Escrow with the FAAC stock then in the General Indemnity Escrow valued
at the
Average Share Value.
(ii) Costs
Related to Direct Claims.
Notwithstanding anything in this Section 9.2
to the
contrary, except as otherwise may be ordered by a court of competent
jurisdiction, the Members Indemnitees and FAAC Indemnitees shall each bear
their
own costs, including counsel fees and expenses, incurred in connection
with
Direct Claims against FAAC and the Members, respectively hereunder that
are not
based upon claims asserted by third parties.
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(e) Calculation
of Amount of Claims and Losses.
The
amount of any claims or losses subject to indemnification under Section
9.2(b)
shall be calculated net of any amounts recovered by FAAC or its Affiliates
(including the Companies after the Closing) under applicable insurance
policies
held by FAAC or its Affiliates, and FAAC agrees to make or cause to be
made all
reasonable claims for insurance under such policies that may be applicable
to
the matter giving rise to the indemnification claim hereunder. The amount
of any
claims or losses subject to indemnification under Section 9.2(b) shall
be
calculated net of the present value of any Tax benefits to FAAC or its
Affiliates (including the Companies after the Closing) resulting from the
matter
giving rise to the indemnification claim hereunder (computed at the highest
effective marginal tax rates at which FAAC is then paying Taxes and limited
to
the extent that the Tax Benefits can be utilized by FAAC).
(f) Limitations
on Rights of FAAC Indemnitees.
(i) Subject
to the provisions of Section 9.2(f)(ii) below the rights of FAAC Indemnitees
to
indemnification by the Members for breaches of representations and warranties
hereunder shall be subject to the limitations:
(A) The
FAAC
Indemnitees shall not be entitled to indemnification with respect to a
claim or
claims of breach of representation and warranty by the Members or the Companies
unless (1) the particular claim exceeds Eight Thousand Dollars ($8,000)
and
(2) the aggregate amount of all such claims made thereunder exceed One
Hundred Seventy Five Thousand Dollars ($175,000), in which event the indemnity
provided for in this Section 9.2
shall be
effective with respect to the total amount of such damages in excess of
$175,000; and
(B) the
Members’ aggregate maximum liability to FAAC Indemnitees under this ARTICLE IX
shall not exceed and be limited to the General Indemnity Escrow;
(ii) The
limitation in Section 9.2(f)(i)(A) above shall not apply to the “Uncapped
Non-Threshold Indemnifications”
as
hereinafter defined and the Members shall be jointly and severally liable
for
Uncapped Non-Threshold Indemnifications up to an aggregate amount of Five
Million Dollars ($5,000,000) separate and apart from the General Indemnity.
Notwithstanding the previous sentence, the limitation in Section 9.2(f)(i)(B)
shall in all events apply. For purposes of this Agreement, the term
“Uncapped
Non-Threshold Indemnifications”
shall
mean and refer collectively to indemnification liabilities of the Members
pursuant to claims based (A) on the breach of Sections 2.4(e), 5.7, 5.8,
5.11(b), 5.11(c), 5.14, 5.16, 5.18, or 5.20; or (B) the representations and
warranties of the Members and the
Companies pursuant
to Section 3.11 (Title), Section 3.28 (ERISA), Section 3.29 (Taxes), D
& O
Indemnification Claims (but only the D & O Indemnification Claims) pursuant
to Section 3.25 or clause (C) of Section 9.2(b)(i); or (C) claims
based on fraud, intentional misrepresentation or criminal acts on the part
of
the Members and the Companies and their respective officers, directors,
agents,
representative and trustees.
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(iii) The
rights of the FAAC Indemnitees to indemnification by the Members for Disclosure
Schedule Update Losses shall be subject to the limitations of Section 9.2(f)(i)
and (ii) above.
(g) Limitations
on Rights of Members Indemnitees.
The
rights of Members Indemnitees to indemnification by FAAC for breaches of
representations and warranties hereunder shall be subject to the limitation
that
Members Indemnitees shall not be entitled to indemnification with respect
to a
claim or claims for a breach of representation and warranty by FAAC unless
the
aggregate of damages with respect to all such claims exceeds $100,000,
in which
event the indemnity provided for in this Section 9.2
shall be
effective with respect to the amount of such damages. The aforementioned
limitations shall not apply to the indemnification liabilities of FAAC
with
respect to claims based on fraud, intentional misrepresentation, or criminal
acts on the part of FAAC.
(h) Limitation
on Rights of Members.
Notwithstanding anything to the contrary, the Members each acknowledge
and agree
that that they shall have no right to make a claim against the Companies
pursuant to any indemnity provision or agreement or otherwise in respect
of
Claims of FAAC Indemnitees pursuant to Section 9.2(b).
(i) Limitations
on Remedies.
No
party hereto shall be liable to the other for indirect, special, incidental,
consequential or punitive damages claimed by such other party resulting
from
such first party’s breach of its obligations, agreements, representations or
warranties hereunder, provided that nothing hereunder shall preclude any
recovery by an Indemnitee against an Indemnitor for third party
claims.
9.3 General
Indemnity Escrow Account.
(a) Pursuant
to Section 2 and the General Indemnity Escrow Agreement, at the Closing,
FAAC
shall deliver to the Escrow Agent the General Indemnity Escrow Property
and the
Escrow Agent shall set up an escrow account pursuant to the terms of the
General
Indemnity Escrow Agreement to secure the Members’ indemnification obligations
under this ARTICLE IX. The remaining property of the General Indemnity
Escrow,
if any, less the sum of the total of all then outstanding indemnity claims
by
FAAC Indemnitees (including amounts offset pursuant to Section 9.4 that
have not
been resolved) shall be delivered by the Escrow Agent to the Members’
Representative within five (5) Business Days after the Survival Date the
accounts designated by the Members’ Representative in accordance with the terms
of the General Indemnity Escrow Agreement. The Members’ Representative shall be
responsible for directing the distribution of the General Indemnity Escrow
(60%
to Rosato and 40% to Gallagher (after taking into consideration any FAAC
common
stock forfeited by Rosato or Gallagher pursuant to Section 2.2(d)(v)) and
the
Escrow Agent shall be entitled to fully rely on such directions. Each of
the
parties hereto agrees that they shall promptly sign joint instructions
authorizing the Escrow Agent to release funds subject to outstanding claims
(including funds held as a result of offsets under Section 9.4) as those
claims
are resolved pursuant to Section 11.11.
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(b) Any
earnings on the General Indemnity Escrow Property, net of escrow expenses
and
taxes, shall be paid, pro rata, to the parties receiving distributions
from
General Indemnity Escrow Account.
9.4 Effect
of Investigation.
The
right
to indemnification or other remedies based on any representation, warranty,
covenant or obligation of the Members or the Companies contained in or
made
pursuant to this Agreement or the Transaction Documents shall not be affected
by
any investigation conducted with respect to, or any knowledge acquired
(or
capable of being acquired) at any time, whether before or after the execution
and delivery of this Agreement or the Closing Date occurs, with respect
to the
accuracy or inaccuracy of or compliance with, any such representation,
warranty,
covenant or obligation. The waiver of any condition to the obligation of
FAAC to
consummate the Contemplated Transactions, where such condition is based
on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, shall not affect the right
to
indemnification or other remedies based on such representation, warranty,
covenant or obligation.
ARTICLE
X
Termination
10.1 Termination.
This
Agreement may be terminated and the transactions contemplated hereby may
be
abandoned:
(a) at
any
time, by mutual written agreement of the Members and FAAC;
(b) at
any
time after January 20, 2007, by either the Members or FAAC upon five (5)
business days’ prior written notice to the other party, if the Closing shall not
have occurred for any reason other than a breach of this Agreement by the
terminating party;
(c) by
FAAC,
if there has been a material violation or breach by the Members of any
agreement, representation or warranty contained in the Agreement, that
has
rendered the satisfaction of any condition to the obligations of FAAC impossible
and such violation or breach has not been waived by FAAC;
(d) by
the
Members, if there has been a material violation or breach by FAAC of any
agreement, representation or warranty contained in the Agreement, that
has
rendered the satisfaction of any condition to the obligations of the Members
impossible and such violation or breach has not been waived by the Members;
or
(e) by
either
FAAC or the Members if a court of competent jurisdiction shall have issued
an
order permanently restraining or prohibiting the transactions contemplated
by
the Agreement, and such order shall have become final and
nonappealable.
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10.2 Procedure
and Effect of Termination.
In
the
event of the termination of this Agreement and the abandonment of the
transactions contemplated hereby, written notice thereof shall be given
by a
terminating party to the other parties and this Agreement shall terminate
and
the transactions contemplated hereby shall be abandoned without further
action
by the Members or FAAC. If this Agreement is terminated pursuant to Section
10.1:
(a) FAAC
shall upon written request from the Members return all documents, work
papers
and other materials (and all copies thereof) obtained from the Members
or the
Companies relating to the transactions contemplated hereby, whether so
obtained
before or after the execution hereof, to the party furnishing the same,
and all
confidential information received by FAAC with respect to the Companies
shall be
treated in accordance with Section 5.2 and the Confidentiality Agreement
referred to in such Section;
(b) At
the
option of the Members, all filings, applications and other submissions
made
pursuant to Sections 5.3 and 5.4 shall, to the extent practicable, be withdrawn
from the agency or other Person to which made;
(c) The
obligations provided for in this Section 10.2, Sections 5.2 and 5.7, and
in the
Confidentiality Agreement shall survive any such termination of this Agreement;
and
(d) Notwithstanding
anything in this Agreement to the contrary, the termination of this Agreement
shall not relieve any party from liability for willful breach of this
Agreement.
ARTICLE
XI
Miscellaneous
11.1 Further
Assurances.
At
any
time and from time to time after the Closing Date, the Members, the Members’
Representative, and the Companies will, upon the request of FAAC, and FAAC
will,
upon the request of the Members or the Members’ Representative perform, execute,
acknowledge and deliver all such further acts, deeds, assignments, transfers,
conveyances, powers of attorney and assurances as may be reasonably required
by
any of them, to effect or evidence the Contemplated Transactions.
11.2 Notices.
All
necessary notices, demands and requests required or permitted to be given
hereunder shall be in writing and addressed as follows:
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If
to
Members’ Thomas
P.
Rosato
Representative 11850
Baltimore Avenue
Beltsville,
Maryland 20705
Fax: __________________
With
a
copy to: William
M. Davidow, Esquire
210
West
Pennsylvania Avenue
Suite
400
Towson,
Maryland 21204-4515
Fax:
(410) 832-2015
If
to
FAAC: Fortress
America Acquisition Corporation
Attn:
Harvey L. Weiss, Chairman of the Board
4100
North Fairfax Drive
Suite
1150
Arlington,
Virginia 22203
With
a
copy to: James
J.
Maiwurm
Squire,
Sanders & Dempsey L.L.P.
8000
Towers Crescent Drive, Suite 1400
Tysons
Corner, VA 22182-2700
Fax:
(703) 720-7801
Notices
shall be delivered by a recognized courier service or by facsimile transmission
and shall be effective upon receipt, provided that notices shall be presumed
to
have been received:
(a) if
given
by courier service, on the second Business Day following delivery of the
notice
to a recognized courier service before the deadline for delivery on or
before
the second Business Day following delivery to such service, delivery costs
prepaid, addressed as aforesaid; and
(b) if
given
by facsimile transmission, on the next Business Day, provided
that the
facsimile transmission is confirmed by answer back, written evidence of
electronic confirmation of delivery, or oral or written acknowledgment
of
receipt thereof by the addressee.
From
time
to time, either party may designate a new address or facsimile number for
the
purpose of notice hereunder by notice to the other party in accordance
with the
provisions of this Section 11.2.
11.3 Governing
Law.
This
Agreement shall in all respects be governed by, and construed in accordance
with, the laws (excluding conflict of laws rules and principles) of the
State of
Maryland applicable to agreements made and to be performed entirely within
the
State of Maryland, including all matters of construction, validity and
performance.
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11.4 Entire
Agreement.
This
Agreement, together with the Exhibits and Schedules hereto and the other
Transaction Documents, constitutes the entire agreement of the parties
relating
to the subject matter hereof and supersedes all prior contracts or agreements,
whether oral or written. There are no representations, agreements, arrangements
or understandings, oral or written, between or among the parties relating
to the
subject matter of this Agreement that are not fully expressed in this
Agreement.
11.5 Severability.
Should
any provision of this Agreement or the application thereof to any person
or
circumstance be held invalid or unenforceable to any extent: (a) such provision
shall be ineffective to the extent, and only to the extent, of such
unenforceability or prohibition and shall be enforced to the greatest extent
permitted by Law; (b) such unenforceability or prohibition in any jurisdiction
shall not invalidate or render unenforceable such provision as applied
(i) to
other persons or circumstances or (ii) in any other jurisdiction; and (c)
such
unenforceability or prohibition shall not affect or invalidate any other
provision of this Agreement.
11.6 Amendment.
Neither
this Agreement nor any of the terms hereof may be terminated, amended,
supplemented or modified orally, but only by an instrument in writing signed
by
the party against which the enforcement of the termination, amendment,
supplement, or modification shall be sought.
11.7 Effect
of Waiver or Consent.
No
waiver
or consent, express or implied, by any person to or of any breach or default
by
any party in the performance by such party of its obligations hereunder
shall be
deemed or construed to be a consent or waiver to or of any other breach
or
default in the performance by such party of the same or any other obligations
of
such party hereunder. No single or partial exercise of any right or power,
or
any abandonment or discontinuance of steps to enforce any right or power,
shall
preclude any other or further exercise thereof or the exercise of any other
right or power. Failure on the part of a party to complain of any act of
any
party or to declare any party in default, irrespective of how long such
failure
continues, shall not constitute a waiver by such person of its rights hereunder
until the applicable statute of limitation period has run.
11.8 Rights
and Remedies Cumulative.
Except
where other remedies are expressly provided herein, indemnifications under
ARTICLE IX shall constitute the sole remedy for Losses identifiable pursuant
to
Sections 9.2(a)(i), 9.2(b)(i), or 9.2(b)(iii) except with respect to fraud
or
intentional misconduct by a party. To the extent this Agreement provides
for
other remedies in addition to the indemnifications under ARTICLE IX, then
such
other remedies together with indemnifications under ARTICLE IX shall be
remedies.
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11.9 Parties
in Interest; Limitation on Rights of Others.
The
terms
of this Agreement shall be binding upon, and inure to the benefit of, the
parties hereto and their respective legal representatives, successors and
assigns. Nothing in this Agreement, whether express or implied, shall be
construed to give any person (other than the parties hereto and their respective
legal representatives, successors and assigns and as expressly provided
herein
and to the extent provided in ARTICLE IX, the Indemnified Parties) any
legal or
equitable right, remedy or claim under or in respect of this Agreement
or any
covenants, conditions or provisions contained herein, as a third party
beneficiary or otherwise.
11.10 Assignability.
This
Agreement shall not be assigned by any party hereto without the prior written
consent of the other party hereto, provided,
however,
that
the prior written consent of the Members’ Representative shall not be required
with respect to (a) any assignment by FAAC of its rights and obligations
under
this Agreement to an Affiliate of FAAC so long as such assignment does
not
relieve FAAC of its obligations hereunder; or (b) any collateral assignment
of
FAAC’s rights and remedies under this Agreement to any lender under credit and
collateral agreements, as such agreements may be amended, modified or replaced
from time to time, so long as such lender does not have the right to exercise
any of FAAC’s rights and remedies under this Agreement in the absence a default
by FAAC under the applicable credit and collateral documents. Each of the
Members hereby agrees to execute and deliver (and authorize the Members’
Representative to execute and deliver) such documents, instruments and
agreements as such lender may reasonably require to confirm, reaffirm or
perfect
such collateral assignment. This Agreement shall be binding upon and shall
inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.
11.11 Dispute
Resolution and Arbitration.
In
the
event that any dispute arises among the parties pertaining to the subject
matter
of this Agreement, and the parties, through the senior management of FAAC
and
the Members’ Representative, are unable to resolve such dispute within a
reasonable time through negotiations and mediation efforts, such dispute
shall
be resolved as set forth in this Section 11.11.
(a) The
procedures of this Section 11.11 may be initiated by a written notice
(“Dispute
Notice”)
given
by one party (“Claimant”)
to the
other, but not before thirty (30) days have passed during which the parties
have
been unable to reach a resolution as described (unless any party would
be
materially prejudiced by such delay). The Dispute Notice shall be accompanied
by
(i) a statement of the Claimant describing the dispute in reasonable detail
and
(ii) documentation, if any, supporting the Claimant’s position on the dispute.
Within twenty (20) days after the other party’s (“Respondent”)
receipt of the Dispute Notice and accompanying materials, the parties shall
submit the dispute to mediation in the Washington, D.C. area under the
rules of
the American Arbitration Association. All negotiations and mediation procedures
pursuant to this paragraph (a) shall be confidential and treated as compromise
and settlement negotiations and shall not be admissible in any arbitration
or
other proceeding.
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(b) If
the
dispute is not resolved as provided in paragraph (a) within sixty (60)
days
after the Respondent’s receipt of the Dispute Notice, the dispute shall be
resolved by binding arbitration. Within the sixty-day period referred to
in the
immediately preceding sentence, the parties shall agree on a single arbitrator
to resolve the dispute. If the parties fail to agree on the designation
of an
arbitrator within said sixty-day period, the American Arbitration Association
in
the Washington, D.C. area shall be requested to designate the single arbitrator.
If the arbitrator becomes disabled, resigns or is otherwise unable to discharge
the arbitrator’s duties, the arbitrator’s successor shall be appointed in the
same manner as the arbitrator was appointed.
(c) Except
as
otherwise provided in this Section 11.11, the arbitration shall be conducted
in
accordance with the Commercial Rules of the American Arbitration Association,
which shall be governed by the United States Arbitration Act.
(d) Any
resolution reached through mediation and any award arising out of arbitration
(i) shall be binding and conclusive upon the parties; (ii) shall be limited
to a
holding for or against a party, and affording such monetary remedy as is
deemed
equitable, just and within the scope of this Agreement; (iii) may not include
special, incidental, consequential or punitive damages; (iv) may in appropriate
circumstances include injunctive relief; and (v) may be entered in court
in
accordance with the United States Arbitration Act.
(e) Arbitration
shall not be deemed a waiver of any right of termination under this Agreement,
and the arbitrator is not empowered to act or make any award other than
based
solely on the rights and obligations of the parties prior to termination
in
accordance with this Agreement.
(f) The
arbitrator may not limit, expand, or otherwise modify the terms of this
Agreement.
(g) The
laws
of the State of Maryland shall apply to any mediation, arbitration, or
litigation arising under this Agreement.
(h) Each
party shall bear its own expenses incurred in any mediation, arbitration
or
litigation, but any expenses related to the compensation and the costs
of any
mediator or arbitrator shall be borne equally by the parties to the
dispute.
(i) A
request
by a party to a court for interim measures necessary to preserve a party’s
rights and remedies for resolution pursuant to this Section 11.11 shall
not be
deemed a waiver of the obligation to mediate or of the agreement to
arbitrate.
(j) The
parties, their representatives, other participants and the mediator or
arbitrator shall hold the existence, content and result of mediation or
arbitration in confidence.
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11.12 Jurisdiction;
Court Proceedings; Waiver of Jury Trial.
Subject
to the provisions of Section 11.11, any suit, action or proceeding against
any
party to this Agreement arising out of or relating to this Agreement shall
be
brought in any Federal or state court located in the Commonwealth of Virginia
and each of the parties hereby submits to the exclusive jurisdiction of
such
courts for the purpose of any such suit, action or proceeding. A final
judgment
in any such action or proceeding shall be conclusive and may be enforced
in
other jurisdictions by suit on the judgment or in any other manner provided
by
Law. To the extent that service of process by mail is permitted by applicable
Law, each party irrevocably consents to the service of process in any such
suit,
action or proceeding in such courts by the mailing of such process by registered
or certified mail, postage prepaid, at its address for notices provided
for
herein. Each party irrevocably agrees not to assert (a) any objection that
it
may ever have to the laying of venue of any such suit, action or proceeding
in
any Federal or state court located in the Commonwealth of Virginia and
(b) any
claim that any such suit, action or proceeding brought in any such court
has
been brought in an inconvenient forum. Each party waives any right to a
trial by
jury, to the extent lawful.
11.13 No
Other Duties.
The
only
duties and obligations of the parties are as specifically set forth in
this
Agreement, and no other duties or obligations shall be implied in fact,
law or
equity, or under any principle of fiduciary obligation.
11.14 Reliance
on Counsel and Other Advisors.
Each
party has consulted such legal, financial, technical or other expert as
it deems
necessary or desirable before entering into this Agreement. Each party
represents and warrants that it has read, knows, understands and agrees
with the
terms and conditions of this Agreement.
11.15 Waiver
of Rights Against Company’s Trust Fund.
The
Companies and each of the Members acknowledges that they have read FAAC’s Final
Prospectus, dated July 13, 2005 (“Prospectus”) and understands that FAAC has
established a trust fund for the benefit of FAAC’s public shareholders and that
FAAC may disburse monies from the trust fund only (a) to FAAC’s public
shareholders in the event such shareholders elect to convert their shares,
(b)
to FAAC’s public shareholders upon its liquidation if FAAC fails to consummate
a
business combination or (c) after or concurrently with the consummation
of a
business combination. Each
of
the Companies and
each
of the Members (i) hereby agrees that from the period commencing from the
Effective Date through the Closing he, she or it do not have any right,
title,
interest or claim of any kind in or to any monies in the trust fund for
so long
as they have not been distributed or required to be distributed and (ii)
will
not seek recourse against monies in the trust fund consistent with clause
(i) of
this sentence. This Section shall survive the termination of this Agreement
but
shall terminate and be of no further force and effect upon Closing.
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11.16 Counterparts.
This
Agreement may be executed in several counterparts, all of which taken together
shall be deemed one and constitute a single instrument. Any manual signature
upon this Agreement that is faxed, scanned or photocopied shall for all
purposes
have the same validity effect and admissibility in evidence as an original
signature and the parties hereby waive any objection to the
contrary.
[Signatures
on Following Page]
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IN
WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly
executed and delivered in its name and on its behalf, all as of the day
and year
first above written.
FORTRESS
AMERICA
ACQUISITION
CORPORATION,
a
Delaware corporation
By:
/s/
Harvey L. Weiss
Name:
Harvey L. Weiss
Title:
Chief Executive Officer
VTC,
L.L.C.,
a
Maryland limited liability company
By:
/s/ Thomas P. Rosato
Name:
Thomas P. Rosato
Title:
Managing Member
VORTECH,
LLC,
a
Maryland limited liability company
By:
/s/ Thomas P. Rosato
Name:
Thomas P. Rosato
Title:
Managing Member
MEMBERS:
/s/
Thomas
P. Rosato
Thomas
P.
Rosato
/s/
Gerald
J
Gallagher
Gerard
J.
Gallagher
MEMBERS’
REPRESENTATIVE:
/s/
Thomas P. Rosato
Name:
Thomas P Rosato
A-95
Annex
B-1
ESCROW
AGREEMENT
(Balance
Sheet Escrow)
ESCROW
AGREEMENT (“Agreement”),
dated
as of ______, 2006, by and among (a) Fortress International Group, Inc.,
formerly Fortress America Acquisition Corporation, a Delaware corporation
("FIG"); (b) VTC, L.L.C., a Maryland limited liability company (“VTC”); (c)
Vortech, LLC, a Maryland limited liability company (“Vortech”); (d) Thomas P.
Rosato (“Rosato”) and Gerard J. Gallagher (“Gallagher” who together with Rosato
owns all of the outstanding membership interests of both VTC and Vortech
(each a
“Member” and jointly the “Members”); (e) Thomas P. Rosato in his capacity as the
Members’ Representative; and (f) SunTrust Bank, a Georgia banking corporation
(the “Escrow
Agent”).
RECITALS:
WHEREAS,
pursuant to that certain Second Amended and Restated Membership Interest
Purchase Agreement, a copy of which without schedules or exhibits is
attached
hereto as Exhibit
1
(“Membership
Interest Purchase Agreement”),
dated
as of July __, 2006, by and among FIG, VTC, Vortech and the Members,
that is
hereby incorporated by reference, FIG will acquire all of the outstanding
membership interests of each VTC and Vortech;
WHEREAS,
pursuant to Section 2.6 of the Membership Interest Purchase Agreement,
the
Members designated Thomas P. Rosato as their representative, agent and
attorney-in-fact for purposes of this Agreement and other various matters
described therein (the “Members’
Representative”);
WHEREAS,
as partial consideration for their respective membership interests in
VTC and
Vortech, each of the Members has received from FIG pursuant to the terms
of the
Membership Interest Purchase Agreement and Stock Acquistion Agreements,
copies
of which (without schedules or exhibits) are attached as Exhibit
2
(jointly
the “Stock
Purchase Agreements”)
in the
aggregate [2,531,257]
shares
of FIG common stock of which 73,260 shares are hereby delivered by FIG
and the
Members to the Escrow Agent (the “Escrow
Deposit”)
to
hold in escrow pursuant to ther terms of this Agreement;
WHEREAS,
the parties desire to specify and clarify their rights and responsibilities
with
respect to the Escrow Deposit; and
WHEREAS,
the Escrow Agent is willing to serve in such capacity, but only pursuant
to the
terms and conditions of this Agreement.
NOW,
THEREFORE, in consideration of the mutual promises contained herein,
the parties
hereto agree as follows:
1. Definitions.
1.1. As
used
in this Agreement, the following terms shall have the meanings set forth
below:
B-1
“Agreed
Share Value”
has
the
meaning set forth in Section 5.3.
“Agreement”
means
this Escrow Agreement.
“Business
Day”
shall
mean any day other than a Saturday, Sunday, or any Federal or Commonwealth
of
Virginia holiday. If any period expires on a day that is not a Business
Day or
any event or condition is required by the terms of this Agreement to
occur or be
fulfilled on a day that is not a Business Day, such period shall expire
or such
event or condition shall occur or be fulfilled, as the case may be, on
the next
succeeding Business Day.
“Escrow
Account”
has
the
meaning set forth in Section 4.1.
“Escrow
Agent”
has
the
meaning set forth in the Preamble.
“Escrow
Property”
has
the
meaning set forth in Section 4.1.
“Escrow
Deposit”
has
the
meaning set forth in the Recitals.
"Final
Determination"
has the
meaning set forth in Section 5.1(b).
“FIG”
has
the
meaning set forth in the Preamble.
"Indemnity
Claim"
has the
meaning set forth in Section 5.2.
"Indemnity
Claim Notice"
has the
meaning set forth in Section 5.2.
“Members”
has
the
meaning set forth in the Preamble.
“Members’
Representative”
has
the
meaning set forth in the Recitals.
“Membership
Interest Purchase Agreement”
has
the
meaning set forth in the Recitals.
1.2. Capitalized
terms used but not defined in this Agreement have the meanings ascribed
to such
terms in the Membership Interest Purchase Agreement.
2. Appointment
of Escrow Agent.
FIG,
the Members, and the Members’ Representative hereby appoint the Escrow Agent to
act as an escrow agent as provided herein, and the Escrow Agent hereby
accepts
such appointment.
B-2
3. Members’
Representative.
3.1. The
parties acknowledge that, pursuant to the Membership Interest Purchase
Agreement, the Members’ Representative is authorized to act as the agent and
attorney-in-fact on behalf of all of the Members in all matters necessary
to
carry out the terms and conditions of this Agreement.
3.2. The
Members’ Representative represents and warrants to the Escrow Agent that he has
the irrevocable right, power and authority with respect to all of the
Members
(a) to give and receive directions and notices hereunder, (b) to make
all
determinations that may be required or that he deems appropriate under
this
Agreement, and (c) to execute and deliver all documents that may be required
or
that he deems appropriate under this Agreement. The Escrow Agent may
act upon
the directions, instructions and notices of the Members’ Representative named
above and thereafter upon the directions and instructions of the successor
Members’ Representative named in a writing executed by a majority-in-interest
of
the Members (pursuant to the provisions of Section 2.6 of the Membership
Interest Purchase Agreement) filed with the Escrow Agent.
4. Delivery
of Escrow Deposit.
4.1. FIG
acknowledges that it deposited the Escrow Deposit in an account (the
“Escrow
Account”)
with
the Escrow Agent. The FIG common stock in the Escrow Account, together
with any
dividends (and any interest or other net income received from or earned
thereon)
is hereinafter collectively referred to as the “Escrow
Property.”
4.2. If,
during the term of this Agreement, there is Escrow Property other than
the FIG
common shares, the Escrow Agent will invest the Escrow Property (other
than the
FIG common stock) as provided in Section 11.
5. Disbursement
of the Escrow Property.
The
Escrow Agent will hold the Escrow Property and, subject to the Escrow
Agent’s
right in Section 9
to
withhold disbursements when the Escrow Agent is uncertain as to what
action to
take, make disbursements therefrom as follows.
5.1. Escrow
Agent shall disburse all or a portion of the Escrow Property on deposit
in the
Escrow Account to FIG, the Members or both, as the case may be, upon
receipt
of:
(a) one
or
more fully executed Payment Request Forms in substantially the form attached
hereto as Exhibit
3,
executed by FIG and the Members' Representative on behalf of the Members,
and
otherwise pursuant to the terms hereof. Upon receipt of a Payment Request
Form,
the shares and amounts specified therein shall be promptly delivered
or paid
directly to the party or parties entitled to payment as specified in
the Payment
Request Form; or
B-3
(b) a
copy of
a Final Determination (as defined below) establishing a party's right
to the
Escrow Property. A "Final
Determination"
shall
mean (i) with respect to an Indemnity Claim (or any other dispute between
the
Members’ Representative and FIG with respect to whether either party is entitled
to some portion, or all of the Escrow Property), a final determination
stating
that it is being provided under the procedures of Section 11.11 of the
Membership Interest Purchase Agreement; or (ii) otherwise a final judgment
of an
arbitrator, arbitration panel or court of competent jurisdiction and
shall in
all cases be accompanied by a certificate of the presenting party to
the effect
that such judgment is a final judgment of an arbitrator, arbitration
panel or
court of competent jurisdiction, as applicable, and indicating the party,
address, accounts or other information as necessary to process
payments.
5.2. If
FIG
asserts in good faith a claim (an “Indemnity
Claim”)
against the Members pursuant to the Membership Interest Purchase Agreement,
FIG
shall send written notice of such Indemnity Claim (an “Indemnity
Claim Notice”)
to the
Escrow Agent and to the Members’ Representative. Such Indemnity Claim Notice
shall set forth in reasonable detail the basis for such Indemnity Claim
and a
good faith, non-binding estimate of the amount of such Indemnity Claim.
In
submitting such Indemnity Claim to the Escrow Agent, FIG shall account
for any
applicable threshold, exclusion or cap provided for in the Membership
Interest
Purchase Agreement. Whenever FIG sends such an Indemnity Claim Notice,
the
parties shall comply with the procedures set forth herein.
(a) If
the
Members’ Representative decides, in his sole and absolute discretion, to dispute
the Indemnity Claim described in the Indemnity Claim Notice, the Members’
Representative shall, on or before the twentieth (20th)
Business Day following the Escrow Agent’s receipt of such notice, send to the
Escrow Agent and FIG a written objection to such Indemnity Claim.
(b) If
the
Escrow Agent receives from the Members’ Representative a written objection to
such Indemnity Claim on or before the twentieth (20th)
Business Day following the Escrow Agent’s receipt of the Indemnity Claim Notice
describing such Indemnity Claim, and if that Indemnity Claim cannot be
settled
through negotiation within twenty (20) days of receipt of the written
objection,
then the dispute shall be resolved in accordance with Section 11.11 of
the
Membership Interest Purchase Agreement and Escrow Agent shall hold the
funds
subject to such dispute until a Final Determination is delivered with
respect
thereto.
(c) If
the
Escrow Agent does not receive from the Members’ Representative a written
objection to such Indemnity Claim Notice on or before the twentieth
(20th)
Business Day following the Escrow Agent’s receipt of the Indemnity Claim Notice
describing such Indemnity Claim, then the Escrow Agent shall make a disbursement
to FIG from the Escrow Property in the amount of the Indemnity Claim
described
in such Indemnity Claim Notice.
B-4
5.3. To
the
extent that a Payment Request Form, Final Determination, or Indemnity
Claim
(made and not timely answered pursuant to Section 5.2(c) above) specifies
a
dollar amount (rather than a share amount) payable thereunder or in satisfaction
thereof, the amount specified or claimed shall be satisfied by the delivery
from
the Escrow Property to FIG or the Members’ Representative, as the case may be,
of certificates for FIG common stock equal in value to the amount specified
or
claimed (with the FIG common stock valued at Five and 46/100 Dollars
($5.46) per
share (the “Agreed
Share Value”)
6. Payments
from the Escrow Property.
6.1. The
Escrow Agent shall make no payments from the Escrow Property unless permitted
pursuant to Sections 5, 7, 9, 10 and 13.
6.2. Any
cash
amounts payable by the Escrow Agent under this Agreement shall be paid
by bank
check or by wire transfer, as specified in the Payment Request Form or
Final
Determination received by the Escrow Agent.
6.3. Any
amounts payable in FIG common stock under this Agreement shall be payable
by the
delivery of stock certificates for FIG common stock valued at the Agreed
Share
Value. To the extent that the number of shares deliverable by the Escrow
Agent
does not correspond with stock certificates then held by the Escrow Agent,
the
Escrow Agent shall deliver to FIG one or more share certificates evidencing
shares in excess of the number of FIG common shares then deliverable
with
instructions to FIG (i) to retain and cancel a specified number of shares
(if
shares are deliverable to FIG hereunder) or issue to the Members’
Representative, or to whomever the Members’ Representative directs FIG (if
shares are deliverable to the Members’ Representative hereunder), a certificate
or certificates for FIG common shares in the amount deliverable by the
Escrow
Agent to FIG or the Members’ Representative as applicable and (ii) to issue to
the Escrow Agent a certificate for the residual balance, if any, of those
FIG
common shares evidenced the share certificate(s) delivered by the Escrow
Agent
to FIG.
6.4. All
interest and other income, if any, received from or earned on the Escrow
Property net of distributions paid or to be paid pursuant to Section
7.3
(“Earnings”) shall be applied first to pay any Escrow Fees then due under
Section 13, with any remaining Earnings to become a part of the Escrow
Property
and be paid in accordance with the other terms of this Agreement.
6.5. The
parties hereto (other than the Escrow Agent) each warrant to and agree
with the
Escrow Agent that, unless otherwise expressly set forth in this Agreement,
there
is no security interest in the Escrow Property or any part of the Escrow
Property; no financing statement under the Uniform Commercial Code of
any
jurisdiction is on file in any jurisdiction claiming a security interest
in or
describing, whether specifically or generally, the Escrow Property or
any part
of the Escrow Property. Notwithstanding anything to the contrary herein
provided, the Escrow Agent shall in no event be deemed to be a collateral
agent
or agent for any pledge or purported pledge of property held under this
Agreement. The Escrow Agent makes no representation concerning whether
or not
any security interest exists with respect to any property held under
the terms
of this Agreement and the Escrow Agent shall have no duty or obligation
with
respect to the creation, perfection or continuation of any such security
interest, it being understood that the duties of the Escrow Agent with
respect
to any property held pursuant to this Agreement are limited and confined
exclusively to the duties and responsibilities expressly set forth herein.
This
Agreement shall not be deemed or construed to be a security agreement
or to
grant a security interest in any property held in escrow hereunder.
B-5
7. Tax
Matters.
7.1. The
parties agree that the Escrow Property is intended to consist only of
FIG common
shares and that no taxable income is anticipated. Notwithstanding the
previous
sentence, for tax reporting purposes in each calendar year (other than
the
calendar year in which this Agreement is terminated pursuant to Section
14
below), all interest or other income earned from the investment of the
Escrow
Property together with all fees and expenses pursuant to Section 13 below
(or
that may otherwise be taken into consideration for purposes of calculating
and
reporting taxes due on earnings with respect to the Escrow Account and
Funds)
shall be allocable to FIG and so reported to the Internal Revenue Service
and
any other applicable taxing authority, except to the extent that any
law or
regulation should otherwise require, as provided in a written notice
from FIG to
the Escrow Agent. Notwithstanding anything to the contrary contained
herein, for
the calendar year during which this Agreement is terminated pursuant
to Section
14 below, all income, fees and expenses shall be allocated pro rata to
the
persons receiving payments of the Escrow Property during that year.
7.2. Each
of
the parties agrees to provide the Escrow Agent with a certified tax
identification number by signing and returning a Form W-9 (or Form W-8,
in the
case of non-U.S. persons) to the Escrow Agent within 30 days from the
date
hereof. The parties understand that, in the event their tax identification
numbers are not certified to the Escrow Agent, the Internal Revenue Code
may
require withholding of a portion of any interest or other income earned
on the
investment of the Escrow Property, in accordance with the Internal Revenue
Code,
as amended from time to time.
7.3. The
Escrow Agent shall distribute quarterly to FIG amounts when and in the
amounts
requested in writing in good faith by FIG to cover the potential federal,
state
or local tax obligations of FIG on account of the cumulative allocation
to FIG
of taxable income attributable to the interest and other income earned
on the
Escrow Property. Such distributions shall be requested and made with
respect to
each quarter as early as fifteen (15) days prior to the date that United
States
taxpayers are required to make estimated federal tax payments with respect
to
such quarter. For purposes of the foregoing, such federal, state and
local tax
obligations of FIG initially shall be assumed to equal an effective combined
federal and state income tax rate equal to forty-two percent (42%) (but
in no
event lower than the highest Federal marginal income tax rate plus seven
percent
(7%)).
7.4. The
Escrow Agent shall report to the Internal Revenue Service, as of each
calendar
year-end, all income earned from the Escrow Property, whether or not
such income
has been distributed during such year, as and to the extent required
by law;
and, the Escrow Agent shall prepare and file any tax returns required
to be
filed with respect to the Escrow Account.
7.5. The
persons to whom income is allocable for each year shall pay all taxes
payable on
income earned from the investment of the Escrow Property, whether or
not the
Escrow Agent distributed the income during any particular year.
B-6
8. Escrow
Agent’s Duties.
8.1. The
Escrow Agent’s duties are entirely ministerial and not discretionary, and the
Escrow Agent will be under no duty or obligation to give any notice,
or to do or
to omit the doing of any action with respect to the Escrow Property,
except to
give notice, make disbursements and invest the Escrow Property in accordance
with the terms of this Agreement.
8.2. The
Escrow Agent will neither be responsible for, nor chargeable with, knowledge
of
the terms and conditions of any other agreement, instrument or document
among
the other parties hereto, in connection herewith, including the Membership
Interest Purchase Agreement, and will be required to act only pursuant
to the
terms and provisions of this Agreement. This Agreement sets forth all
matters
pertinent to the escrow contemplated hereunder, and no additional obligations
of
the Escrow Agent will be inferred from the terms of this Agreement, the
Membership Interest Purchase Agreement or any other agreement.
8.3. The
Escrow Agent will not be liable for any error in judgment or any act
or steps
taken or permitted to be taken in good faith, or for any mistake of law
or fact,
or for anything it may do or refrain from doing in connection with this
Agreement, except for its own willful misconduct or gross negligence.
As to any
legal questions arising in connection with the administration of this
Agreement,
the Escrow Agent may consult with and rely absolutely upon the opinions
given to
it by counsel (including internal counsel) and shall be free of liability
for
acting in reliance on such opinions. In no event shall the Escrow Agent
be
liable for incidental, indirect, special, consequential or punitive damages.
8.4. The
Escrow Agent will not be required in any way to determine the validity,
genuineness, authenticity or sufficiency, whether in form or substance,
of any
instrument, document, certificate, statement or notice referred to in
this
Agreement or contemplated by this Agreement, or the identity or authority
of the
persons executing it, and it will be sufficient if any writing purporting
to be
such instrument, document, certificate, statement or notice is delivered
to the
Escrow Agent and purports to be correct in form and signed or otherwise
executed
by the party or parties required to sign or execute it under this Agreement.
The
Escrow Agent reserves the right, but shall in no way be obligated, to
call upon
the parties, or any of them, for written instructions before taking any
actions
hereunder.
8.5. During
the term of this Agreement, the Escrow Agent shall not exercise on its
own
behalf any right of set-off against, or enforce any lien on, the Escrow
Property, except such right or lien as may arise in connection with this
Agreement.
8.6. The
parties to this Agreement agree to make modifications to this Section
upon the
reasonable request of the Escrow Agent.
B-7
8.7. In
the
event of a shareholder vote, the Escrow Agent shall have the right to
exercise
all voting rights with respect to the FIG common stock held by the Escrow
Agent
as part of the Escrow Property; provided, however, that the Escrow Agent
shall
have no discretion as to voting the shares of FIG common stock except
in a
fashion that is in all respects proportional to the manner in which the
FIG
common stock not held as part of the Escrowed Property is voted (as certified
by
FIG’s Secretary). FIG, Rosato, Gallagher and the Members’ Representative each
hereby (i) instruct the Escrow Agent to vote all of the FIG common shares
held
as Escrow Property in the manner described in this Section 8.7 and (ii)
agree
that the Escrow Agent shall have no liability with respect to voting
the FIG
common stock held as Escrow Property in the manner described in this
Section
8.7. This Section 8.7 shall constitute an irrevocable proxy, coupled
with an
interest, with respect to any shares of FIG common stock (or other FIG
securities) that Escrow Agent holds pursuant to this Agreement.
9. Disputes.
9.1. It
is
understood and agreed that should any dispute arise with respect to the
payment
and/or ownership or right of possession of the Escrow Property, or should
the
Escrow Agent be uncertain as to what action to take with respect to the
Escrow
Property, the Escrow Agent is authorized and directed to retain in its
possession, without liability to anyone, all or any part of the Escrow
Property
until such dispute or uncertainty shall have been settled either by mutual
agreement by the parties concerned (as evidenced by a written agreement
among
them) or by a Final Determination.
9.2. If
the
Escrow Agent becomes involved in litigation by reason of this Agreement,
or if
the Escrow Agent reasonably believes, in its sole discretion, that it
may become
involved in litigation, the Escrow Agent is authorized to institute a
bill of
interpleader in a court in the Commonwealth of Virginia to determine
the rights
of the parties and to deposit the Escrow Property with the court in accordance
with the Commonwealth of Virginia law. Upon deposit of the Escrow Property
with
the court, the Escrow Agent shall stand fully relieved and discharged
of any
further duties as Escrow Agent. The filing of any such legal proceedings
shall
not deprive the Escrow Agent of its compensation hereunder earned prior
to such
filing and discharge of the Escrow Agent of its duties hereunder.
9.3. If
a bill
of interpleader is instituted, or if the Escrow Agent is threatened with
litigation or becomes involved in litigation in any manner whichever
on account
of this Agreement or the Escrow Property, FIG and the Members, jointly
and
severally, shall pay the Escrow Agent its reasonable attorneys’ fees and any
other disbursements, expenses, losses, costs and damages incurred by
the Escrow
Agent in connection with or resulting from such threatened or actual
litigation.
All costs and expenses of such dispute will be charged to the non-prevailing
party in such dispute, unless such non-prevailing party is a third party,
in
which case the Escrow Agent’s costs and expenses will be charged to and paid out
of the Escrow Property, and to the extent the Escrow Property are insufficient,
will be charged equally to FIG and the Members.
B-8
9.4. In
the
event that the Escrow Agent proposes to disburse to the Members any portion
of
the Escrow Property, the disbursement of which the Escrow Agent had previously
withheld pursuant to this Section, the Escrow Agent shall disburse such
amount
to the Member’s Representative.
10. Indemnity.
FIG and
the Members jointly and severally agree to hold the Escrow Agent harmless
and to
indemnify the Escrow Agent against any loss, liability, expenses (including
reasonable attorney’s fees and expenses), claim, or demand arising out of or in
connection with the performance of its obligations in accordance with
the
provisions of this Agreement, except for willful misconduct or gross
negligence
of the Escrow Agent. Notwithstanding anything in this Agreement to the
contrary,
the Escrow Agent shall be entitled to set-off against the Escrow Property
and
apply such set-off to payment of such fees and disbursements and other
liabilities and obligations hereunder. Upon the written request of the
Escrow
Agent, FIG and the Members jointly and severally agree to assume the
investigation and defense of any such claim, including the employment
of counsel
acceptable to the Escrow Agent and the payment of all expenses related
thereto
and, notwithstanding any such assumption, the Escrow Agent shall have
the right,
and FIG and the Members jointly and severally agree to pay the cost and
expense
thereof, to employ separate counsel with respect to any such claim and
participate in the investigation and defense thereof in the event that
the
Escrow Agent shall have been advised by counsel that there may be one
or more
legal defenses available to the Escrow Agent which are different from
or in
addition to those available to FIG or the Members. FIG and the Members
agree
that all references in this Section to the Escrow Agent shall be deemed
to
include references to its directors, officers, employees and agents.
The
foregoing indemnities in this paragraph shall survive the resignation
or removal
of the Escrow Agent or the termination of this Agreement.
11. Investment.
11.1. As
used
in this Section, “Eligible
Investments”
include
one or more of the following obligations or securities, but only to the
extent
that such obligations or securities mature within thirty (30) calendar
days or
such longer time as the Members’ Representative and FIG shall determine, such
longer maturities not to exceed eighteen (18) months from the Closing
Date: (a)
direct obligations of, or obligations fully guaranteed by, the United
States of
America or any agency thereof, and (b) money market funds investing primarily in
the obligations or securities listed in clause (a) above or repurchase
agreements fully collateralized by direct obligations of the United States
of
America.
11.2. The
Escrow Agent will invest the Escrow Property in such Eligible Investments
as the
Members’ Representative and FIG, from time to time, shall jointly instruct the
Escrow Agent in writing. Notwithstanding the foregoing, in no event shall
the
FIG common stock held as part of the Escrow Property be invested. Earnings
upon
Eligible Investments shall be deemed part of the Escrow Property, shall
be
deposited in the Escrow Account and shall be disbursed in accordance
with the
terms of this Agreement. Any loss or expense incurred from an Eligible
Investment shall be borne by the Escrow Property. The Escrow Agent shall
have no
responsibility or liability for any diminution which may result from
any
investments or reinvestments made in accordance with this
Agreement.
B-9
11.3. The
parties acknowledge and agree that the Escrow Agent will not provide
supervision, recommendations or advice relative to either the investment
of the
Escrow Property or the purchase, sale, retention or other disposition
of any
Eligible Investment.
11.4. The
Escrow Agent is hereby authorized to execute purchases and sales of Eligible
Investments through its own trading or capital markets operations. The
Escrow
Agent shall send statements to FIG and the Members’ Representative reflecting
activity for the Escrow Account for the preceding quarter within fifteen
(15)
days after the last day of each calendar quarter. Although the parties
acknowledge that they may obtain a broker confirmation or written statement
containing comparable information at no additional cost, each party hereby
agrees that confirmations of Eligible Investments are not required to
be issued
by the Escrow Agent for each period in which a statement is
provided.
12. Resignation.
12.1. The
Escrow Agent may resign upon thirty (30) calendar days’ prior written notice to
the Members’ Representative and FIG, and, upon joint instructions from the
Members’ Representative and FIG, will deliver the Escrow Property to any
designated substitute Escrow Agent selected by the Members’ Representative and
FIG. If the Members’ Representative and FIG fail to designate a substitute
Escrow Agent within 15 calendar days after receipt of such notice, the
Escrow
Agent may, at its sole discretion, institute a bill of interpleader as
contemplated by Section 9
above
for the purpose of having an appropriate court designate a substitute
Escrow
Agent. The Escrow Agent shall have no responsibility for the appointment
of a
successor Escrow Agent hereunder.
12.2. Any
company into which the Escrow Agent may be merged or converted or with
which it
may be consolidated, or any company resulting from any merger, conversion
or
consolidation to which it shall be a party, or any company to which the
Escrow
Agent may sell or transfer all or substantially all of its corporate
trust
business shall be the successor to the Escrow Agent without the execution
or
filing of any paper or the performance of any further act, notwithstanding
anything herein to the contrary.
13. Compensation.
FIG and
Members agree that the fees and expenses of the Escrow Agent, including
any
investment fees and other investment-related charges, for services rendered,
including the basic fees set forth in Exhibit
4
attached
hereto, shall be paid out of the Earnings; provided,
however,
that if
the Earnings are less than the fees then due, then the balance of the
fees due
to the Escrow Agent shall be paid equally by the Members and FIG. Upon
any
withdrawal from the Escrow Property to pay such fees and expenses, the
Escrow
Agent shall provide written notification of such withdrawal to FIG and
the
Members' Representative, detailing such fees and expenses. The Escrow
Agent
shall have, and is hereby granted, a prior lien upon any property, cash,
or
assets hereunder, with respect to its unpaid fees and nonreimbursed expenses,
superior to the interests of any other person.
14. Termination.
Upon
delivery of all amounts constituting the Escrow Property as provided
in Sections
5
and 7
and the resolution of all disputes, if any, covered by Section 9,
this
Agreement shall terminate except for the provisions of Section 9
(with
respect to payment of the Escrow Agent’s expenses), Section 10
and
Section 13.
B-10
15. Notices.
15.1. All
necessary notices, demands and requests required or permitted to be given
hereunder shall be in writing and addressed as follows:
If
to the
Members: c/o
Thomas P. Rosato
Members’
Representative
9841
Broken Land Parkway
Columbia,
Maryland [Zip
Code]
Fax:
________________
With
a
copy to: William
M. Davidow, Esquire
Whiteford
Taylor & Preston L.L.P.
7
St.
Paul Street
Baltimore,
Maryland 21202-1626
Fax:
(410) 223-4367
If
to
FIG: Fortress
International Group, Inc.
4100
North Fairfax Drive
Suite
1150
Arlington,
Virginia 22203
Attn:
Harvey L. Weiss, Chairman of the Board
and
James
J.
Maiwurm
Squire,
Sanders & Dempsey L.L.P.
8000
Towers Crescent Drive, Suite 1400
Tysons
Corner, VA 22182-2700
Fax:
(703) 720-7801
If
to the
Escrow Agent: SunTrust
Bank
919
East
Main Street, 10th
Floor
Richmond,
Virginia 23219
Attn:
E.
Carl Thompson, Jr.
Fax:
(804) 782-7855
15.2. Notices
shall be delivered by a recognized courier service or by facsimile transmission
and shall be effective upon receipt, provided that notices shall be presumed
to
have been received:
B-11
(a) if
given
by courier service, on the second Business Day following delivery of
the notice
to a recognized courier service for delivery on or before the second
Business
Day following delivery to such service, delivery costs prepaid, addressed
as
aforesaid; and
(b) if
given
by facsimile transmission, on the next Business Day, provided that the
facsimile
transmission is confirmed by answer back, written evidence of electronic
confirmation of delivery, or oral or written acknowledgment of receipt
thereof
by the addressee.
15.3. From
time
to time either party may designate a new address or facsimile number
for the
purpose of notice hereunder by notice to the other party in accordance
with the
provisions of this Section 15.
15.4. Notwithstanding
anything to the contrary herein provided, the Escrow Agent shall not
be deemed
to have received any notice prior to the Escrow Agent’s actual receipt thereof.
16. Choice
of Laws; Cumulative Rights.
This
Agreement shall be construed in accordance with and governed by the laws
of the
Commonwealth of Virginia without regard to the choice of law provisions
thereof.
The rights and remedies provided to each party hereunder are cumulative
and will
be in addition to the rights and remedies otherwise available to such
party
under this Agreement, any other agreement or applicable law.
17. Counterparts.
This
Agreement may be executed in any number of counterparts, each of which
when so
executed and delivered will be deemed an original, and such counterparts
together will constitute an original.
18. Successors
and Assigns.
This
Agreement will bind and inure to the benefit of the parties and their
respective
successors and permitted assigns. Except as provided in Section 12.2,
this
Agreement may not be assigned by operation of law or otherwise without
the prior
written consent of each of the parties hereto.
19. Severability.
The
provisions of this Agreement will be deemed severable, and if any provision
or
part of this Agreement is held illegal, void or invalid under applicable
law,
such provision or part may be changed to the extent reasonably necessary
to make
the provision or part, as so changed, legal, valid and binding. If any
provision
of this Agreement is held illegal, void or invalid in its entirety, the
remaining provisions of this Agreement will not in any way be affected
or
impaired but will remain binding in accordance with their terms.
20. Headings.
The
Section headings in this Agreement are for convenience of reference only
and
will not be deemed to alter or affect the meaning or interpretation of
any
provisions hereof.
B-12
21. Waiver.
No
failure on the part of any party to exercise any power, right, privilege
or
remedy under this Agreement, and no delay on the part of any party in
exercising
any power, right, privilege or remedy under this Agreement, shall operate
as a
waiver of such power, right, privilege or remedy; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude
any other
or further exercise thereof or any other power, right, privilege or remedy.
No
party shall be deemed to have waived any claim arising out of this Agreement,
or
any power, right, privilege or remedy under this Agreement, unless the
waiver of
such claim, power, right, privilege or remedy is expressly set forth
in a
written instrument duly executed and delivered on behalf of such party;
and any
such waiver shall not be applicable or have any effect except in the
specific
instance in which it is given.
22. Amendments.
This
Agreement may not be amended, modified, altered or supplemented other
than by
means of a written instrument duly executed and delivered on behalf of
each of
the parties hereto.
23. Parties
in Interest.
None of
the provisions of this Agreement is intended to provide any rights or
remedies
to any Person other than the parties hereto and their respective successors
and
permitted assigns, if any.
24. Entire
Agreement.
This
Agreement sets forth the entire understanding of the parties hereto relating
to
the subject matter hereof and supersedes all prior agreements and understandings
among or between any of the parties relating to the subject matter
hereof.
25. Escrow
Agent Documentation.
In order
to maintain compliance with the Patriot Act, prior to the effective date
of this
Agreement, FIG and the Members’ Representative shall provide to the Escrow Agent
a completed Form W-9, Certificate of Incumbency, and a copy of the corporate
document (i.e., Corporate Resolution, Articles of Incorporation, Bylaws,
Partnership Agreement, etc.) that would show proper authorization for
such
parties to enter into this Agreement.
B-13
IN
WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date
first above written.
FIG:
FORTRESS
INTERNATIONAL GROUP, INC.,
a
Delaware corporation
By:
Name:
Title:
MEMBERS:
Thomas
P.
Rosato
Gerard
J.
Gallagher
MEMBERS’
REPRESENTATIVE:
Thomas
P.
Rosato as the representative for those
Members
pursuant to Section 2.6 of the Membership
Interest
Purchase Agreement.
ESCROW
AGENT:
SUNTRUST
BANK,
a
Georgia
banking corporation
By:
Name:
Title:
B-14
Annex
B-2
ESCROW
AGREEMENT
(General
Indemnity Escrow)
ESCROW
AGREEMENT (“Agreement”),
dated
as of ______, 2006, by and among (a) Fortress International Group, Inc.,
formerly Fortress America Acquisition Corporation, a Delaware corporation
("FIG"); (b) VTC, L.L.C., a Maryland limited liability company (“VTC”); (c)
Vortech, LLC, a Maryland limited liability company (“Vortech”); (d) Thomas P.
Rosato (“Rosato”) and Gerard J. Gallagher (“Gallagher” who together with Rosato
owns all of the outstanding membership interests of both VTC and Vortech
(each a
“Member” and jointly the “Members”); (e) Thomas P. Rosato in his capacity as the
Members’ Representative; and (f) SunTrust Bank, a Georgia banking corporation
(the “Escrow
Agent”).
RECITALS:
WHEREAS,
pursuant to that certain Second Amended and Restated Membership Interest
Purchase Agreement, a copy of which without schedules or exhibits is
attached
hereto as Exhibit
1
(“Membership
Interest Purchase Agreement”),
dated
as of July __, 2006, by and among FIG, VTC, Vortech and the Members,
that is
hereby incorporated by reference, FIG will acquire all of the outstanding
membership interests of each VTC and Vortech;
WHEREAS,
pursuant to Section 2.6 of the Membership Interest Purchase Agreement,
the
Members designated Thomas P. Rosato as their representative, agent and
attorney-in-fact for purposes of this Agreement and other various matters
described therein (the “Members’
Representative”);
WHEREAS,
as partial consideration for their respective membership interests in
VTC and
Vortech, each of the Members has received from FIG pursuant to the terms
of the
Membership Interest Purchase Agreement and Stock Acquistion Agreements,
copies
of which (without schedules or exhibits) are attached as Exhibit
2
(jointly
the “Stock
Purchase Agreements”)
in the
aggregate [2,531,257]
shares
of FIG common stock of which [2,487,484]
shares
are hereby delivered by FIG and the Members to the Escrow Agent (the
“Escrow
Deposit”)
to
hold in escrow pursuant to ther terms of this Agreement;
WHEREAS,
the parties desire to specify and clarify their rights and responsibilities
with
respect to the Escrow Deposit; and
WHEREAS,
the Escrow Agent is willing to serve in such capacity, but only pursuant
to the
terms and conditions of this Agreement.
NOW,
THEREFORE, in consideration of the mutual promises contained herein,
the parties
hereto agree as follows:
1. Definitions.
1.1. As
used
in this Agreement, the following terms shall have the meanings set forth
below:
B-15
“Agreed
Share Value”
has
the
meaning set forth in Section 5.3.
“Agreement”
means
this Escrow Agreement.
“Business
Day”
shall
mean any day other than a Saturday, Sunday, or any Federal or Commonwealth
of
Virginia holiday. If any period expires on a day that is not a Business
Day or
any event or condition is required by the terms of this Agreement to
occur or be
fulfilled on a day that is not a Business Day, such period shall expire
or such
event or condition shall occur or be fulfilled, as the case may be, on
the next
succeeding Business Day.
“Escrow
Account”
has
the
meaning set forth in Section 4.1.
“Escrow
Agent”
has
the
meaning set forth in the Preamble.
“Escrow
Property”
has
the
meaning set forth in Section 4.1.
“Escrow
Deposit”
has
the
meaning set forth in the Recitals.
"Final
Determination"
has the
meaning set forth in Section 5.1(b).
“FIG”
has
the
meaning set forth in the Preamble.
"Indemnity
Claim"
has the
meaning set forth in Section 5.2.
"Indemnity
Claim Notice"
has the
meaning set forth in Section 5.2.
“Members”
has
the
meaning set forth in the Preamble.
“Members’
Representative”
has
the
meaning set forth in the Recitals.
“Membership
Interest Purchase Agreement”
has
the
meaning set forth in the Recitals.
1.2. Capitalized
terms used but not defined in this Agreement have the meanings ascribed
to such
terms in the Membership Interest Purchase Agreement.
2. Appointment
of Escrow Agent.
FIG,
the Members, and the Members’ Representative hereby appoint the Escrow Agent to
act as an escrow agent as provided herein, and the Escrow Agent hereby
accepts
such appointment.
3. Members’
Representative.
B-16
3.1. The
parties acknowledge that, pursuant to the Membership Interest Purchase
Agreement, the Members’ Representative is authorized to act as the agent and
attorney-in-fact on behalf of all of the Members in all matters necessary
to
carry out the terms and conditions of this Agreement.
3.2. The
Members’ Representative represents and warrants to the Escrow Agent that he has
the irrevocable right, power and authority with respect to all of the
Members
(a) to give and receive directions and notices hereunder, (b) to make
all
determinations that may be required or that he deems appropriate under
this
Agreement, and (c) to execute and deliver all documents that may be required
or
that he deems appropriate under this Agreement. The Escrow Agent may
act upon
the directions, instructions and notices of the Members’ Representative named
above and thereafter upon the directions and instructions of the successor
Members’ Representative named in a writing executed by a majority-in-interest
of
the Members (pursuant to the provisions of Section 2.6 of the Membership
Interest Purchase Agreement) filed with the Escrow Agent.
4. Delivery
of Escrow Deposit.
4.1. FIG
acknowledges that it deposited the Escrow Deposit in an account (the
“Escrow
Account”)
with
the Escrow Agent. The FIG common stock in the Escrow Account, together
with any
dividends (and any interest or other net income received from or earned
thereon)
is hereinafter collectively referred to as the “Escrow
Property.”
4.2. If,
during the term of this Agreement, there is Escrow Property other than
the FIG
common shares, the Escrow Agent will invest the Escrow Property (other
than the
FIG common stock) as provided in Section 11.
5. Disbursement
of the Escrow Property.
The
Escrow Agent will hold the Escrow Property and, subject to the Escrow
Agent’s
right in Section 9
to
withhold disbursements when the Escrow Agent is uncertain as to what
action to
take, make disbursements therefrom as follows.
5.1. Escrow
Agent shall disburse all or a portion of the Escrow Property on deposit
in the
Escrow Account to FIG, the Members or both, as the case may be, upon
receipt
of:
(a) one
or
more fully executed Payment Request Forms in substantially the form attached
hereto as Exhibit
3,
executed by FIG and the Members' Representative on behalf of the Members,
and
otherwise pursuant to the terms hereof. Upon receipt of a Payment Request
Form,
the shares and amounts specified therein shall be promptly delivered
or paid
directly to the party or parties entitled to payment as specified in
the Payment
Request Form; or
(b) a
copy of
a Final Determination (as defined below) establishing a party's right
to the
Escrow Property. A "Final
Determination"
shall
mean (i) with respect to an Indemnity Claim (or any other dispute between
the
Members’ Representative and FIG with respect to whether either party is entitled
to some portion, or all of the Escrow Property), a final determination
stating
that it is being provided under the procedures of Section 11.11 of the
Membership Interest Purchase Agreement; or (ii) otherwise a final judgment
of an
arbitrator, arbitration panel or court of competent jurisdiction and
shall in
all cases be accompanied by a certificate of the presenting party to
the effect
that such judgment is a final judgment of an arbitrator, arbitration
panel or
court of competent jurisdiction, as applicable, and indicating the party,
address, accounts or other information as necessary to process
payments.
B-17
5.2. If
FIG
asserts in good faith a claim (an “Indemnity
Claim”)
against the Members pursuant to the Membership Interest Purchase Agreement,
FIG
shall send written notice of such Indemnity Claim (an “Indemnity
Claim Notice”)
to the
Escrow Agent and to the Members’ Representative. Such Indemnity Claim Notice
shall set forth in reasonable detail the basis for such Indemnity Claim
and a
good faith, non-binding estimate of the amount of such Indemnity Claim.
In
submitting such Indemnity Claim to the Escrow Agent, FIG shall account
for any
applicable threshold, exclusion or cap provided for in the Membership
Interest
Purchase Agreement. Whenever FIG sends such an Indemnity Claim Notice,
the
parties shall comply with the procedures set forth herein.
(a) If
the
Members’ Representative decides, in his sole and absolute discretion, to dispute
the Indemnity Claim described in the Indemnity Claim Notice, the Members’
Representative shall, on or before the twentieth (20th)
Business Day following the Escrow Agent’s receipt of such notice, send to the
Escrow Agent and FIG a written objection to such Indemnity Claim.
(b) If
the
Escrow Agent receives from the Members’ Representative a written objection to
such Indemnity Claim on or before the twentieth (20th)
Business Day following the Escrow Agent’s receipt of the Indemnity Claim Notice
describing such Indemnity Claim, and if that Indemnity Claim cannot be
settled
through negotiation within twenty (20) days of receipt of the written
objection,
then the dispute shall be resolved in accordance with Section 11.11 of
the
Membership Interest Purchase Agreement and Escrow Agent shall hold the
funds
subject to such dispute until a Final Determination is delivered with
respect
thereto.
(c) If
the
Escrow Agent does not receive from the Members’ Representative a written
objection to such Indemnity Claim Notice on or before the twentieth
(20th)
Business Day following the Escrow Agent’s receipt of the Indemnity Claim Notice
describing such Indemnity Claim, then the Escrow Agent shall make a disbursement
to FIG from the Escrow Property in the amount of the Indemnity Claim
described
in such Indemnity Claim Notice.
5.3. To
the
extent that a Payment Request Form, Final Determination, or Indemnity
Claim
(made and not timely answered pursuant to Section 5.2(c) above) specifies
a
dollar amount (rather than a share amount) payable thereunder or in satisfaction
thereof, the amount specified or claimed shall be satisfied by the delivery
from
the Escrow Property to FIG or the Members’ Representative, as the case may be,
of certificates for FIG common stock equal in value to the amount specified
or
claimed (with the FIG common stock valued at Five and 46/100 Dollars
($5.46) per
share (the “Agreed
Share Value”)
B-18
6. Payments
from the Escrow Property.
6.1. The
Escrow Agent shall make no payments from the Escrow Property unless permitted
pursuant to Sections 5, 7, 9, 10 and 13.
6.2. Any
cash
amounts payable by the Escrow Agent under this Agreement shall be paid
by bank
check or by wire transfer, as specified in the Payment Request Form or
Final
Determination received by the Escrow Agent.
6.3. Any
amounts payable in FIG common stock under this Agreement shall be payable
by the
delivery of stock certificates for FIG common stock valued at the Agreed
Share
Value. To the extent that the number of shares deliverable by the Escrow
Agent
does not correspond with stock certificates then held by the Escrow Agent,
the
Escrow Agent shall deliver to FIG one or more share certificates evidencing
shares in excess of the number of FIG common shares then deliverable
with
instructions to FIG (i) to retain and cancel a specified number of shares
(if
shares are deliverable to FIG hereunder) or issue to the Members’
Representative, or to whomever the Members’ Representative directs FIG (if
shares are deliverable to the Members’ Representative hereunder), a certificate
or certificates for FIG common shares in the amount deliverable by the
Escrow
Agent to FIG or the Members’ Representative as applicable and (ii) to issue to
the Escrow Agent a certificate for the residual balance, if any, of those
FIG
common shares evidenced the share certificate(s) delivered by the Escrow
Agent
to FIG.
6.4. All
interest and other income, if any, received from or earned on the Escrow
Property net of distributions paid or to be paid pursuant to Section
7.3
(“Earnings”) shall be applied first to pay any Escrow Fees then due under
Section 13, with any remaining Earnings to become a part of the Escrow
Property
and be paid in accordance with the other terms of this Agreement.
6.5. The
parties hereto (other than the Escrow Agent) each warrant to and agree
with the
Escrow Agent that, unless otherwise expressly set forth in this Agreement,
there
is no security interest in the Escrow Property or any part of the Escrow
Property; no financing statement under the Uniform Commercial Code of
any
jurisdiction is on file in any jurisdiction claiming a security interest
in or
describing, whether specifically or generally, the Escrow Property or
any part
of the Escrow Property. Notwithstanding anything to the contrary herein
provided, the Escrow Agent shall in no event be deemed to be a collateral
agent
or agent for any pledge or purported pledge of property held under this
Agreement. The Escrow Agent makes no representation concerning whether
or not
any security interest exists with respect to any property held under
the terms
of this Agreement and the Escrow Agent shall have no duty or obligation
with
respect to the creation, perfection or continuation of any such security
interest, it being understood that the duties of the Escrow Agent with
respect
to any property held pursuant to this Agreement are limited and confined
exclusively to the duties and responsibilities expressly set forth herein.
This
Agreement shall not be deemed or construed to be a security agreement
or to
grant a security interest in any property held in escrow hereunder.
7. Tax
Matters.
7.1. The
parties agree that the Escrow Property is intended to consist only of
FIG common
shares and that no taxable income is anticipated. Notwithstanding the
previous
sentence, for tax reporting purposes in each calendar year (other than
the
calendar year in which this Agreement is terminated pursuant to Section
14
below), all interest or other income earned from the investment of the
Escrow
Property together with all fees and expenses pursuant to Section 13 below
(or
that may otherwise be taken into consideration for purposes of calculating
and
reporting taxes due on earnings with respect to the Escrow Account and
Funds)
shall be allocable to FIG and so reported to the Internal Revenue Service
and
any other applicable taxing authority, except to the extent that any
law or
regulation should otherwise require, as provided in a written notice
from FIG to
the Escrow Agent. Notwithstanding anything to the contrary contained
herein, for
the calendar year during which this Agreement is terminated pursuant
to Section
14 below, all income, fees and expenses shall be allocated pro rata to
the
persons receiving payments of the Escrow Property during that year.
7.2. Each
of
the parties agrees to provide the Escrow Agent with a certified tax
identification number by signing and returning a Form W-9 (or Form W-8,
in the
case of non-U.S. persons) to the Escrow Agent within 30 days from the
date
hereof. The parties understand that, in the event their tax identification
numbers are not certified to the Escrow Agent, the Internal Revenue Code
may
require withholding of a portion of any interest or other income earned
on the
investment of the Escrow Property, in accordance with the Internal Revenue
Code,
as amended from time to time.
7.3. The
Escrow Agent shall distribute quarterly to FIG amounts when and in the
amounts
requested in writing in good faith by FIG to cover the potential federal,
state
or local tax obligations of FIG on account of the cumulative allocation
to FIG
of taxable income attributable to the interest and other income earned
on the
Escrow Property. Such distributions shall be requested and made with
respect to
each quarter as early as fifteen (15) days prior to the date that United
States
taxpayers are required to make estimated federal tax payments with respect
to
such quarter. For purposes of the foregoing, such federal, state and
local tax
obligations of FIG initially shall be assumed to equal an effective combined
federal and state income tax rate equal to forty-two percent (42%) (but
in no
event lower than the highest Federal marginal income tax rate plus seven
percent
(7%)).
7.4. The
Escrow Agent shall report to the Internal Revenue Service, as of each
calendar
year-end, all income earned from the Escrow Property, whether or not
such income
has been distributed during such year, as and to the extent required
by law;
and, the Escrow Agent shall prepare and file any tax returns required
to be
filed with respect to the Escrow Account.
7.5. The
persons to whom income is allocable for each year shall pay all taxes
payable on
income earned from the investment of the Escrow Property, whether or
not the
Escrow Agent distributed the income during any particular year.
B-19
8. Escrow
Agent’s Duties.
8.1. The
Escrow Agent’s duties are entirely ministerial and not discretionary, and the
Escrow Agent will be under no duty or obligation to give any notice,
or to do or
to omit the doing of any action with respect to the Escrow Property,
except to
give notice, make disbursements and invest the Escrow Property in accordance
with the terms of this Agreement.
8.2. The
Escrow Agent will neither be responsible for, nor chargeable with, knowledge
of
the terms and conditions of any other agreement, instrument or document
among
the other parties hereto, in connection herewith, including the Membership
Interest Purchase Agreement, and will be required to act only pursuant
to the
terms and provisions of this Agreement. This Agreement sets forth all
matters
pertinent to the escrow contemplated hereunder, and no additional obligations
of
the Escrow Agent will be inferred from the terms of this Agreement, the
Membership Interest Purchase Agreement or any other agreement.
8.3. The
Escrow Agent will not be liable for any error in judgment or any act
or steps
taken or permitted to be taken in good faith, or for any mistake of law
or fact,
or for anything it may do or refrain from doing in connection with this
Agreement, except for its own willful misconduct or gross negligence.
As to any
legal questions arising in connection with the administration of this
Agreement,
the Escrow Agent may consult with and rely absolutely upon the opinions
given to
it by counsel (including internal counsel) and shall be free of liability
for
acting in reliance on such opinions. In no event shall the Escrow Agent
be
liable for incidental, indirect, special, consequential or punitive damages.
8.4. The
Escrow Agent will not be required in any way to determine the validity,
genuineness, authenticity or sufficiency, whether in form or substance,
of any
instrument, document, certificate, statement or notice referred to in
this
Agreement or contemplated by this Agreement, or the identity or authority
of the
persons executing it, and it will be sufficient if any writing purporting
to be
such instrument, document, certificate, statement or notice is delivered
to the
Escrow Agent and purports to be correct in form and signed or otherwise
executed
by the party or parties required to sign or execute it under this Agreement.
The
Escrow Agent reserves the right, but shall in no way be obligated, to
call upon
the parties, or any of them, for written instructions before taking any
actions
hereunder.
8.5. During
the term of this Agreement, the Escrow Agent shall not exercise on its
own
behalf any right of set-off against, or enforce any lien on, the Escrow
Property, except such right or lien as may arise in connection with this
Agreement.
8.6. The
parties to this Agreement agree to make modifications to this Section
upon the
reasonable request of the Escrow Agent.
8.7. In
the
event of a shareholder vote, the Escrow Agent shall have the right to
exercise
all voting rights with respect to the FIG common stock held by the Escrow
Agent
as part of the Escrow Property; provided, however, that the Escrow Agent
shall
have no discretion as to voting the shares of FIG common stock except
in a
fashion that is in all respects proportional to the manner in which the
FIG
common stock not held as part of the Escrowed Property is voted (as certified
by
FIG’s Secretary). FIG, Rosato, Gallagher and the Members’ Representative each
hereby (i) instruct the Escrow Agent to vote all of the FIG common shares
held
as Escrow Property in the manner described in this Section 8.7 and (ii)
agree
that the Escrow Agent shall have no liability with respect to voting
the FIG
common stock held as Escrow Property in the manner described in this
Section
8.7. This Section 8.7 shall constitute an irrevocable proxy, coupled
with an
interest, with respect to any shares of FIG common stock (or other FIG
securities) that Escrow Agent holds pursuant to this Agreement.
B-20
9. Disputes.
9.1. It
is
understood and agreed that should any dispute arise with respect to the
payment
and/or ownership or right of possession of the Escrow Property, or should
the
Escrow Agent be uncertain as to what action to take with respect to the
Escrow
Property, the Escrow Agent is authorized and directed to retain in its
possession, without liability to anyone, all or any part of the Escrow
Property
until such dispute or uncertainty shall have been settled either by mutual
agreement by the parties concerned (as evidenced by a written agreement
among
them) or by a Final Determination.
9.2. If
the
Escrow Agent becomes involved in litigation by reason of this Agreement,
or if
the Escrow Agent reasonably believes, in its sole discretion, that it
may become
involved in litigation, the Escrow Agent is authorized to institute a
bill of
interpleader in a court in the Commonwealth of Virginia to determine
the rights
of the parties and to deposit the Escrow Property with the court in accordance
with the Commonwealth of Virginia law. Upon deposit of the Escrow Property
with
the court, the Escrow Agent shall stand fully relieved and discharged
of any
further duties as Escrow Agent. The filing of any such legal proceedings
shall
not deprive the Escrow Agent of its compensation hereunder earned prior
to such
filing and discharge of the Escrow Agent of its duties hereunder.
9.3. If
a bill
of interpleader is instituted, or if the Escrow Agent is threatened with
litigation or becomes involved in litigation in any manner whichever
on account
of this Agreement or the Escrow Property, FIG and the Members, jointly
and
severally, shall pay the Escrow Agent its reasonable attorneys’ fees and any
other disbursements, expenses, losses, costs and damages incurred by
the Escrow
Agent in connection with or resulting from such threatened or actual
litigation.
All costs and expenses of such dispute will be charged to the non-prevailing
party in such dispute, unless such non-prevailing party is a third party,
in
which case the Escrow Agent’s costs and expenses will be charged to and paid out
of the Escrow Property, and to the extent the Escrow Property are insufficient,
will be charged equally to FIG and the Members.
9.4. In
the
event that the Escrow Agent proposes to disburse to the Members any portion
of
the Escrow Property, the disbursement of which the Escrow Agent had previously
withheld pursuant to this Section, the Escrow Agent shall disburse such
amount
to the Member’s Representative.
B-21
10. Indemnity.
FIG and
the Members jointly and severally agree to hold the Escrow Agent harmless
and to
indemnify the Escrow Agent against any loss, liability, expenses (including
reasonable attorney’s fees and expenses), claim, or demand arising out of or in
connection with the performance of its obligations in accordance with
the
provisions of this Agreement, except for willful misconduct or gross
negligence
of the Escrow Agent. Notwithstanding anything in this Agreement to the
contrary,
the Escrow Agent shall be entitled to set-off against the Escrow Property
and
apply such set-off to payment of such fees and disbursements and other
liabilities and obligations hereunder. Upon the written request of the
Escrow
Agent, FIG and the Members jointly and severally agree to assume the
investigation and defense of any such claim, including the employment
of counsel
acceptable to the Escrow Agent and the payment of all expenses related
thereto
and, notwithstanding any such assumption, the Escrow Agent shall have
the right,
and FIG and the Members jointly and severally agree to pay the cost and
expense
thereof, to employ separate counsel with respect to any such claim and
participate in the investigation and defense thereof in the event that
the
Escrow Agent shall have been advised by counsel that there may be one
or more
legal defenses available to the Escrow Agent which are different from
or in
addition to those available to FIG or the Members. FIG and the Members
agree
that all references in this Section to the Escrow Agent shall be deemed
to
include references to its directors, officers, employees and agents.
The
foregoing indemnities in this paragraph shall survive the resignation
or removal
of the Escrow Agent or the termination of this Agreement.
11. Investment.
11.1. As
used
in this Section, “Eligible
Investments”
include
one or more of the following obligations or securities, but only to the
extent
that such obligations or securities mature within thirty (30) calendar
days or
such longer time as the Members’ Representative and FIG shall determine, such
longer maturities not to exceed eighteen (18) months from the Closing
Date: (a)
direct obligations of, or obligations fully guaranteed by, the United
States of
America or any agency thereof, and (b) money market funds investing primarily
in
the obligations or securities listed in clause (a) above or repurchase
agreements fully collateralized by direct obligations of the United States
of
America.
11.2. The
Escrow Agent will invest the Escrow Property in such Eligible Investments
as the
Members’ Representative and FIG, from time to time, shall jointly instruct the
Escrow Agent in writing. Notwithstanding the foregoing, in no event shall
the
FIG common stock held as part of the Escrow Property be invested. Earnings
upon
Eligible Investments shall be deemed part of the Escrow Property, shall
be
deposited in the Escrow Account and shall be disbursed in accordance
with the
terms of this Agreement. Any loss or expense incurred from an Eligible
Investment shall be borne by the Escrow Property. The Escrow Agent shall
have no
responsibility or liability for any diminution which may result from
any
investments or reinvestments made in accordance with this
Agreement.
11.3. The
parties acknowledge and agree that the Escrow Agent will not provide
supervision, recommendations or advice relative to either the investment
of the
Escrow Property or the purchase, sale, retention or other disposition
of any
Eligible Investment.
B-22
11.4. The
Escrow Agent is hereby authorized to execute purchases and sales of Eligible
Investments through its own trading or capital markets operations. The
Escrow
Agent shall send statements to FIG and the Members’ Representative reflecting
activity for the Escrow Account for the preceding quarter within fifteen
(15)
days after the last day of each calendar quarter. Although the parties
acknowledge that they may obtain a broker confirmation or written statement
containing comparable information at no additional cost, each party hereby
agrees that confirmations of Eligible Investments are not required to
be issued
by the Escrow Agent for each period in which a statement is
provided.
12. Resignation.
12.1. The
Escrow Agent may resign upon thirty (30) calendar days’ prior written notice to
the Members’ Representative and FIG, and, upon joint instructions from the
Members’ Representative and FIG, will deliver the Escrow Property to any
designated substitute Escrow Agent selected by the Members’ Representative and
FIG. If the Members’ Representative and FIG fail to designate a substitute
Escrow Agent within 15 calendar days after receipt of such notice, the
Escrow
Agent may, at its sole discretion, institute a bill of interpleader as
contemplated by Section 9
above
for the purpose of having an appropriate court designate a substitute
Escrow
Agent. The Escrow Agent shall have no responsibility for the appointment
of a
successor Escrow Agent hereunder.
12.2. Any
company into which the Escrow Agent may be merged or converted or with
which it
may be consolidated, or any company resulting from any merger, conversion
or
consolidation to which it shall be a party, or any company to which the
Escrow
Agent may sell or transfer all or substantially all of its corporate
trust
business shall be the successor to the Escrow Agent without the execution
or
filing of any paper or the performance of any further act, notwithstanding
anything herein to the contrary.
13. Compensation.
FIG and
Members agree that the fees and expenses of the Escrow Agent, including
any
investment fees and other investment-related charges, for services rendered,
including the basic fees set forth in Exhibit
4
attached
hereto, shall be paid out of the Earnings; provided,
however,
that if
the Earnings are less than the fees then due, then the balance of the
fees due
to the Escrow Agent shall be paid equally by the Members and FIG. Upon
any
withdrawal from the Escrow Property to pay such fees and expenses, the
Escrow
Agent shall provide written notification of such withdrawal to FIG and
the
Members' Representative, detailing such fees and expenses. The Escrow
Agent
shall have, and is hereby granted, a prior lien upon any property, cash,
or
assets hereunder, with respect to its unpaid fees and nonreimbursed expenses,
superior to the interests of any other person.
14. Termination.
Upon
delivery of all amounts constituting the Escrow Property as provided
in Sections
5
and 7
and the resolution of all disputes, if any, covered by Section 9,
this
Agreement shall terminate except for the provisions of Section 9
(with
respect to payment of the Escrow Agent’s expenses), Section 10
and
Section 13.
B-23
15. Notices.
15.1. All
necessary notices, demands and requests required or permitted to be given
hereunder shall be in writing and addressed as follows:
If
to the
Members: c/o
Thomas P. Rosato
Members’
Representative
9841
Broken Land Parkway
Columbia,
Maryland [Zip
Code]
Fax:
________________
With
a
copy to: William
M. Davidow, Esquire
Whiteford
Taylor & Preston L.L.P.
7
St.
Paul Street
Baltimore,
Maryland 21202-1626
Fax:
(410) 223-4367
If
to
FIG: Fortress
International Group, Inc.
4100
North Fairfax Drive
Suite
1150
Arlington,
Virginia 22203
Attn:
Harvey L. Weiss, Chairman of the Board
and
James
J.
Maiwurm
Squire,
Sanders & Dempsey L.L.P.
8000
Towers Crescent Drive, Suite 1400
Tysons
Corner, VA 22182-2700
Fax:
(703) 720-7801
If
to the
Escrow Agent: SunTrust
Bank
919
East
Main Street, 10th
Floor
Richmond,
Virginia 23219
Attn:
E.
Carl Thompson, Jr.
Fax:
(804) 782-7855
15.2. Notices
shall be delivered by a recognized courier service or by facsimile transmission
and shall be effective upon receipt, provided that notices shall be presumed
to
have been received:
B-24
(a) if
given
by courier service, on the second Business Day following delivery of
the notice
to a recognized courier service for delivery on or before the second
Business
Day following delivery to such service, delivery costs prepaid, addressed
as
aforesaid; and
(b) if
given
by facsimile transmission, on the next Business Day, provided that the
facsimile
transmission is confirmed by answer back, written evidence of electronic
confirmation of delivery, or oral or written acknowledgment of receipt
thereof
by the addressee.
15.3. From
time
to time either party may designate a new address or facsimile number
for the
purpose of notice hereunder by notice to the other party in accordance
with the
provisions of this Section 15.
15.4. Notwithstanding
anything to the contrary herein provided, the Escrow Agent shall not
be deemed
to have received any notice prior to the Escrow Agent’s actual receipt thereof.
16. Choice
of Laws; Cumulative Rights.
This
Agreement shall be construed in accordance with and governed by the laws
of the
Commonwealth of Virginia without regard to the choice of law provisions
thereof.
The rights and remedies provided to each party hereunder are cumulative
and will
be in addition to the rights and remedies otherwise available to such
party
under this Agreement, any other agreement or applicable law.
17. Counterparts.
This
Agreement may be executed in any number of counterparts, each of which
when so
executed and delivered will be deemed an original, and such counterparts
together will constitute an original.
18. Successors
and Assigns.
This
Agreement will bind and inure to the benefit of the parties and their
respective
successors and permitted assigns. Except as provided in Section 12.2,
this
Agreement may not be assigned by operation of law or otherwise without
the prior
written consent of each of the parties hereto.
19. Severability.
The
provisions of this Agreement will be deemed severable, and if any provision
or
part of this Agreement is held illegal, void or invalid under applicable
law,
such provision or part may be changed to the extent reasonably necessary
to make
the provision or part, as so changed, legal, valid and binding. If any
provision
of this Agreement is held illegal, void or invalid in its entirety, the
remaining provisions of this Agreement will not in any way be affected
or
impaired but will remain binding in accordance with their terms.
20. Headings.
The
Section headings in this Agreement are for convenience of reference only
and
will not be deemed to alter or affect the meaning or interpretation of
any
provisions hereof.
B-25
21. Waiver.
No
failure on the part of any party to exercise any power, right, privilege
or
remedy under this Agreement, and no delay on the part of any party in
exercising
any power, right, privilege or remedy under this Agreement, shall operate
as a
waiver of such power, right, privilege or remedy; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude
any other
or further exercise thereof or any other power, right, privilege or remedy.
No
party shall be deemed to have waived any claim arising out of this Agreement,
or
any power, right, privilege or remedy under this Agreement, unless the
waiver of
such claim, power, right, privilege or remedy is expressly set forth
in a
written instrument duly executed and delivered on behalf of such party;
and any
such waiver shall not be applicable or have any effect except in the
specific
instance in which it is given.
22. Amendments.
This
Agreement may not be amended, modified, altered or supplemented other
than by
means of a written instrument duly executed and delivered on behalf of
each of
the parties hereto.
23. Parties
in Interest.
None of
the provisions of this Agreement is intended to provide any rights or
remedies
to any Person other than the parties hereto and their respective successors
and
permitted assigns, if any.
24. Entire
Agreement.
This
Agreement sets forth the entire understanding of the parties hereto relating
to
the subject matter hereof and supersedes all prior agreements and understandings
among or between any of the parties relating to the subject matter
hereof.
25. Escrow
Agent Documentation.
In order
to maintain compliance with the Patriot Act, prior to the effective date
of this
Agreement, FIG and the Members’ Representative shall provide to the Escrow Agent
a completed Form W-9, Certificate of Incumbency, and a copy of the corporate
document (i.e., Corporate Resolution, Articles of Incorporation, Bylaws,
Partnership Agreement, etc.) that would show proper authorization for
such
parties to enter into this Agreement.
B-26
IN
WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date
first above written.
FIG:
FORTRESS
INTERNATIONAL GROUP, INC.,
a
Delaware corporation
By:
Name:
Title:
MEMBERS:
Thomas
P.
Rosato
Gerard
J.
Gallagher
MEMBERS’
REPRESENTATIVE:
Thomas
P.
Rosato as the representative for those
Members
pursuant to Section 2.6 of the Membership
Interest
Purchase Agreement.
ESCROW
AGENT:
SUNTRUST
BANK,
a
Georgia
banking corporation
By:
Name:
Title:
B-27
Annex
C
REGISTRATION
RIGHTS AGREEMENT
THIS
REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is entered into as of the
_______ day of ______________, 2006, by and among Fortress America Acquisition
Corporation, a Delaware corporation (the “Company”) and the undersigned parties
listed under Stockholders on the signature page hereto (each, a “Stockholder”
and collectively, the “Stockholders”).
WHEREAS,
the Stockholders are parties to the Second Amended and Restated Membership
Interest Purchase Agreement by and among the Company, VTC, L.L.C., Vortech,
LLC,
Thomas P. Rosato and Gerard J. Gallagher, dated dated July __, 2006 (the
“Purchase Agreement”); and
WHEREAS,
pursuant to the Purchase Agreement, the Stockholders and the Company
desire to
enter into this Agreement to provide the Stockholders with certain rights
relating to the registration of shares of Common Stock issued to the
Stockholders pursuant to the terms and conditions of the Purchase Agreement.
NOW,
THEREFORE, in consideration of the mutual covenants and agreements set
forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree
as
follows:
1. DEFINITIONS.
The following capitalized terms used herein have the following
meanings:
“Agreement”
means
this Agreement, as amended, restated, supplemented, or otherwise modified
from
time to time.
“Commission”
means
the Securities and Exchange Commission, or any other federal agency then
administering the Securities Act or the Exchange Act.
“Common
Stock”
means
the common stock, par value $0.0001 per share, of the Company.
“Company”
is
defined in the preamble to this Agreement.
“Demand
Registration”
is
defined in Section 2.1.1.
“Demanding
Holder”
is
defined in Section 2.1.1.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the Commission promulgated thereunder, all as the same shall be in
effect at
the time.
“Form
S-3”
is
defined in Section 2.3.
C-1
“Founding
Investor Registration Rights Agreement”
means
that certain Registration Rights Agreement dated as of July 13, 2005
by and
among the Company and the investors listed on the signature page
thereto.
“Indemnified
Party”
is
defined in Section 4.3.
“Indemnifying
Party”
is
defined in Section 4.3.
“Maximum
Number of Shares”
is
defined in Section 2.1.4.
“Notices”
is
defined in Section 6.3.
“Piggy-Back
Registration”
is
defined in Section 2.2.1.
“Register,”
“registered”
and
“registration”
each
means a registration effected by preparing and filing a registration
statement
or similar document in compliance with the requirements of the Securities
Act,
and the applicable rules and regulations promulgated thereunder, and
such
registration statement becoming effective.
“Registrable
Securities”
mean
all of the shares of Common Stock owned or held by Stockholders.
Registrable Securities include any warrants, shares of capital stock
or other
securities of the Company issued as a dividend or other distribution
with
respect to or in exchange for or in replacement of such shares of Common
Stock. As to any particular Registrable Securities, such securities shall
cease to be Registrable Securities when: (a) a Registration Statement
with respect to the sale of such securities shall have become effective
under
the Securities Act and such securities shall have been sold, transferred,
disposed of or exchanged in accordance with such Registration Statement;
(b) such securities shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have
been
delivered by the Company and subsequent public distribution of them shall
not
require registration under the Securities Act; (c) such securities shall
have ceased to be outstanding, or (d) the Securities and Exchange Commission
makes a definitive determination to the Company that the Registrable
Securities
are salable under Rule 144(k).
“Registration
Statement”
means
a
registration statement filed by the Company with the Commission in compliance
with the Securities Act and the rules and regulations promulgated thereunder
for
a public offering and sale of Common Stock (other than a registration
statement
on Form S-4 or Form S-8, or their successors, or any registration
statement covering only securities proposed to be issued in exchange
for
securities or assets of another entity).
“Release
Date”
means
July 13, 2008.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
of the
Commission promulgated thereunder, all as the same shall be in effect
at the
time.
C-2
“Stockholder”
is
defined in the preamble to this Agreement.
“Stockholder
Indemnified Party”
is
defined in Section 4.1.
“Underwriter”
means
a
securities dealer who purchases any Registrable Securities as principal
in an
underwritten offering and not as part of such dealer’s market-making
activities.
2. REGISTRATION
RIGHTS.
2.1 Demand
Registration.
2.1.2. Effective
Registration.
A
registration will not count as a Demand Registration until the Registration
Statement filed with the Commission with respect to such Demand Registration
has
been declared effective and the Company has complied with all of its
obligations
under this Agreement with respect thereto; provided,
however,
that
if, after such Registration Statement has been declared effective, the
offering
of Registrable Securities pursuant to a Demand Registration is interfered
with
by any stop order or injunction of the Commission or any other governmental
agency or court, the Registration Statement with respect to such Demand
Registration will be deemed not to have been declared effective, unless
and
until, (i) such stop order or injunction is removed, rescinded or otherwise
terminated, and (ii) a majority-in-interest of the Demanding Holders
thereafter
elect to continue the offering; provided,
further,
that
the Company shall not be obligated to file a second Registration Statement
until
a Registration Statement that has been filed is counted as a Demand Registration
or is terminated.
2.1.3. Underwritten
Offering.
If a majority-in-interest of the Demanding Holders so elect and such
holders so
advise the Company as part of their written demand for a Demand Registration,
the offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of an underwritten offering. In such event, the
right of
any holder to include its Registrable Securities in such registration
shall be
conditioned upon such holder’s participation in such underwriting and the
inclusion of such holder’s Registrable Securities in the underwriting to the
extent provided herein. All Demanding Holders proposing to distribute
their securities through such underwriting shall enter into an underwriting
agreement in customary form with the Underwriter or Underwriters selected
for
such underwriting by a majority-in-interest of the holders initiating
the Demand
Registration.
C-3
2.1.4. Reduction
of Offering.
If the managing Underwriter or Underwriters for a Demand Registration
that is to
be an underwritten offering advises the Company and the Demanding Holders
in
writing that the dollar amount or number of shares of Registrable Securities
which the Demanding Holders desire to sell, taken together with all other
shares
of Common Stock or other securities which the Company desires to sell
and the
shares of Common Stock, if any, as to which registration has been requested
pursuant to written contractual piggy-back registration rights held by
other
shareholders of the Company who desire to sell, exceeds the maximum dollar
amount or maximum number of shares that can be sold in such offering
without
adversely affecting the proposed offering price, the timing, the distribution
method, or the probability of success of such offering (such maximum
dollar
amount or maximum number of shares, as applicable, the “Maximum
Number of Shares”),
then
the Company shall include in such registration: (i) first, the Registrable
Securities as to which Demand Registration has been requested by the
Demanding
Holders (pro
rata
in
accordance with the number of shares of Registrable Securities which
such
Demanding Holder has requested be included in such registration, regardless
of
the number of shares of Registrable Securities held by each Demanding
Holder)
that can be sold without exceeding the Maximum Number of Shares; (ii)
second, to
the extent that the Maximum Number of Shares has not been reached under
the
foregoing clause (i), the shares of Common Stock or other securities
that the
Company desires to sell that can be sold without exceeding the Maximum
Number of
Shares; (iii) third, to the extent that the Maximum Number of Shares
has not
been reached under the foregoing clauses (i) and (ii), the shares of
Common
Stock for the account of other persons that the Company is obligated
to register
pursuant to written contractual arrangements with such persons and that
can be
sold without exceeding the Maximum Number of Shares; and (iv) fourth,
to the
extent that the Maximum Number of Shares have not been reached under
the
foregoing clauses (i), (ii), and (iii), the shares of Common Stock that
other
shareholders desire to sell that can be sold without exceeding the Maximum
Number of Shares.
2.1.5. Withdrawal.
If a
majority-in-interest of the Demanding Holders disapprove of the terms
of any
underwriting or are not entitled to include all of their Registrable
Securities
in any offering, such majority-in-interest of the Demanding Holders may
elect to
withdraw from such offering by giving written notice to the Company and
the
Underwriter or Underwriters of their request to withdraw prior to the
effectiveness of the Registration Statement filed with the Commission
with
respect to such Demand Registration. If the majority-in-interest of the
Demanding Holders withdraws from a proposed offering relating to a Demand
Registration, then such registration shall not count as a Demand Registration
provided for in Section 2.1.1.
C-4
2.2 Piggy-Back
Registration.
2.2.1. Piggy-Back
Rights.
If at any time on or after the Release Date the Company proposes to file
a
Registration Statement under the Securities Act with respect to an offering
of
equity securities, or securities or other obligations exercisable or
exchangeable for, or convertible into, equity securities, by the Company
for its
own account or for shareholders of the Company for their account (or
by the
Company and by shareholders of the Company including, without limitation,
pursuant to Section 2.1), other than a Registration Statement (i) filed in
connection with any employee stock option or other benefit plan, (ii)
for an
exchange offer or offering of securities solely to the Company’s existing
shareholders, (iii) for an offering of debt that is convertible into
equity
securities of the Company or (iv) for a dividend reinvestment plan, then
the Company shall (x) give written notice of such proposed filing to
the holders
of Registrable Securities as soon as practicable but in no event less
than ten
(10) days before the anticipated filing date, which notice shall describe
the
amount and type of securities to be included in such offering, the intended
method(s) of distribution, and the name of the proposed managing Underwriter
or
Underwriters, if any, of the offering, and (y) offer to the holders of
Registrable Securities in such notice the opportunity to register the
sale of
such number of shares of Registrable Securities as such holders may request
in
writing within fifteen (15) days following receipt of such notice (a
“Piggy-Back
Registration”).
The Company shall cause such Registrable Securities to be included in
such
registration and shall use its best efforts to cause the managing Underwriter
or
Underwriters of a proposed underwritten offering to permit the Registrable
Securities requested to be included in a Piggy-Back Registration to be
included
on the same terms and conditions as any similar securities of the Company
and to
permit the sale or other disposition of such Registrable Securities in
accordance with the intended method(s) of distribution thereof. All
holders of Registrable Securities proposing to distribute their securities
through a Piggy-Back Registration that involves an Underwriter or Underwriters
shall enter into an underwriting agreement in customary form with the
Underwriter or Underwriters selected for such Piggy-Back
Registration.
2.2.2. Reduction
of Offering.
If the managing Underwriter or Underwriters for a Piggy-Back Registration
that
is to be an underwritten offering advises the Company and the holders
of
Registrable Securities in writing that the dollar amount or number of
shares of
Common Stock which the Company desires to sell, taken together with shares
of
Common Stock, if any, as to which registration has been demanded pursuant
to
written contractual arrangements with persons other than the holders
of
Registrable Securities hereunder, the Registrable Securities as to which
registration has been requested under this Section 2.2, and the shares of
Common Stock, if any, as to which registration has been requested pursuant
to
the written contractual piggy-back registration rights of other shareholders
of
the Company, exceeds the Maximum Number of Shares, then the Company shall
include in any such registration:
(i) If
the
registration is undertaken for the Company’s account: (A) first, the shares of
Common Stock or other securities that the Company desires to sell that
can be
sold without exceeding the Maximum Number of Shares; (B) second, to the
extent
that the Maximum Number of Shares has not been reached under the foregoing
clause (A), the shares of Common Stock, if any, including the Registrable
Securities, as to which registration has been requested pursuant to written
contractual piggy-back registration rights of security holders (pro rata
in
accordance with the number of shares of Common Stock which each such
person has
actually requested to be included in such registration, regardless of
the number
of shares of Common Stock with respect to which such persons have the
right to
request such inclusion) that can be sold without exceeding the Maximum
Number of
Shares; and
(ii) If
the
registration is a “demand” registration undertaken at the demand of persons
other than the holders of Registrable Securities pursuant to written
contractual
arrangements with such persons, (A) first, the shares of Common Stock
for the
account of the demanding persons that can be sold without exceeding the
Maximum
Number of Shares; (B) second, to the extent that the Maximum Number of
Shares
has not been reached under the foregoing clause (A), the shares of Common
Stock
or other securities that the Company desires to sell that can be sold
without
exceeding the Maximum Number of Shares; (C) third, to the extent that
the
Maximum Number of Shares has not been reached under the foregoing clauses
(A)
and (B), the shares of Common Stock as to which registration has been
requested
pursuant to written contractual piggy-back registration rights under
the
Founding Investor Registration Rights Agreement that can be sold without
exceeding the Maximum Number of Shares; (D) fourth, to the extent that the
Maximum Number of Shares has not been reached under the foregoing
clauses (A), (B) and (C), the Registrable Securities as to which
registration has been requested under this Section 2.2 (pro rata in accordance
with the number of shares of Registrable Securities held by each such
holder)
that can be sold without exceeding the Maximum Number of Shares; and
(E) fifth,
to the extent that the Maximum Number of Shares has not been reached
under the
foregoing clauses (A), (B), (C) and (D), the shares of Common Stock,
if any, as
to which registration has been requested pursuant to written contractual
piggy-back
registration rights which other shareholders desire to sell that can
be sold
without exceeding the Maximum Number of Shares.
C-5
2.2.3. Withdrawal.
Any holder of Registrable Securities may elect to withdraw such holder’s request
for inclusion of Registrable Securities in any Piggy-Back Registration
by giving
written notice to the Company of such request to withdraw prior to the
effectiveness of the Registration Statement. The Company may also elect to
withdraw a registration statement at any time prior to the effectiveness
of the
Registration Statement. Notwithstanding any such withdrawal, the Company
shall pay all expenses incurred by the holders of Registrable Securities
in
connection with such Piggy-Back Registration as provided in
Section 3.3.
2.3 Registrations
on Form S-3.
The holders of Registrable Securities may at any time and from time to
time,
request in writing that the Company register the resale of any or all
of such
Registrable Securities on Form S-3 or any similar short-form registration
which
may be available at such time (“Form
S-3”);
provided,
however,
that
the Company shall not be obligated to effect such request through an
underwritten offering. Upon receipt of such written request, the Company
will promptly give written notice of the proposed registration to all
other
holders of Registrable Securities, and, as soon as practicable thereafter,
effect the registration of all or such portion of such holder’s or holders’
Registrable Securities as are specified in such request, together with
all or
such portion of the Registrable Securities of any other holder or holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided,
however,
that
the Company shall not be obligated to effect any such registration pursuant
to
this Section 2.3: (i) if Form S-3 is not available for such offering; or
(ii) if the holders of the Registrable Securities, together with the
holders of
any other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if
any) at any
aggregate price to the public of less than $500,000. Registrations effected
pursuant to this Section 2.3 shall not be counted as Demand Registrations
effected pursuant to Section 2.1.
3. REGISTRATION
PROCEDURES.
3.1 Filings;
Information.
Whenever the Company is required to effect the registration of any Registrable
Securities pursuant to Section 2, the Company shall use its best efforts to
effect the registration and sale of such Registrable Securities in accordance
with the intended method(s) of distribution thereof as expeditiously
as
practicable, and in connection with any such request:
3.1.1. Filing
Registration Statement.
The Company shall, as expeditiously as possible and in any event within
sixty
(60) days after receipt of a request for a Demand Registration pursuant
to
Section 2.1, prepare and file with the Commission a Registration Statement
on any form for which the Company then qualifies or which counsel for
the
Company shall deem appropriate and which form shall be available for
the sale of
all Registrable Securities to be registered thereunder in accordance
with the
intended method(s) of distribution thereof, and shall use its best efforts
to
cause such Registration Statement to become and remain effective for
the period
required by Section 3.1.3; provided,
however,
that
the Company shall have the right to defer any Demand Registration for
up to
thirty (30) days, and
any
Piggy-Back Registration for such period as may be applicable to deferment
of any
demand registration to which such Piggy-Back Registration relates, in
each case
if the Company shall furnish to the holders a certificate signed by the
Chief
Executive Officer of the Company stating that, in the good faith judgment
of the
Board of Directors of the Company, it would be materially detrimental
to the
Company and its shareholders for such Registration Statement to be effected
at
such time; provided
further, however,
that
the Company shall not have the right to exercise the right set forth
in the
immediately preceding proviso more than once in any 365-day period in
respect of
a Demand Registration hereunder.
C-6
3.1.2. Copies.
The Company shall, prior to filing a Registration Statement or prospectus,
or
any amendment or supplement thereto, furnish without charge to the holders
of
Registrable Securities included in such registration, and such holders’ legal
counsel, copies of such Registration Statement as proposed to be filed,
each
amendment and supplement to such Registration Statement (in each case
including
all exhibits thereto and documents incorporated by reference therein),
the
prospectus included in such Registration Statement (including each preliminary
prospectus), and such other documents as the holders of Registrable Securities
included in such registration or legal counsel for any such holders may
request
in order to facilitate the disposition of the Registrable Securities
owned by
such holders.
3.1.3. Amendments
and Supplements.
The Company shall prepare and file with the Commission such amendments,
including post-effective amendments, and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary
to
keep such Registration Statement effective and in compliance with the
provisions
of the Securities Act until all Registrable Securities and other securities
covered by such Registration Statement have been disposed of in accordance
with
the intended method(s) of distribution set forth in such Registration
Statement
(which period shall not exceed the sum of one hundred eighty (180) days
plus any
period during which any such disposition is interfered with by any stop
order or
injunction of the Commission or any governmental agency or court) or
such
securities have been withdrawn.
3.1.4. Notification.
After the filing of a Registration Statement, the Company shall promptly,
and in
no event more than two (2) business days after such filing, notify the
holders
of Registrable Securities included in such Registration Statement of
such
filing, and shall further notify such holders promptly and confirm such
advice
in writing in all events within two (2) business days of the occurrence
of any
of the following: (i) when such Registration Statement becomes
effective; (ii) when any post-effective amendment to such Registration
Statement becomes effective; (iii) the issuance or threatened issuance by
the Commission of any stop order (and the Company shall take all actions
required to prevent the entry of such stop order or to remove it if entered);
and (iv) any request by the Commission for any amendment or supplement to
such Registration Statement or any prospectus relating thereto or for
additional
information or of the occurrence of an event requiring the preparation
of a
supplement or amendment to such prospectus so that, as thereafter delivered
to
the purchasers of the securities covered by such Registration Statement,
such
prospectus will not contain an untrue statement of a material fact or
omit to
state any material fact required to be stated therein or necessary to
make the
statements therein not misleading, and promptly make available to the
holders of
Registrable Securities included in such Registration Statement any such
supplement or amendment; except that before filing with the Commission
a
Registration Statement or
prospectus or any amendment or supplement thereto, including documents
incorporated by reference, the Company shall furnish to the holders of
Registrable Securities included in such Registration Statement and to
the legal
counsel for any such holders, copies of all such documents proposed to
be filed
sufficiently in advance of filing to provide such holders and legal counsel
with
a reasonable opportunity to review such documents and comment thereon,
and the
Company shall not file any Registration Statement or prospectus or amendment
or
supplement thereto, including documents incorporated by reference, to
which such
holders or their legal counsel shall object.
C-7
3.1.5. State
Securities Laws Compliance.
The Company shall use its best efforts to (i) register or qualify the
Registrable Securities covered by the Registration Statement under such
securities or “blue sky” laws of such jurisdictions in the United States as the
holders of Registrable Securities included in such Registration Statement
(in
light of their intended plan of distribution) may request and (ii) take
such action necessary to cause such Registrable Securities covered by
the
Registration Statement to be registered with or approved by such other
governmental authorities as may be necessary by virtue of the business
and
operations of the Company and do any and all other acts and things that
may be
necessary or advisable to enable the holders of Registrable Securities
included
in such Registration Statement to consummate the disposition of such
Registrable
Securities in such jurisdictions; provided,
however,
that
the Company shall not be required to qualify generally to do business
in any
jurisdiction where it would not otherwise be required to qualify but
for this
Section 3.1.5 or subject itself to taxation in any such
jurisdiction.
3.1.6. Agreements
for Disposition.
The Company shall enter into customary agreements (including, if applicable,
an
underwriting agreement in customary form) and take such other actions
as are
reasonably required in order to expedite or facilitate the disposition
of such
Registrable Securities. The representations, warranties and covenants of
the Company in any underwriting agreement which are made to or for the
benefit
of any Underwriters, to the extent applicable, shall also be made to
and for the
benefit of the holders of Registrable Securities included in such registration
statement. No holder of Registrable Securities included in such
registration statement shall be required to make any representations
or
warranties in the underwriting agreement except, if applicable, with
respect to
such holder’s organization, good standing, authority, title to Registrable
Securities, lack of conflict of such sale with such holder’s material agreements
and organizational documents, and with respect to written information
relating
to such holder that such holder has furnished in writing expressly for
inclusion
in such Registration Statement.
3.1.7. Cooperation.
The principal executive officer of the Company, the principal financial
officer
of the Company, the principal accounting officer of the Company and all
other
officers and members of the management of the Company shall cooperate
fully in
any offering of Registrable Securities hereunder, which cooperation shall
include, without limitation, the preparation of the Registration Statement
with
respect to such offering and all other offering materials and related
documents,
and participation in meetings with Underwriters, attorneys, accountants
and
potential Stockholders.
3.1.8. Records.
The Company shall make available for inspection by the holders of Registrable
Securities included in such Registration Statement, any Underwriter
participating in any disposition pursuant to such registration statement
and any
attorney, accountant or other professional retained by any holder of
Registrable
Securities included in such Registration Statement or any Underwriter,
all
financial and other records, pertinent corporate documents and properties
of the
Company, as shall be necessary to enable them to exercise their due diligence
responsibility, and cause the Company’s officers, directors and employees to
supply all information requested by any of them in connection with such
Registration Statement.
C-8
3.1.9. Opinions
and Comfort Letters.
The Company shall furnish to each holder of Registrable Securities included
in
any Registration Statement a signed counterpart, addressed to such holder,
of
(i) any opinion of counsel to the Company delivered to any Underwriter and
(ii) any comfort letter from the Company’s independent public accountants
delivered to any Underwriter. In the event no legal opinion is delivered
to any Underwriter, the Company shall furnish to each holder of Registrable
Securities included in such Registration Statement, at any time that
such holder
elects to use a prospectus, an opinion of counsel to the Company to the
effect
that the Registration Statement containing such prospectus has been declared
effective and that no stop order is in effect.
3.1.10. Earnings
Statement.
The Company shall comply with all applicable rules and regulations of
the
Commission and the Securities Act, and make available to its shareholders,
as
soon as practicable, an earnings statement covering a period of twelve
(12)
months, beginning within three (3) months after the effective date of
the
registration statement, which earnings statement shall satisfy the provisions
of
Section 11(a) of the Securities Act and Rule 158
thereunder.
3.1.11. Listing.
The Company shall use its best efforts to cause all Registrable Securities
included in any registration to be listed on such exchanges or otherwise
designated for trading in the same manner as similar securities issued
by the
Company are then listed or designated or, if no such similar securities
are then
listed or designated, in a manner satisfactory to the holders of a majority
of
the Registrable Securities included in such registration.
3.2 Obligation
to Suspend Distribution.
Upon receipt of any notice from the Company of the happening of any event
of the
kind described in Section 3.1.4(iii), or, in the case of a resale
registration on Form S-3 pursuant to Section 2.3 hereof, upon any
suspension by the Company, pursuant to a written insider trading compliance
program adopted by the Company’s Board of Directors, of the ability of all
“insiders” covered by such program to transact in the Company’s securities
because of the existence of material non-public information and holder
would be
deemed an “insider” under such program, each holder of Registrable Securities
included in any registration shall immediately discontinue disposition
of such
Registrable Securities pursuant to the Registration Statement covering
such
Registrable Securities until such holder receives the supplemented or
amended
prospectus contemplated by Section 3.1.4(iv) or the restriction on the
ability of “insiders” to transact in the Company’s securities is removed or is
inapplicable to such holder, as applicable, and, if so directed by the
Company,
each such holder will deliver to the Company all copies, other than permanent
file copies then in such holder’s possession, of the most recent prospectus
covering such Registrable Securities at the time of receipt of such
notice.
C-9
3.4 Information.
The holders of Registrable Securities shall provide such information
as may
reasonably be requested by the Company, or the managing Underwriter,
if any, in
connection with the preparation of any Registration Statement, including
amendments and supplements thereto, in order to effect the registration
of any
Registrable Securities under the Securities Act pursuant to Section 2 and
in connection with the Company’s obligation to comply with federal and
applicable state securities laws.
4. INDEMNIFICATION
AND CONTRIBUTION.
4.1 Indemnification
by the Company.
The Company agrees to indemnify and hold harmless each Stockholder and
each
other holder of Registrable Securities, and each of their respective
officers,
employees, affiliates, directors, partners, members and agents, and each
person,
if any, who controls a Stockholder and each other holder of Registrable
Securities (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) (each, a “Stockholder
Indemnified Party”),
from
and against any expenses, losses, judgments, claims, damages or liabilities,
whether joint or several, arising out of or based upon any untrue statement
(or
allegedly untrue statement) of a material fact contained in any Registration
Statement under which the sale of such Registrable Securities was registered
under the Securities Act, any preliminary prospectus, final prospectus
or
summary prospectus contained in the Registration Statement, or any amendment
or
supplement to such Registration Statement, or arising out of or based
upon any
omission (or alleged omission) to state a material fact required to be
stated
therein or necessary to make the statements therein not misleading, or
any
violation by the Company of the Securities Act or any rule or regulation
promulgated thereunder
applicable to the Company and relating to action or inaction required
of the
Company in connection with any such registration; and the Company shall
promptly
reimburse the Stockholder Indemnified Party for any legal and any other
expenses
reasonably incurred by such Stockholder Indemnified Party in connection
with
investigating and defending any such expense, loss, judgment, claim,
damage,
liability or action; provided,
however,
that
the Company will not be liable in any such case to the extent that any
such
expense, loss, claim, damage or liability arises out of or is based upon
any
untrue statement or allegedly untrue statement or omission or alleged
omission
made in such Registration Statement, preliminary prospectus, final prospectus,
or summary prospectus, or any such amendment or supplement, in reliance
upon and
in conformity with information furnished to the Company, in writing,
by such
selling holder expressly for use therein. The Company also shall indemnify
any Underwriter of the Registrable Securities, their officers, affiliates,
directors, partners, members and agents and each person who controls
such
Underwriter on substantially the same basis as that of the indemnification
provided above in this Section 4.1.
C-10
4.2 Indemnification
by Holders of Registrable Securities.
Each selling holder of Registrable Securities will, in the event that
any
registration is being effected under the Securities Act pursuant to this
Agreement of any Registrable Securities held by such selling holder,
indemnify
and hold harmless the Company, each of its directors and officers and
each
underwriter (if any), and each other person, if any, who controls such
selling
holder or such underwriter within the meaning of the Securities Act,
against any
losses, claims, judgments, damages or liabilities, whether joint or several,
insofar as such losses, claims, judgments, damages or liabilities (or
actions in
respect thereof) arise out of or are based upon any untrue statement
or
allegedly untrue statement of a material fact contained in any Registration
Statement under which the sale of such Registrable Securities was registered
under the Securities Act, any preliminary prospectus, final prospectus
or
summary prospectus contained in the Registration Statement, or any amendment
or
supplement to the Registration Statement, or arise out of or are based
upon any
omission or the alleged omission to state a material fact required to
be stated
therein or necessary to make the statement therein not misleading, if
the
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by such selling holder
expressly
for use therein, and shall reimburse the Company, its directors and officers,
and each such controlling person for any legal or other expenses reasonably
incurred by any of them in connection with investigation or defending
any such
loss, claim, damage, liability or action. Each selling holder’s
indemnification obligations hereunder shall be several and not joint
and shall
be limited to the amount of any net proceeds (after payment of all underwriting
fees, discounts, commissions and taxes) actually received by such selling
holder
from the sale of Registrable Securities which gave rise to such indemnification
obligation.
4.3 Conduct
of Indemnification Proceedings.
Promptly after receipt by any person of any notice of any loss, claim,
damage or
liability or any action in respect of which indemnity may be sought pursuant
to
Section 4.1 or 4.2, such person (the “Indemnified
Party”)
shall,
if a claim in respect thereof is to be made against any other person
for
indemnification hereunder, notify such other person (the “Indemnifying
Party”)
in
writing of the loss, claim, judgment, damage, liability or action; provided,
however,
that
the failure by the Indemnified Party to notify the Indemnifying Party
shall not
relieve the Indemnifying Party from any liability which the Indemnifying
Party
may have to such Indemnified Party hereunder, except and solely to the
extent
the Indemnifying Party is actually prejudiced by such failure. If the
Indemnified Party is seeking indemnification with respect to any claim
or action
brought against the
Indemnified Party, then the Indemnifying Party shall be entitled to participate
in such claim or action, and, to the extent that it wishes, jointly with
all
other Indemnifying Parties, to assume control of the defense thereof
with
counsel reasonably satisfactory to the Indemnified Party. After notice
from the Indemnifying Party to the Indemnified Party of its election
to assume
control of the defense of such claim or action, the Indemnifying Party
shall not
be liable to the Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof
other
than reasonable costs of investigation; provided,
however,
that in
any action in which both the Indemnified Party and the Indemnifying Party
are
named as defendants, the Indemnified Party shall have the right to employ
separate counsel (but no more than one such separate counsel) to represent
the
Indemnified Party and its controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought
by the
Indemnified Party against the Indemnifying Party, with the fees and expenses
of
such counsel to be paid by such Indemnifying Party if, based upon the
written
opinion of counsel of such Indemnified Party, representation of both
parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, consent to entry of judgment
or effect
any settlement of any claim or pending or threatened proceeding in respect
of
which the Indemnified Party is or could have been a party and indemnity
could
have been sought hereunder by such Indemnified Party, unless such judgment
or
settlement includes an unconditional release of such Indemnified Party
from all
liability arising out of such claim or proceeding.
C-11
4.4 Contribution.
4.4.1. If
the
indemnification provided for in the foregoing Sections 4.1, 4.2 and 4.3 is
unavailable to any Indemnified Party in respect of any loss, claim, damage,
liability or action referred to herein, then each such Indemnifying Party,
in
lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid
or payable by such Indemnified Party as a result of such loss, claim,
damage,
liability or action in such proportion as is appropriate to reflect the
relative
fault of the Indemnified Parties and the Indemnifying Parties in connection
with
the actions or omissions which resulted in such loss, claim, damage,
liability
or action, as well as any other relevant equitable considerations. The
relative fault of any Indemnified Party and any Indemnifying Party shall
be
determined by reference to, among other things, whether the untrue or
alleged
untrue statement of a material fact or the omission or alleged omission
to state
a material fact relates to information supplied by such Indemnified Party
or
such Indemnifying Party and the parties’ relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
4.4.2. The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 4.4 were determined by pro
rata
allocation or by any other method of allocation which does not take account
of
the equitable considerations referred to in the immediately preceding
Section 4.4.1. The amount paid or payable by an Indemnified Party as
a result of any loss, claim, damage, liability or action referred to
in the
immediately preceding paragraph shall be deemed to include, subject to
the
limitations set forth above, any legal or other expenses incurred by
such
Indemnified Party in connection with investigating or defending any such
action
or claim. Notwithstanding the provisions of this Section 4.4, no
holder of Registrable Securities shall be required to contribute any
amount in
excess of the dollar amount
of the
net proceeds (after payment of all underwriting fees, discounts, commissions
and
taxes) actually received by such holder from the sale of Registrable
Securities
which gave rise to such contribution obligation. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person
who was
not guilty of such fraudulent misrepresentation.
C-12
5. UNDERWRITING
AND DISTRIBUTION.
5.1 Rule 144.
The Company covenants that it shall file any reports required to be filed
by it
under the Securities Act and the Exchange Act and shall take such further
action
as the holders of Registrable Securities may reasonably request, all
to the
extent required from time to time to enable such holders to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144 under the Securities Act, as such
Rules may be amended from time to time, or any similar Rule or regulation
hereafter adopted by the Commission.
6. MISCELLANEOUS.
6.1 Other
Registration Rights.
The Company represents and warrants that no person, other than a holder
of the
Registrable Securities and the parties to the Founding Investor Registration
Rights Agreement, has any right to require the Company to register any
shares of
the Company’s capital stock for sale or to include shares of the Company’s
capital stock in any registration filed by the Company for the sale of
shares of
capital stock for its own account or for the account of any other
person.
6.2 Assignment;
No Third-Party Beneficiaries.
This Agreement and the rights, duties and obligations of the Company
hereunder
may not be assigned or delegated by the Company in whole or in part. This
Agreement and the rights, duties and obligations of the holders of Registrable
Securities hereunder may be freely assigned or delegated by such holder
of
Registrable Securities in conjunction with and to the extent of any transfer
of
Registrable Securities by any such holder. This Agreement and the
provisions hereof shall be binding upon and shall inure to the benefit
of each
of the parties and their respective successors and the permitted assigns
of the
Stockholder or holder of Registrable Securities or of any assignee of
the
Stockholder or holder of Registrable Securities. This Agreement is not
intended to confer any rights or benefits on any persons that are not
a party
hereto other than as expressly set forth in Section 4 and this
Section 6.2.
6.3 Notices.
All
notices, demands, requests, consents, approvals or other communications
(collectively, “Notices”)
required or permitted to be given hereunder or which are given with respect
to
this Agreement shall be in writing and shall be personally served, delivered
by
reputable air courier service with charges prepaid, or transmitted by
hand
delivery, telegram, telex or facsimile, addressed as set forth below,
or to such
other address as such party shall have specified most recently by written
notice. Notice shall be deemed given on the date of service or
transmission if personally served or transmitted by telegram, telex or
facsimile;
provided,
that if
such service or transmission is not on a business day or is after normal
business hours, then such notice shall be deemed given on the next business
day. Notice otherwise sent as provided herein shall be deemed given on the
next business day following timely delivery of such notice to a reputable
air
courier service with an order for next-day delivery.
C-13
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Fortress
America Acquisition Corporation
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4100
North Fairfax Drive, #1150
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Arlington,
Virginia 22203
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Attention:
Chairman
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with
a copy to:
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Squire,
Sanders & Dempsey L.L.P.
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8000
Towers Crescent Drive, 14th
Floor
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Tysons
Corner, Virginia 22182
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Attn:
James J. Maiwurm, Esq.; and
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To
a Stockholder,:
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to
the addresses listed on Exhibit A hereto.
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6.4 Severability.
This Agreement shall be deemed severable, and the invalidity or unenforceability
of any term or provision hereof shall not affect the validity or enforceability
of this Agreement or of any other term or provision hereof. Furthermore,
in lieu of any such invalid or unenforceable term or provision, the parties
hereto intend that there shall be added as a part of this Agreement a
provision
as similar in terms to such invalid or unenforceable provision as may
be
possible and be valid and enforceable.
6.5 Counterparts.
This Agreement may be executed in multiple counterparts, each of which
shall be
deemed an original, and all of which taken together shall constitute
one and the
same instrument.
6.6 Entire
Agreement.
This Agreement (including all agreements entered into pursuant hereto
and all
certificates and instruments delivered pursuant hereto and thereto) constitute
the entire agreement of the parties with respect to the subject matter
hereof
and supersede all prior and contemporaneous agreements, representations,
understandings, negotiations and discussions between the parties, whether
oral
or written.
6.7 Modifications
and Amendments.
No amendment, modification or termination of this Agreement shall be
binding
upon any party unless executed in writing by such party.
6.8 Titles
and Headings.
Titles and headings of sections of this Agreement are for convenience
only and
shall not affect the construction of any provision of this
Agreement.
C-14
6.9 Waivers
and Extensions.
Any party to this Agreement may waive any right, breach or default which
such
party has the right to waive, provided
that
such waiver will not be effective against the waiving party unless it
is in
writing, is signed by such party, and specifically refers to this
Agreement. Waivers may be made in advance or after the right waived has
arisen or the breach or default waived has occurred. Any waiver may be
conditional. No waiver of any breach of any agreement or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof
or of any other agreement or provision herein contained. No waiver or
extension of time for performance of any obligations or acts shall be
deemed a
waiver or extension of the time for performance of any other obligations
or
acts.
6.10 Remedies
Cumulative.
In the event that the Company fails to observe or perform any covenant
or
agreement to be observed or performed under this Agreement, the Stockholder
or
any other holder of Registrable Securities may proceed to protect and
enforce
its rights by suit in equity or action at law, whether for specific performance
of any term contained in this Agreement or for an injunction against
the breach
of any such term or in aid of the exercise of any power granted in this
Agreement or to enforce any other legal or equitable right, or to take
any one
or more of such actions, without being required to post a bond. None of
the rights, powers or remedies conferred under this Agreement shall be
mutually
exclusive, and each such right, power or remedy shall be cumulative and
in
addition to any other right, power or remedy, whether conferred by this
Agreement or now or hereafter available at law, in equity, by statute
or
otherwise.
6.12 Waiver
of Trial by Jury.
Each party hereby irrevocably and unconditionally waives the right to
a trial by
jury in any action, suit, counterclaim or other proceeding (whether based
on
contract, tort or otherwise) arising out of, connected with or relating
to this
Agreement, the transactions contemplated hereby, or the actions of any
Stockholder in the negotiation, administration, performance or enforcement
hereof.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
C-15
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FORTRESS
AMERICA ACQUISITION CORPORATION
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A
Delaware corporation
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By:
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Name:
Title:
__________________________________________
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STOCKHOLDERS:
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Thomas
P. Rosato
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Gerard
J. Gallagher
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C-16
Exhibit
A
Stockholders:
Thomas
P.
Rosato
Gerard
J.
Gallagher
C-17
Annex
D
SECOND
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
FORTRESS
AMERICA ACQUISITION CORPORATION
FIRST:
Name.
The
name of this corporation is Fortress America Acquisition Corporation
(the
"Corporation").
SECOND:
Registered
Office and Agent.
The
address of the Corporation's registered office in the State of Delaware
is to be
located at 2711 Centerville Road, Suite 400, in the City of Wilmington,
County
of New Castle, State of Delaware 19808. Its registered agent at such
address is
Corporation Service Company.
THIRD:
Purpose.
The
purpose of the Corporation is to engage in any lawful act or activity
for which
corporations may be organized under the Delaware General Corporation
Law, as
amended from time to time (the "DGCL").
FOURTH:
Capital
Stock.
Section
4.1. Authorized
Shares.
The
total number of shares of stock which the Corporation shall have
authority to
issue is fifty-one million (51,000,000), fifty million (50,000,000)
of which
shall be shares of Common Stock with a par value of $0.0001
per share and one million (1,000,000) of which shall be shares of
Preferred
Stock with a par value of $0.0001 per share.
Section
4.2. Common
Stock.
Except
as otherwise required by law or as otherwise provided in the terms
of any class
or series of stock having a preference over the Common Stock as to
dividends or
upon liquidation, the holders of the Common Stock shall exclusively
possess all
voting power, and each share of Common Stock shall have one vote.
Section
4.3. Preferred
Stock.
(a)
Board
Authorized to Fix Terms.
The
Board of Directors is authorized, subject to limitations prescribed
by law, by
resolution or resolutions to provide for the issuance of shares of
preferred
stock in one or more series, and, by filing a certificate when required
by the
DGCL, to establish from time to time the number of shares to be included
in each
such series and to fix the designation, powers, preferences and rights
of the
shares of each such series and the qualifications, limitations or
restrictions
thereof. The authority of the Board of Directors with respect to
each series
shall include, but not be limited to, determination of the
following:
(i)
the
number of shares constituting that series, including the authority
to increase
or decrease such number, and the distinctive designation of that
series;
(ii)
the
dividend rate on the shares of that series, whether dividends shall
be
cumulative, and, if so, the date or dates from which they shall be
cumulative
and the relative rights of priority, if any, in the payment of dividends
on
shares of that series;
(iii)
the
voting rights, if any, of the shares of that series in addition to
the voting
rights provided by law and the terms of any such voting rights;
(iv)
the
terms and conditions, if any, upon which shares of that series shall
be
convertible or exchangeable for shares of any other class or classes
of stock of
the Corporation or other entity, including provision for adjustment
of the
conversion or exchange rate upon the occurrence of such events as
the Board of
Directors shall determine;
D-1
(v)
the
right, if any, of the Corporation to redeem shares of that series
and the terms
and conditions of such redemption, including the date or dates upon
or after
which they shall be redeemable and the amount per share payable in
case of
redemption, which amount may vary according to different conditions
and
different redemption dates;
(vi)
the
obligation, if any, of the Corporation to retire shares of that series
pursuant
to a retirement or sinking fund or fund of a similar nature for the
redemption
or purchase of shares of that series and the terms and conditions
of such
obligation;
(vii)
the
rights of the shares of that series in the event of voluntary or
involuntary
liquidation, dissolution or winding up of the Corporation, and the
relative
rights of priority, if any, in the payment of shares of that series;
and
(viii)
any other rights, preferences and limitations of the shares of that
series as
may be permitted by law.
(b)
Dividend
Preference.
Dividends on outstanding shares of preferred stock shall be paid
or declared and
set apart for payment before any dividends shall be paid or declared
and set
apart for payment on shares of common stock with respect to the same
dividend
period.
(c)
Relative
Liquidation Preference.
If,
upon any voluntary or involuntary liquidation, dissolution or winding
up of the
Corporation, the assets available for distribution to holders of
shares of
preferred stock of all series shall be insufficient to pay such holders
the full
preferential amount to which they are entitled, then such assets
shall be
distributed ratably among the shares of all series of preferred stock
in
accordance with their respective priorities and preferential amounts
(including
unpaid cumulative dividends, if any) payable with respect thereto.
(d)
Reissuance
of Preferred Stock.
Subject
to the conditions or restrictions on issuance set forth in the resolution
or
resolutions adopted by the Board of Directors providing for the issue
of any
series of shares of Preferred Stock, shares of Preferred Stock of
any series
that have been redeemed or repurchased by the Corporation (whether
through the
operation of a sinking fund or otherwise) or that, if convertible
or
exchangeable, have been converted or exchanged in accordance with
their terms,
shall be retired and have the status of authorized and unissued shares
of
Preferred Stock of the same series and may be reissued as a part
of the series
of which they were originally a part or may, upon the filing of an
appropriate
certificate with the Delaware Secretary of State, be reissued as
part of a new
series of shares of Preferred Stock to be created by resolution or
resolutions
of the Board of Directors or as part of any other series of shares
of Preferred
Stock.
FIFTH:
Elimination
of Certain Liability of Directors.
No
director of the Corporation shall be personally liable to the Corporation
or its
stockholders for monetary damages for breach of fiduciary duty as
a director
except (a) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation
of law,
(c) under Section 174 of the DGCL or (d) for any transaction from
which the director derived an improper personal benefit. If the DGCL
is
hereafter amended to permit a corporation to further eliminate or
limit the
liability of a director of a corporation, then the liability of a
director of
the Corporation, in addition to the circumstances in which a director
is not
personally liable as set forth in the preceding sentence, shall,
without further
action of the directors or stockholders, be further eliminated or
limited to the
fullest extent permitted by the DGCL as so amended. Neither any amendment,
repeal, or modification of this Article Fifth, nor the adoption or
amendment of
any other provision of this Certificate of Incorporation or the bylaws
of the
Corporation inconsistent with this Article Fifth, shall adversely
affect any
right or protection provided hereby with respect to any act or omission
occurring prior to the date when such amendment, repeal, modification,
or
adoption became effective.
D-2
SIXTH:
Indemnification.
Section
6.1. Right
to Indemnification.
Each
person who was or is a party or is threatened to be made a party
to or is
involved in any threatened, pending or completed action, suit, proceeding
or
alternative dispute resolution procedure, whether (a) civil, criminal,
administrative, investigative or otherwise, (b) formal or informal or
(c) by or in the right of the Corporation (collectively, a "proceeding"),
by reason of the fact that he or she, or a person of whom he or she
is the legal
representative, is or was a director, officer, employee or agent
of the
Corporation or is or was serving at the request of the Corporation
as a
director, manager, officer, partner, trustee, employee or agent of
another
foreign or domestic corporation or of a foreign or domestic limited
liability
company, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis
of such
proceeding is alleged action in an official capacity as such a director,
officer, employee or agent of the Corporation or in any other capacity
while
serving as such other director, manager, officer, partner, trustee,
employee or
agent, shall be indemnified and held harmless by the Corporation
against all
judgments, penalties and fines incurred or paid, and against all
expenses
(including attorneys' fees) and settlement amounts incurred or paid,
in
connection with any such proceeding, except in relation to matters
as to which
the person did not act in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Corporation,
and,
with respect to any criminal action or proceeding, had no reasonable
cause to
believe the person's conduct was unlawful. Until such time as there
has been a
final judgment to the contrary, a person shall be presumed to be
entitled to be
indemnified under this Section 6.1. The termination of any proceeding
by
judgment, order, settlement, conviction, or upon a plea of nolo contendere
or
its equivalent, shall not, of itself, either rebut such presumption
or create a
presumption that (a) the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best
interests of the Corporation, (b) with respect to any criminal action or
proceeding, the person had reasonable cause to believe that the person's
conduct
was unlawful or (c) the person was not successful on the merits or
otherwise in defense of the proceeding or of any claim, issue or
matter therein.
If the DGCL is hereafter amended to provide for indemnification rights
broader
than those provided by this Section 6.1, then the persons referred
to in this
Section 6.1 shall be indemnified and held harmless by the Corporation
to the
fullest extent permitted by the DGCL as so amended (but, in the case
of any such
amendment, only to the extent that such amendment permits the Corporation
to
provide broader indemnification rights than permitted prior to such
amendment).
Section
6.2. Determination
of Entitlement to Indemnification.
A
determination as to whether a person who is a director or officer
of the
Corporation at the time of the determination is entitled to be indemnified
and
held harmless under Section 6.1 shall be made (a) a majority vote of the
directors who are not parties to such proceeding, even though less
than a
quorum, (b) by a committee of such directors designated by majority vote of
such directors, even though less than a quorum, (c) if there are
no such
directors, or if such directors so direct, by independent legal counsel
in a
written opinion, or (d) by the stockholders. A determination as to whether
a person who is not a director or officer of the Corporation at the
time of the
determination is entitled to be indemnified and held harmless under
Section 6.1
shall be made by or as directed by the Board of Directors of the
Corporation.
Section
6.3. Mandatory
Advancement of Expenses.
The
right to indemnification conferred in this Article Sixth shall include
the right
to require the Corporation to pay the expenses (including attorneys'
fees)
incurred in defending any such proceeding in advance of its final
disposition;
provided,
however,
that,
if the Board of Directors so determines, an advancement of expenses
incurred by
an indemnitee in his or her capacity as a director or officer of
the Corporation
(but not in any other capacity in which service was or is rendered
by such
indemnitee, including, without limitation, service to an employee
benefit plan)
shall be made only upon delivery to the Corporation of an undertaking,
by or on
behalf of such indemnitee, to repay all amounts so advanced if it
shall be
finally determined that such indemnitee is not entitled to be indemnified
for
such expenses under Section 6.1 or otherwise.
Section
6.4. Non-Exclusivity
of Rights.
The
right to indemnification and the advancement of expenses conferred
in this
Article Sixth shall not be exclusive of any other right which any
person may
have or hereafter acquire under any statute, any provision of this
Certificate
of Incorporation or of any bylaw, agreement, or insurance policy
or arrangement,
or any vote of stockholders or disinterested directors, or otherwise.
The Board
of Directors is expressly authorized to adopt and enter into indemnification
agreements with, and obtain insurance for, directors and officers.
Section
6.5. Effect
of Amendment.
Neither
any amendment, repeal, or modification of this Article Sixth, nor
the adoption
or amendment of any other provision of this Certificate of Incorporation
or the
bylaws of the Corporation inconsistent with this Article Sixth, shall
adversely
affect any right or protection provided hereby with respect to any
act or
omission occurring prior to the date when such amendment, repeal,
modification,
or adoption became effective.
D-3
SEVENTH:
Miscellaneous.
The
following provisions are inserted for the management of the business
and for the
conduct of the affairs of the Corporation and for the purpose of
creating,
defining, limiting and regulating powers of the Corporation and its
directors
and stockholders:
Section
7.1 Classification,
Election and Term of Office of Directors.
The
directors, other than those who may be elected by the holders of
any class or
series of stock having a preference over the Common Stock as to dividends
or
upon liquidation, shall be classified with respect to the time for
which they
severally hold office into three classes, as nearly equal in number
as possible.
At the first election of directors by the incorporator, the incorporator
shall
elect a director for a term expiring at the Corporation's third annual
meeting
of stockholders. That director shall then elect additional directors
to serve in
the other classes of directors with terms expiring at the first and
second
annual meetings of stockholders. At each succeeding annual meeting
of
stockholders successors to the class of directors whose term expires
at that
meeting shall be elected by plurality vote of all votes cast at such
meeting to
hold office for a term expiring at the annual meeting of stockholders
held in
the third year following the year of their election, subject, however,
to their
prior death, resignation or removal from office as provided by law.
If the
number of directors is changed, any increase or decrease shall be
apportioned
among the classes so as to maintain a number of directors in each
class as
nearly equal as possible. Any additional director of any class elected
to fill a
vacancy resulting from an increase in such class shall hold office
for a term
that shall coincide with the remaining term of such class. No decrease
in the
number of directors shall change the term of any director in office
at the time
of such decrease. A director shall hold office until the annual meeting
for the
year in which the director's term expires and such director's successor
shall be
elected and qualified, subject, however, to such director's prior
death,
resignation or removal from office.
Section
7.2 Manner
of Election of Directors.
Elections of directors need not be by written ballot unless the bylaws
of the
Corporation shall so provide.
Section
7.3 Adoption
and Amendment of Bylaws.
The
Board of Directors shall have power to make and adopt bylaws with
respect to the
organization, operation and government of the Corporation and, subject
to such
restrictions as may be set forth in the bylaws, from time to time
to change,
alter, amend or repeal the same, but the stockholders of the Corporation
may
make and adopt additional bylaws and, subject to such restrictions
as may be set
forth in the bylaws, may change, alter, amend or repeal any bylaw
whether
adopted by them or otherwise.
Section
7.4 Vote
Required to Amend Certain Provisions of Certificate of
Incorporation.
Notwithstanding any other provision of this Certificate of Incorporation
or the
bylaws of the Corporation or any provision of law which might otherwise
permit a
lesser vote, but in addition to any affirmative vote of the holders
of any
particular class or series of stock required by law, this Certificate
of
Incorporation, or the bylaws, the affirmative vote of the holders
of at least
66⅔% of the Corporation's capital stock entitled to vote generally in
the
election of directors, voting as a single class, shall be required
to alter,
amend, or adopt any provision inconsistent with or repeal Articles
Fifth, Sixth
and Seventh of this Certificate of Incorporation.
Section
7.5 Severability.
In the
event any provision (or portion thereof) of this Certificate of Incorporation
shall be found to be invalid, prohibited, or unenforceable for any
reason, the
remaining provisions (or portions thereof) of this Certificate of
Incorporation
shall be deemed to remain in full force and effect, and shall be
construed as if
such invalid, prohibited, or unenforceable provision had been stricken
herefrom
or otherwise rendered inapplicable, it being the intent of the Corporation
and
its stockholders that each such remaining provision (or portion thereof)
of this
Certificate of Incorporation remain, to the fullest extent permitted
by law,
applicable and enforceable as to all stockholders, notwithstanding
any such
finding.
Section
7.6 Reservation
of Right to Amend Certificate of Incorporation.
The
Corporation reserves the right to amend, alter, change or repeal
any provision
contained in this Certificate of Incorporation, in the manner now
or hereafter
prescribed by statute or herein, and all rights conferred upon stockholders
herein are granted subject to this reservation.
D-4
Annex
E
FORTRESS
AMERICA ACQUISITION CORPORATION
2006
OMNIBUS INCENTIVE COMPENSATION PLAN
ARTICLE
ONE
ESTABLISHMENT,
OBJECTIVES AND DURATION
1.1 ESTABLISHMENT
OF THE PLAN. Fortress America Acquisition Corporation, a Delaware corporation
(the “Company”),
hereby adopts, effective upon the later of stockholder approval of
the Plan and
the consummation of the Company’s acquisition of VTC, L.L.C. and Vortech, LLC
(the “Effective
Date”),
the
Fortress America Acquisition Corporation 2006 Omnibus Incentive Compensation
Plan as set forth in this document. The Plan permits the grant of Nonqualified
Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted
Stock, Performance Shares and Performance Units, and Other Incentive
Awards.
1.2 OBJECTIVES
OF THE PLAN. The objectives of the Plan are to optimize the profitability
and
growth of the Company through incentives which are consistent with
the Company’s
goals and which link and align the personal interests of Participants
with an
incentive for excellence in individual performance, and to promote
teamwork.
The
Plan
is further intended to provide flexibility to the Company in its ability
to
motivate, attract and retain the services of Participants who make
significant
contributions to the Company’s success and to allow Participants to share in the
success of the Company.
1.3 DURATION
OF THE PLAN. The Plan shall commence on the Effective Date, as described
in
Section 1.1 hereof, and shall remain in effect, subject to the right
of the
Board of Directors to amend or terminate the Plan at any time pursuant
to
Article 15 hereof, until all Shares subject to it shall have been purchased
or
acquired according to the Plan’s provisions. However, in no event may an Award
be granted under the Plan on or after June 30, 2016.
ARTICLE
TWO
DEFINITIONS
Whenever
used in the Plan, the following terms shall have the meanings set forth
below,
and when the meaning is intended, the initial letter of the word shall
be
capitalized:
“Award”
means,
individually or collectively, a grant under this Plan of Nonqualified
Stock
Options, Incentive Stock Options, Stock Appreciation Rights, Restricted
Stock,
Performance Shares or Performance Units, or Other Incentive Awards.
“Award
Agreement”
means
an agreement entered into by the Company and each Participant setting
forth the
terms and provisions applicable to Awards granted under this Plan.
E-1
“Beneficial
Owner”
or
“Beneficial
Ownership”
shall
have the meaning ascribed to such term in Rule 13d-3 of the General
Rules and
Regulations under the Exchange Act.
“Board”
or
“Board
of Directors”
means
the Board of Directors of the Company.
“Change
in Control”
of
the
Company means any one or more of the following:
(a) The
Company is merged, consolidated or reorganized into or with another
corporation,
partnership, limited liability company, trust, or other legal person
(collectively referred herein as a “Business
Entity”),
and
immediately after such merger, consolidation, or reorganization less
than fifty
percent (50%) of the combined voting power of the then-outstanding
securities of
such Business Entity immediately after such transaction are held in
the
aggregate by the holders of voting stock of the Company immediately
prior to
such transaction;
(b) The
Company sells all or substantially all of its assets to any other Business
Entity, and less than fifty percent (50%) of the combined voting power
of the
then-outstanding securities of such Business Entity immediately after
such sale
are held in the aggregate by the holders of voting stock of the Company
immediately prior to such sale; or
(c) Any
person (as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of
the Exchange Act) or group of persons acting in concert has become
the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or
any successor rule or regulation promulgated under the Exchange Act)
of
securities representing fifty percent (50%) or more of the voting stock
of the
Company.
“Code”
means
the Internal Revenue Code of 1986, as amended from time to time.
“Committee”
means
the Compensation Committee of the Board, as specified in Article 3
herein, or
such other Committee appointed by the Board to administer the Plan
with respect
to grants of Awards.
“Common
Stock”
means
the common stock of the Company.
“Company”
means
Fortress America Acquisition Corporation, a Delaware corporation, as
well as any
successor to the Company as provided in Article 18 herein.
“Director”
means
any individual who is a member of the Board of Directors of the
Company.
“Disability”
means
the inability of a Participant to engage in any substantially gainful
activity
by reason of any medically determinable physical or mental impairment
that is
expected to result in death or has lasted or can be expected to last
for a
continuous period of twelve (12) months or more. A determination that
a
Participant is disabled shall be made by the Committee on the basis
of such
medical evidence as the Committee deems warranted under the
circumstances.
E-2
“Effective
Date”
shall
have the meaning ascribed to such term in Section 1.1 hereof.
“Employee”
means
any employee of the Company or any Subsidiary. Nonemployee Directors
shall not
be considered Employees under this Plan unless specifically designated
otherwise.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended from time to time,
or any
successor act thereto.
“Fair
Market Value”
shall
be the fair market value of a share of Common Stock, as determined
in good faith
by the Committee.
“Freestanding
SAR”
means
an SAR that is granted independently of any Options, as described in
Article 7
herein.
“Incentive
Stock Option”
or
“ISO”
means
an option to purchase Shares granted under Article 6 herein and which
is
designated as an Incentive Stock Option and which is intended to meet
the
requirements of Code Section 422.
“Nonemployee
Director”
means
an individual who is a member of the Board of Directors of the Company
but who
is not an Employee of the Company or a Subsidiary.
“Nonqualified
Stock Option”
or
“NQSO”
means
an option to purchase Shares granted under Article 6 herein and which
is not
intended to meet the requirements of Code Section 422.
“Option”
means
an Incentive Stock Option or a Nonqualified Stock Option, as described
in
Article 6 herein.
“Option
Price”
means
the price at which a Share may be purchased by a Participant pursuant
to an
Option.
“Other
Incentive Award”
means
an award granted pursuant to Article 10 hereof.
“Participant”
means
an Employee or Nonemployee Director who has outstanding an Award granted
under
the Plan.
“Performance
Period”
means
the time period during which performance goals must be achieved with
respect to
an Award, as determined by the Committee.
“Performance
Share”
means
an Award granted to a Participant, as described in Article 9
herein.
“Performance
Unit”
means
an Award granted to a Participant, as described in Article 9
herein.
“Period
of Restriction”
means
the period during which the transfer of Shares of Restricted Stock
is limited in
some way (based on the passage of time, the achievement of performance
goals,
and/or upon the occurrence of other events as determined by the Committee
at its
discretion), and the Shares are subject to a substantial risk of forfeiture,
as
provided in Article 8 herein.
E-3
“Person”
shall
have the meaning ascribed to such term in Section 3(a) (9) of the Exchange
Act
and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in
Section 13(d) thereof.
“Restricted
Stock”
means
an Award granted to a Participant pursuant to Article 8 herein.
“Shares”
means
the shares of common stock of the Company.
“Share
Pool”
means
the number of shares authorized for issuance under Section 4.1, as
adjusted for
awards and payouts under Section 4.2 and as adjusted for changes in
corporate
capitalization under Section 4.3.
“Stock
Appreciation Right”
or
“SAR”
means
an Award, granted alone or in connection with a related Option, designated
as an
SAR, pursuant to the terms of Article 7 herein.
“Subsidiary”
means
any corporation, partnership, joint venture, affiliate or other entity
in which
the Company has a majority voting interest, and which the Committee
designates
as a participating entity in the Plan.
“Tandem
SAR”
means
an SAR that is granted in connection with a related Option pursuant
to Article 7
herein, the exercise of which shall require forfeiture of the right
to purchase
a Share under the related Option (and when a Share is purchased under
the
Option, the Tandem SAR shall similarly be canceled).
ARTICLE
THREE
ADMINISTRATION
3.1 THE
COMMITTEE. The Plan shall be administered by the Compensation Committee
of the
Board or by any other Committee appointed by the Board. The members
of the
Committee shall be appointed from time to time by, and shall serve
at the
discretion of, the Board of Directors.
3.2 AUTHORITY
OF THE COMMITTEE. Except as limited by law or by the Articles of Incorporation
or Bylaws. of the Company, and subject to the provisions herein, the
Committee
shall have full power to select Employees and Nonemployee Directors
who shall
participate in the Plan; determine the sizes and types of Awards; determine
the
terms and conditions of Awards in a manner consistent with the Plan;
construe
and interpret the Plan and any agreement or instrument entered into
under the
plan; establish, amend or waive rules and regulations for the Plan’s
administration; and (subject to the provisions of Article 15 herein)
amend the
terms and conditions of any outstanding Award to the extent such terms
and
conditions are within the discretion of the Committee as provided in
the Plan.
Further, the Committee shall make all other determinations which may
be
necessary or advisable for the administration of the Plan. As permitted
by law,
the Committee may delegate its authority as identified herein.
E-4
3.3 DECISIONS
BINDING. All determinations and decisions made by the Committee pursuant
to the
provisions of the Plan and all related orders and resolutions of the
Board shall
be final, conclusive and binding on all persons, including the Company,
its
stockholders, Employees, Participants and their estates and
beneficiaries.
ARTICLE
FOUR
SHARES
SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER
OF
SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in Section
4.3
herein, the number of Shares hereby reserved for issuance under the
Plan shall
be 2,100,000. The Committee shall determine the appropriate methodology
for
calculating the number of Shares issued pursuant to the Plan.
4.2 LAPSED
AWARDS. If any Award granted under this Plan is canceled, terminates,
expires,
or lapses for any reason (with the exception of the termination of
a Tandem SAR
upon exercise of the related Option, or the termination of a related
Option upon
exercise of the corresponding Tandem SAR), any Shares subject to such
Award
shall again be available for the grant of an Award under the Plan.
4.3 ADJUSTMENTS
IN AUTHORIZED SHARES. In the event of any change following Board adoption
of the
Plan (including any such change prior to the Effective Date) in corporate
capitalization, such as a stock split, or a corporate transaction,
such as any
merger, consolidation, separation, including a spin-off, or other distribution
of stock or property of the Company, any reorganization (whether or
not such
reorganization comes within the definition of such term in Code Section
368), or
any partial or complete liquidation of the Company, such adjustment
shall be
made in the number and class of Shares available in the Share Pool
and in the
number and class of and/or price of Shares subject to outstanding Awards
granted
under the Plan, as may be determined to be appropriate and equitable
by the
Committee, in its sole discretion, to prevent dilution or enlargement
of rights;
provided,
however,
that
the number of Shares subject to any Award shall always be a whole
number.
ARTICLE
FIVE
ELIGIBILITY
AND PARTICIPATION
5.1 ELIGIBILITY.
Persons eligible to participate in this Plan include (a) all officers
and key
employees of the Company, as determined by the Committee, including
Employees
who are members of the Board and (b) all Nonemployee Directors.
5.2 ACTUAL
PARTICIPATION. Subject to the provisions of the Plan, the Committee
may, from
time to time, select from all eligible Employees and Nonemployee Directors
those
to whom Awards shall be granted and shall determine the nature and
amount of
each Award.
E-5
ARTICLE
SIX
STOCK
OPTIONS
6.1 GRANT
OF
OPTIONS. Subject to the terms and provisions of the Plan, Options may
be
granted, either by the Committee or the Board, to one or more Participants
in
such number, and upon such terms, and at any time and from time to
time as shall
be determined by the Committee. The Committee or the Board shall have
the
authority to grant Incentive Stock Options or to grant Nonqualified
Stock
Options or to grant both types of Options. In the case of Incentive
Stock
Options, the terms and conditions of such grants shall be subject to,
and comply
with, such rules as may be prescribed by Section 422 of the Code, as
from time
to time amended, and any regulations implementing such statute, including,
without limitation, the requirements of Code Section 422(d) which limit
the
aggregate Fair Market Value of Shares (determined at the time that
such Option
is granted) for which Incentive Stock Options are exercisable for the
first time
to $100,000 per calendar year, and the requirement that Incentive Stock
Options
may only be granted to Employees. Each provision of the Plan and of
each written
Award Agreement relating to an Option designated as an Incentive Stock
Option
shall be construed so that such Option qualifies as an Incentive Stock
Option,
and any provision that cannot be so construed shall be disregarded.
6.2 AWARD
AGREEMENT. Each Option grant shall be evidenced by an Award Agreement
that shall
specify the Option Price, the duration of the Option, the number of
Shares to
which the Option pertains, and such other provisions as the Committee
shall
determine. The Award Agreement also shall specify whether the Option
is intended
to be an ISO or an NQSO.
6.3 OPTION
PRICE. The Option Price for each grant of an Option under this Plan
shall be at
least equal to one hundred percent (100%) of the Fair Market Value
of a Share on
the date the Option is granted. Notwithstanding any provision contained
herein,
in the case of an Incentive Stock Option, the exercise price at the
time such
Incentive Stock Option is granted to any Employee who, at the time
of such
grant, owns (within the meaning of Section 424(d) of the Code) more
than ten
percent of the voting power of all classes of stock of the Company
or a
Subsidiary, shall not be less than 110% of the per Share Fair Market
Value on
the date of grant.
6.4 DURATION
OF OPTIONS. Each Option shall expire at such time as the Committee
shall
determine at the time of grant; provided, however, that in the case
of an
Incentive Stock Option, an Employee may not exercise such Incentive
Stock Option
after the date which is ten years (five years in the case of a Participant
who
owns more than ten percent of the voting power of the Company or a
Subsidiary)
after the date on which such Incentive Stock Option is granted.
6.5 EXERCISE
OF OPTIONS. Options granted under this Article 6 shall be exercisable
at such
times and be subject to such restrictions and conditions as the Committee
shall
in each instance approve, which need not be the same for each grant
or for each
Participant.
6.6 PAYMENT.
Options granted under this Article 6 shall be exercised by the delivery
of a
written notice of exercise to the Company, setting forth the number
of Shares
with respect to which the Option is to be exercised, accompanied by
full payment
for the Shares.
E-6
The
Option Price upon exercise of any Option shall be payable to the Company
in full
either: (a) in cash or its equivalent, or (b) by tendering previously
acquired
Shares having an aggregate Fair Market Value at the time of exercise
equal to
the total Option Price (provided that the Shares that are tendered
must have
been held by the Participant for at least six (6) months prior to their
tender
to satisfy the Option Price), or (c) by a combination of (a) and
(b).
As
soon
as practicable after receipt of a written notification of exercise
and full
payment, the Company shall deliver to the Participant, in the Participant’s
name, Share certificates in an appropriate amount based upon the number
of
Shares purchased under the Option(s).
6.7 RESTRICTIONS
ON SHARE TRANSFERABILITY. The Committee may impose such restrictions
on any
Shares acquired pursuant to the exercise of an Option granted under
this Article
6 as it may deem advisable, including, without limitation, restrictions
under
applicable federal securities laws, under the requirements of any stock
exchange
or market upon which such Shares are then listed and/or traded, and
under any
blue sky or state securities laws applicable to such Shares.
6.8 TERMINATION
OF EMPLOYMENT. Each Option Award Agreement shall set forth the extent
to which
the Participant shall have the right to exercise the Option following
termination of the Participant’s employment with (or service to) the Company
and/or its Subsidiaries. Such provisions shall be determined in the
sole
discretion of the Committee, shall be included in the Award Agreement
entered
into with each Participant, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons
for
termination of employment or service.
6.9 NONTRANSFERABILITY
OF OPTIONS.
(a) INCENTIVE
STOCK OPTIONS. No ISO granted under the Plan may be sold, transferred,
pledged,
assigned, or otherwise alienated or hypothecated, other than by will
or by the
laws of descent and distribution. Further, all ISOs granted to a Participant
under the Plan shall be exercisable during his or her lifetime only
by such
Participant.
(b) NON-QUALIFIED
STOCK OPTIONS. Except as otherwise provided in a Participant’s Award Agreement,
no NQSO granted under this Article 6 may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will
or by the
laws of descent and distribution. Further, except as otherwise provided
in a
Participant’s Award Agreement, all NQSOs granted to a Participant under this
Article 6 shall be exercisable during his or her lifetime only by such
Participant.
ARTICLE
SEVEN
STOCK
APPRECIATION RIGHTS
7.1 GRANT
OF
SARs. Subject to the terms and conditions of the Plan, SARs may be
granted to
Participants at any time and from time to time as shall be determined
by the
Committee. The Committee may grant Freestanding SARs, Tandem SARs,
or any
combination of these forms of SAR.
E-7
The
Committee shall have complete discretion in determining the number
of SARs
granted to each Participant (subject to Article 4 herein) and, consistent
with
the provisions of the Plan, in determining the terms and conditions
pertaining
to such SARs.
Unless
otherwise designated by the Committee at the time of grant, the grant
price of a
Freestanding SAR shall equal the Fair Market Value of a Share on the
date of
grant of the SAR. The grant price of Tandem SARs shall equal the Option
Price of
the related Option.
7.2 EXERCISE
OF TANDEM SARs. Tandem SARs may be exercised for all or part of the
Shares
subject to the related Option upon the surrender of the right to exercise
the
equivalent portion of the related Option. A Tandem SAR may be exercised
only
with respect to the Shares for which its related Option is then
exercisable.
Notwithstanding
any other provision of this Plan to the contrary, with respect to a
Tandem SAR
granted in connection with an ISO: (i) the Tandem SAR will expire no
later than
the expiration of the underlying ISO; (ii) the value of the payout
with respect
to the Tandem SAR may be for no more than one hundred percent (100%)
of the
difference between the Option Price of the underlying ISO and the Fair
Market
Value of the Shares subject to the underlying ISO at the time the Tandem
SAR is
exercised; and (iii) the Tandem SAR may be exercised only when the
Fair Market
Value of the Shares subject to the ISO exceeds the Option Price of
the
ISO.
7.3 EXERCISE
OF FREESTANDING SARs. Freestanding SARs may be exercised upon whatever
terms and
conditions the Committee, in its sole discretion, imposes upon
them.
7.4 SAR
AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement
that shall
specify the grant price, the term of the SAR, and such other provisions
as the
Committee shall determine.
7.5 TERM
OF
SARs. The term of an SAR granted under the Plan shall be determined
by the
Committee, in its sole discretion; provided, however, that unless otherwise
designated by the Committee, such term shall not exceed ten (10)
years.
7.6 PAYMENT
OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be entitled
to
receive payment from the Company in an amount determined by
multiplying:
(a) The
difference between the Fair Market Value of a Share on the date of
exercise over
the grant price; by
(b) The
number of Shares with respect to which the SAR is exercised.
At
the
discretion of the Committee, the payment upon SAR exercise may be in
cash, in
Shares of equivalent value, in Restricted Shares of equivalent value,
or in some
combination thereof.
7.7 TERMINATION
OF EMPLOYMENT. Each SAR Award Agreement shall set forth the extent
to which the
Participant shall have the right to exercise the SAR following termination
of
the Participant’s employment with (or service to) the Company and/or its
Subsidiaries. Such provisions shall be determined in the sole discretion
of the
Committee, shall be included in the Award Agreement entered into with
Participants, need not be uniform among all SARs issued pursuant to
the Plan,
and may reflect distinctions based on the reasons for termination of
employment
or service.
E-8
7.8 NON-TRANSFERABILITY
OF SARs. Except as otherwise provided in a Participant’s Award Agreement, no SAR
granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise
alienated or hypothecated, other than by will or by the laws of descent
and
distribution. Further, except as otherwise provided in a Participant’s Award
Agreement, all SARs granted to a Participant under the Plan shall be
exercisable
during his or her lifetime only by such Participant.
ARTICLE
EIGHT
RESTRICTED
STOCK
8.1 GRANT
OF
RESTRICTED STOCK. Subject to the terms and provisions of the Plan,
the
Committee, at any time and from time to time, may grant Shares of Restricted
Stock to Participants in such amounts as the Committee shall
determine.
8.2 RESTRICTED
STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by
an Award
Agreement that shall specify the Period(s) of Restriction, the number
of Shares
of Restricted Stock granted, and such other provisions as the Committee
shall
determine.
8.3 TRANSFERABILITY.
Except as provided in this Article 8, the Shares of Restricted Stock
granted
herein may not be sold, transferred, pledged, assigned, or otherwise
alienated
or hypothecated until the end of the applicable Period of Restriction
established by the Committee and specified in the Restricted Stock
Award
Agreement, or upon earlier satisfaction of any other conditions, as
specified by
the Committee in its sole discretion and set forth in the Restricted
Stock
Agreement. All rights with respect to the Restricted Stock granted
to a
Participant under the Plan shall be available during his or her lifetime
only to
such Participant.
8.4 OTHER
RESTRICTIONS. Subject to Article 11 herein, the Committee may impose
such other
conditions and/or restrictions on any Shares of Restricted Stock granted
pursuant to the Plan as it may deem advisable including, without limitation,
a
requirement that Participants pay a stipulated purchase price for each
Share of
Restricted Stock, a requirement that Participants own a certain amount
of Shares
before vesting shall occur, restrictions based upon the achievement
of specific
performance goals (Company-wide, divisional, and/or individual), time-based
restrictions on vesting following the attainment of the performance
goals,
requirement and/or restrictions under applicable federal or state securities
laws.
The
Company shall retain the certificates representing Shares of Restricted
Stock in
the Company’s possession until such time as all conditions and/or restrictions
applicable to such Shares have been satisfied.
Except
as
otherwise provided in this Article 8, Shares of Restricted Stock covered
by each
Restricted Stock grant made under the Plan shall become freely transferable
by
the Participant after the last day of the applicable Period of
Restriction.
E-9
8.5 VOTING
RIGHTS. Unless otherwise designated by the Committee at the time of
grant,
Participants holding Shares of Restricted Stock granted hereunder may
exercise
full voting rights with respect to those Shares during the Period of
Restriction.
8.6 DIVIDENDS
AND OTHER DISTRIBUTIONS. Unless otherwise designated by the Committee
at the
time of grant, Participants holding Shares of Restricted Stock granted
hereunder
may be credited with regular cash dividends paid with respect to the
underlying
Shares while they are so held during the Period of Restriction. The
Committee
may apply any restrictions to the dividends that the Committee deems
appropriate.
8.7 TERMINATION
OF EMPLOYMENT. Each Restricted Stock Award Agreement shall set forth
the extent
to which the Participant shall have the right to receive unvested Restricted
Shares following termination of the Participant’s employment with (or service
to) the Company and/or its Subsidiaries. Such provisions shall be determined
in
the sole discretion of the Committee, shall be included in the Award
Agreement
entered into with each Participant, need not be uniform among all Shares
of
Restricted Stock issued pursuant to the Plan, and may reflect distinctions
based
on the reasons for termination of employment or service.
ARTICLE
NINE
PERFORMANCE
UNITS AND PERFORMANCE SHARES
9.1 GRANT
OF
PERFORMANCE UNITS AND PERFORMANCE SHARES. Subject to the terms of the
Plan,
Performance Units and/or Performance Shares may be granted to Participants
in
such amounts and upon such terms, and at any time and from time to
time, as
shall be determined by the Committee.
9.2 VALUE
OF
PERFORMANCE UNITS/SHARES. Each Performance Unit shall have an initial
value that
is established by the Committee at the time of grant. Each Performance
Share
shall have an initial value equal to the Fair Market Value of a Share
on the
date of grant. The Committee shall set performance goals in its discretion
which, depending on the extent to which they are met, will determine
the number
and/or value of Performance Units/Shares that will be paid out to the
Participant. For purposes of this Article 9, the time period during
which the
performance goals must be met shall be called a “Performance
Period.”
9.3 EARNING
OF PERFORMANCE UNITS/SHARES. Subject to the terms of this Plan, after
the
applicable Performance Period has ended, the holder of Performance
Units/Shares
shall be entitled to receive payout on the number and value of Performance
Units/Shares earned by the Participant over the Performance Period,
to be
determined as a function of the extent to which the corresponding performance
goals have been achieved, as established by the Committee.
9.4 FORM
AND
TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Subject to the terms
of this
Plan, the Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination
thereof)
which have an aggregate Fair Market Value equal to the value of the
earned
Performance Units/Shares at the close of the applicable Performance
Period. Such
Shares may be granted subject to any restrictions deemed appropriate
by the
Committee.
E-10
At
the
discretion of the Committee, Participants may be entitled to receive
any
dividends declared with respect to Shares which have been earned in
connection
with grants of Performance Units and/or Performance Shares which have
been
earned, but not yet distributed to Participants (such dividends shall
be subject
to the same accrual, forfeiture, and payout restrictions as apply to
dividends
earned with respect to Shares of Restricted Stock, as set forth in
Section 8.6
herein). In addition, Participants may, at the discretion of the Committee,
be
entitled to exercise their voting rights with respect to such
Shares.
9.5 TERMINATION
OF EMPLOYMENT DUE TO DEATH, DISABILITY
OR
RETIREMENT.
Unless
otherwise designated by the Committee, and set forth in the Participant’s Award
Agreement, in the event the employment (or service) of a Participant
is
terminated due to death, Disability or retirement during a Performance
Period,
the Participant shall receive a prorated payout of the Performance
Units/Shares.
The prorated payout shall be determined by the Committee, shall be
based upon
the length of time that the Participant held the Performance Units/Shares
during
the Performance Period and shall further be adjusted based on the achievement
of
the preestablished performance goals. Payment of earned Performance
Units/Shares
shall be made at a time specified by the Committee in its sole discretion
and
set forth in the Participant’s Award Agreement.
9.6 TERMINATION
OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant’s employment
(or service) terminates for any reason other than those reasons set
forth in
Section 9.5 herein, all Performance Units/Shares shall be forfeited
by the
Participant to the Company unless determined otherwise by the Committee,
as set
forth in the Participant’s Award Agreement.
9.7 NONTRANSFERABILITY.
Except as otherwise provided in a Participant’s Award Agreement, Performance
Units/Shares may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, other than by will or by the laws of descent
and
distribution. Further, except as otherwise provided in a Participant’s Award
Agreement, a Participant’s rights under the Plan shall be exercisable during the
Participant’s lifetime only by the Participant or the Participant’s legal
representative.
ARTICLE
TEN
OTHER
INCENTIVE AWARDS
10.1 GRANT
OF
OTHER INCENTIVE AWARDS. Subject to the terms and provisions of the
Plan, Other
Incentive Awards may be granted to Participants in such amount, upon
such terms,
and at any time and from time to time as shall be determined by the
Committee.
10.2 OTHER
INCENTIVE AWARD AGREEMENT. Each Other Incentive Award grant shall be
evidenced
by an Award Agreement that shall specify the amount of the Other Incentive
Award
granted, the terms and conditions applicable to such grant, the applicable
Performance Period and performance goals, and such other provisions
as the
Committee shall determine, subject to the terms and provisions of the
Plan.
10.3 NONTRANSFERABILITY.
Except as otherwise provided in a Participant’s Award Agreement, Other Incentive
Awards may not be sold, transferred, pledged, assigned or otherwise
alienated or
hypothecated, other than by will or by the laws of descent and
distribution.
E-11
10.4 FORM
AND
TIMING OF PAYMENT OF OTHER INCENTIVE AWARDS. Payment of Other Incentive
Awards
shall be made at such times and in such form, in cash, in Shares, or
in
Restricted Shares (or a combination thereof), as established by the
Committee
subject to the terms of the Plan. Such Shares may be granted subject
to any
restrictions deemed appropriate by the Committee. Without limiting
the
generality of the foregoing, annual incentive awards may be paid in
the form of
Shares and/or Other Incentive Awards (which may or may not be subject
to
restrictions, at the discretion of the Committee).
ARTICLE
ELEVEN
BENEFICIARY
DESIGNATION
Each
Participant under the Plan may, from time to time, name any beneficiary
or
beneficiaries (who may be named contingently or successively) to whom
any
benefit under the Plan is to be paid in case of his or her death before
he or
she receives any or all of such benefit. Each such designation shall
revoke all
prior designations by the same Participant, shall be in a form prescribed
the
Company, and will be effective only when filed by the Participant in
writing
with the Company during the Participant’s lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant’s death shall be paid
to the Participant’s estate.
ARTICLE
TWELVE
DEFERRALS
The
Committee may permit a Participant to defer such Participant’s receipt of the
payment of cash or the delivery of Shares that would otherwise be due
to such
Participant by virtue of the exercise of an Option or SAR, the lapse
or waiver
of restrictions with respect to Restricted Stock, or the satisfaction
of any
requirements or goals with respect to Performance Units/Shares or Other
Incentive Awards. If any such deferral election is required or permitted,
the
Committee shall, in its sole discretion, establish rules and procedures
for such
payment deferrals. Any such deferral shall be made in a manner consistent
with
the requirements of Section 409A of the Code.
ARTICLE
THIRTEEN
RIGHTS
OF EMPLOYEES AND NONEMPLOYEE DIRECTORS
13.1 EMPLOYMENT.
Nothing in the Plan shall interfere with or limit in any way the right
of the
Company to terminate any Participant’s employment at any time, nor confer upon
any Participant any right to continue in the employ of the Company.
13.2 PARTICIPATION.
No Employee or Nonemployee Director shall have the right to be selected
to
receive an Award under this Plan or, having been so selected, to be
selected to
receive a future Award.
E-12
ARTICLE
FOURTEEN
CHANGE
IN CONTROL
14.1 TREATMENT
OF OUTSTANDING AWARDS. Upon the occurrence of a Change in Control,
unless
otherwise specifically prohibited under applicable laws, or by the
rules and
regulations of any governing governmental agencies or national securities
exchanges:
(a) Any
and
all Options and SARs granted hereunder shall become immediately exercisable,
and
shall remain exercisable throughout their entire term, and any cash
or property
received upon exercise of any Option or SAR shall be free from further
restriction;
(b) Any
restriction periods and restrictions imposed on Restricted Shares shall
lapse;
and
(c) Unless
otherwise specified in a Participant’s Award Agreement at time of grant, the
target payout opportunities attainable under all outstanding Awards
of
Performance Units and Performance Shares and Other Incentive Awards
shall be
deemed to have been fully earned for the entire Performance period(s)
as of the
effective date of the Change in Control. The vesting of all such Awards
shall be
accelerated as of the effective date of the Change in Control and,
in full
settlement of such Awards, there shall be paid out to Participants
(in Shares
for Awards normally paid in Shares and in cash for Awards normally
paid in cash)
within thirty (30) days following the effective date of the Change
in Control a
pro rata portion of all targeted Award opportunities associated with
such
outstanding Awards, based on the number of complete and partial calendar
months
within the Performance Period which had elapsed as of such effective
date.
14.2 TERMINATION,
AMENDMENT AND MODIFICATIONS OF CHANGE IN CONTROL PROVISIONS. Notwithstanding
any
other provision of this Plan or any Award Agreement provision, the
provisions of
this Article 14 may not be terminated, amended or modified to affect
adversely
any Award theretofore granted under the Plan without the prior written
consent
of the Participant with respect to said Participant’s outstanding
Awards.
ARTICLE
FIFTEEN
AMENDMENT,
MODIFICATION AND TERMINATION
15.1 AMENDMENT,
MODIFICATION AND TERMINATION. The Board may at any time and from time
to time
alter, amend, suspend or terminate the Plan in whole or in part.
15.2 AWARDS
PREVIOUSLY GRANTED. No termination, amendment or modification of the
Plan shall
adversely affect in any material way any Award previously granted under
the
Plan, without the written consent of the Participant holding such
Award.
E-13
ARTICLE
SIXTEEN
WITHHOLDING
16.1 TAX
WITHHOLDING. The Company shall have the power and the right to deduct
or
withhold, or require a Participant to remit to the Company, an amount
sufficient
to satisfy federal, state, and local taxes, domestic or foreign, required
by law
or regulation to be withheld with respect to any taxable event arising
as a
result of this Plan.
16.2 SHARE
WITHHOLDING. With respect to withholding required upon the exercise
of Options
or SARs, upon the lapse of restrictions on Restricted Stock, or upon
any other
taxable event arising as a result of Awards granted hereunder, Participants
may
elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold Shares
having a
Fair Market Value on the date the tax is to be determined equal to
the minimum
statutory total tax which could be imposed on the transaction. All
such
elections shall be irrevocable, made in writing, signed by the Participant,
and
shall be subject to any restrictions or limitations that the Committee,
in its
sole discretion, deems appropriate.
ARTICLE
SEVENTEEN
INDEMNIFICATION
Each
person who is or shall have been a member of the Committee, or of the
Board,
shall be indemnified by the Company against and from any loss, cost,
liability
or expense that may be imposed upon or reasonably incurred by him or
her in
connection with or resulting from any claim, action, suit or proceeding
to which
he or she may be a party or in which he or she may be involved by reason
of any
action taken or failure to act under the Plan. Such person shall be
indemnified
by the Company for all amounts paid by him or her in settlement thereof,
with
the Company’s approval, or paid by him or her in satisfaction of any judgment in
any such action, suit or proceeding against him or her, provided he
or she shall
give the Company an opportunity, at its own expense, to handle and
defend the
same before he or she undertakes to handle and defend it on his or
her own
behalf. The foregoing right of indemnification shall not be exclusive
of any
other rights of indemnification to which such persons may be entitled
under the
Company’s Articles of Incorporation or Bylaws, as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE
EIGHTEEN
SUCCESSORS
All
obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether
the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of
the business
and/or assets of the Company.
E-14
ARTICLE
NINETEEN
LEGAL
CONSTRUCTION
19.1 GENDER
AND NUMBER. Except where otherwise indicated by the context, any masculine
term
used herein shall also include the feminine, the plural shall include
the
singular, and the singular shall include the plural.
19.2 SEVERABILITY.
In the event any provision of the Plan shall be held illegal or invalid
for any
reason, the illegality or invalidity shall not affect the remaining
parts of the
Plan, and the Plan shall be construed and enforced as if the illegal
or invalid
provision had not been included.
19.3 REQUIREMENTS
OF LAW. The granting of Awards and the issuance of Shares under the
Plan shall
be subject to all applicable laws, rules and regulations, and to such
approvals
by any governmental agencies or national securities exchanges as may
be
required.
19.4 GOVERNING
LAW. To the extent not preempted by federal law, the Plan, and all
agreements
hereunder, shall be construed in accordance with and governed by the
laws of the
State of Delaware, without giving effect to the conflict of laws principles
thereof.
ARTICLE
TWENTY
TERMINATION
The
Plan
shall terminate on the tenth (10th)
anniversary of the Effective Date or at such earlier time as the Committee,
with
the consent of the Board, may determine. No termination shall affect
any Award
then outstanding under the Plan.
*
* * * *
*
E-15
Annex
F
July
31,
2006
The
Board
of Directors
Fortress
America Acquisition Corporation
4100
North Fairfax Drive, Suite 1150
Arlington,
VA 22203
Dear
Members of the Board:
You
have
requested Business Valuation Center, Inc. (“BVC”) to render its opinion (the
“Opinion”) as of the current date, as to the fairness, from a financial point
of
view, to the existing public stockholders of Fortress America Acquisition
Corporation (“FAAC” or the “Company”) of the contemplated Acquisition
Consideration offered to acquire the outstanding equity interests
of VTC, LLC,
and Vortech Consulting, LLC (hereinafter “VTC” or “Sellers”) pursuant to the
executed Second Amended and Restated Membership Interest Purchase
Agreement
dated July 2006 by the Company and VTC.
The
Acquisition Consideration, as defined by the Second Amended and Restated
Membership Interest Purchase Agreement, is summarized as follows:
FAAC
is
to pay total aggregate consideration of $38,500,000 for 100% of the
equity
interests
of VTC. The form of the consideration to be paid by FAAC is:
•At
closing, FAAC will pay $11,000,000 in cash (the “Cash Consideration”).
•FAAC
will
assume up to an aggregate of $161,000 in the form of long-term bank
debt (the
“Assumed Debt”).
•FAAC
will
pay $10,000,000 to Sellers in the form of two convertible notes (the
Convertible
Promissory Notes). The
Convertible Notes shall bear interest only at 6% per annum for the
first two
years and thereafter be evenly amortized over the remaining three
years. The
Convertible Note shall be convertible, at any time 6 months after
closing, by
the Sellers into common stock of FAAC at a conversion price of $7.50
per share
(the “Conversion Price”). The Convertible Note shall automatically convert into
common stock of FAAC at the Conversion Price in the event that the
average
closing price of FAAC common stock equals or exceeds $7.50 per share
for any 20
consecutive trading days from the period from 6 months to two years
after
closing.
F-1
•FAAC
Common Stock equal to $17,500,000 less (1) the amount of the Assumed Debt
and (2) the value of the FAAC Stock Grant Shares which is defined
as 576,559
shares at the Average Share Value of $5.46, or $3,148,012. The FAAC
Common Stock
purchase consideration represents “restricted securities” as defined under the
federal securities laws and these “restricted securities” are subject to an
Acquisition Agreement, a Registration Rights Agreement and a Lock
Up Agreement.
•The
Stock
Grant Shares totaling 576,559 of FAAC Common Stock which will be
designated by
Sellers to be distributed to certain employees of Seller as consideration
for
the execution of Key Employment Agreements. In the event that there
is a
forfeiture of such Stock Grant Shares to FAAC by the designated employees
on or
before the third anniversary of the Closing Date, FAAC shall issue
the forfeited
Stock Grant Shares to the Sellers as additional consideration for
their
respective Membership Interests.
The
Opinion does not address the Company’s underlying business decision to acquire
VTC or any other alternative business strategies or acquisition plans
that may
have been considered by the Company. We have not been requested to,
and did not,
solicit third party indications of interest in acquiring all or part
of VTC. In
addition, BVC was not involved at any time in the negotiations between
the
Company and VTC and did not provide any advisory services to the
Company
regarding the contents of the Purchase Agreement.
As
part
of our financial advisory activities, BVC engages in the valuation
of businesses
and securities in connection with mergers and acquisitions, private
placements,
and valuations for estate, corporate and other purposes. We are experienced
in
these activities and have performed assignments similar in nature
to that
requested by you on numerous occasions.
In
rendering its Opinion, BVC has reviewed and analyzed certain independently
prepared information, as well as certain information furnished by
the Company
and VTC, including, but not limited to, the following:
F-2
•Audited
financial statements for VTC for the fiscal periods ended December
31, 2003,
2004 and 2005.
•Financial
projections prepared by VTC management.
•The
Letter Agreement describing the terms and conditions of the acquisition
which
was executed by VTC and the Company on March 1, 2006.
•The
value
range associated with the Acquisition Consideration.
•The
public filings of FAAC with the Securities and Exchange Commission
and certain
publicly available information regarding the trading activity and
marketplace
for the Company’s common stock.
•The
unaudited financial statements of VTC for the three-month period
ending April
30, 2006.
•The
historical and present financial performance and condition of both
FAAC and VTC.
•An
analysis of the projected future cash flows of VTC and related discounted
cash
flow models.
•A
valuation analysis of public companies which operate in similar industry
segments to VTC and have comparable operating and financial characteristics.
•A
valuation analysis of merger and acquisition transactions of private
companies
which operate in similar industry sectors to VTC and have comparable
operating
and financial characteristics.
•Customer
contract work in process (WIP) reports prepared by VTC management
and related
contract backlog information.
•An
analysis prepared by VTC and the Company reflecting adjustments to
normalize
earnings before interest, taxes, depreciation and amortization (EBITDA)
for
nonrecurring expenses identified in the income statement for the
year ending
December 31, 2005.
•Conducted
in-depth interviews with the officers and senior management of both
FAAC and VTC
regarding each company’s operations, as well as historical and forecasted
financial performance.
F-3
•Other
reviews and analyses as we deemed appropriate and necessary in the
formulation
of our Opinion.
We
have
met with certain officers and employees of VTC and discussed with
them the
business, operations, assets, present condition and future prospects
of VTC. We
have visited VTC’s headquarters facility in Columbia, Maryland, but have not
conducted a physical inspection of fixed assets, nor have we made
or obtained
any independent evaluation or appraisal of any such fixed assets
or any other
assets of VTC. In addition, we undertook such other studies, analyses
and due
diligence investigations as we deemed appropriate.
In
arriving at our Opinion, BVC assumed and relied upon the accuracy
and
completeness of the financial and other information provided to us
and we have
not and do not assume any responsibility for independent verification
of such
information. We have assumed that the financial pro forma statements
and
projections prepared by the management of VTC represents their best
current
judgment as to the future financial condition and results of operations
of VTC
and have assumed that the projections have been reasonably prepared
based on
such current judgment. We have also taken into account our assessment
of general
economic, market and financial conditions and our experience in similar
transactions, as well as our experience in securities valuation in
general. Our
Opinion necessarily is based upon regulatory, economic, market and
other
conditions as they exist on the valuation date, and the information
made
available to us as of the date hereof. Subsequent developments may
affect this
Opinion, and we do not have any obligation to update, revise or reaffirm
this
Opinion. The officers and senior management of VTC have informed
us that it
knows of no additional information that would have a material effect
on our
valuation. The Opinion does not address the relative merits of the
acquisition
and any other transaction or business strategies discussed by the
Board of the
Company as alternatives to the acquisition of VTC, or the decision
of the
Company to proceed with the acquisition of VTC.
BVC
assumed that there had been no material change in the Company’s financial
condition, results of operations, business or prospects since the
date of the
last financial statements made available to BVC. BVC relied on advice
of counsel
to the Company as to all legal matters with respect to the Company
and its
acquisition of VTC.
The
preparation of a fairness opinion involves various determinations
as to the most
appropriate and relevant quantitative and qualitative methods of
financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial
analysis
or summary description. Furthermore, in arriving at its Opinion,
BVC did not
attribute any particular weight to any analysis or factor considered
by it, but
rather made qualitative judgments as to the significance and relevance
of each
analysis or factor. Accordingly, BVC believes that its analysis must
be
considered as a whole and that considering any portion of such analysis
and of
the factors considered, without considering all analyses and factors,
could
create a misleading or incomplete view of the process underlying
its Opinion. In
its analyses, BVC made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters,
many of
which are beyond the control of the Company and VTC. Any estimates
contained in
these analyses are not necessarily indicative of actual values or
predictive of
future results or values which may be significantly more or less
favorable than
as set forth therein. In addition, analyses relating to the value
of the
business do not purport to be an appraisal or to reflect the price
at which the
business might actually be sold.
F-4
Neither
BVC nor its employees has any present, or contemplated future interest
in the
Company or VTC, which would prevent them from making a fair and unbiased
opinion. BVC has received a retainer payment from the Company to
prepare the
Opinion and we will receive the balance of our fees upon the submission
of this
Opinion. BVC’s fee for preparing the fairness opinion is not contingent on the
completion of the acquisition of VTC.
The
Opinion is to be used only by the Board of Directors in the course
of its review
of the acquisition of VTC and is not in any way provided as a recommendation
to
Company stockholders regarding their decision to vote or proceed
with the
acquisition. Neither the Opinion nor its contents or our name may
be referred to
or quoted in any registration statement, prospectus, offering memorandum,
loan
agreement or other agreement or document given to third parties,
without our
prior written consent with the exception of its use in a proxy statement
or any
other Company filings required by the rules of Securities and Exchange
Commission in connection with the acquisition of VTC.
Based
on
the foregoing and such other factors as we consider relevant, and
in reliance
thereon, it is our opinion as of the date of this letter, that the
Acquisition
Consideration is fair to the existing stockholders of the Company
from a
financial point of view.
Sincerely,
/s/
Business Valuation Center, Inc.
Business
Valuation Center, Inc.
F-5
The
Audit
Committee shall provide assistance to the Board of Directors in fulfilling
its
oversight responsibilities to the Company, its stockholders, the investment
community, and others by reviewing the financial reports and related
financial
information provided by the Company to governmental agencies or the
general
public, the Company’s systems of internal and disclosure controls and the
effectiveness of its control structure, the Company’s compliance with designated
laws and regulations, and the Company’s accounting, internal and external
auditing, and financial reporting processes.
The
Audit
Committee’s function is one of oversight only; both management and the
independent auditor have more knowledge of, and detailed information
concerning,
the Company than do Audit Committee members. Consequently, in carrying
out its
oversight responsibilities, the Audit Committee is not providing any
expert or
special assurance as to the Company’s financial statements or any professional
certification as to the independent auditor’s work. The existence and
functioning of the Audit Committee do not relieve the Company’s management from
its responsibility for preparing financial statements that accurately
and fairly
present the Company’s financial results and condition, or the independent
auditor from its responsibilities relating to the audit or review of
financial
statements.
In
discharging its responsibilities, the Committee shall:
·
serve
as
an independent and objective party to monitor the Company’s financial reporting
process and internal control and disclosure control systems;
·
review
any request of any of the directors and executive officers for any
deviation or
waiver from the Company’s Code of Ethics and, if appropriate, approve such
request;
·
review,
evaluate and, if appropriate, approve all “related party transactions” as that
term is defined in Securities and Exchange Commission (“SEC”)
regulations;
·
review
and evaluate the audit procedures and results of the Company’s independent
auditor and internal auditors;
·
approve,
engage, and/or terminate the independent auditor;
·
review
and evaluate the independent auditor’s qualifications, performance, and
independence;
·
review,
evaluate, and approve in advance any non-audit services the independent
auditor
may perform for the Company and disclose such approved non-auditor
services in
periodic reports to stockholders;
·
inquire
of senior management of known or potential instances of non-compliance
with
applicable laws, regulatory policies (including SEC reporting requirements),
and
the Company’s Code of Ethics as they relate to the functions and
responsibilities of the Committee;
·
be
informed by the Company’s counsel of material litigation in which the Company is
involved or in which management believes involvement of the Company
is
reasonably likely;
·
periodically
inquire about and review the Company’s policies and procedures regarding the
review of officers’ expense reports and perquisites for compliance with proper
reporting, accounting and tax treatment;
G-1
·
maintain
free and open means of communication between the Board, the independent
auditor,
the internal auditors, and
the management of the Company;
·
at
least
annually, review and update this charter for consideration by the
Board and
perform an evaluation of the Committee performance and function,
and report to
the Board the results of such evaluation (such report may be written
or oral);
and
·
such
additional duties or responsibilities as the Board may determine
from time to
time.
The
members of the Committee shall be appointed by the Board and may be
removed only
by the Board. The Committee will have a minimum of three members. The
Committee
may consult or retain its own outside legal, accounting or other advisors
and
shall determine the degree of independence from the Company required
from said
advisors. The Committee shall meet at least four times per year and
report
directly to the full Board on any issues that arise with respect to
the quality
and integrity of the Company’s financial statements, the Company’s compliance
with legal and/or regulatory requirements, the performance and independence
of
the Company’s independent auditor, or the performance of the internal audit
function. The Committee may also meet periodically by itself to discuss
matters
it determines require private Committee or Board attention. Further,
the
Committee shall meet separately with management, with the internal auditors or
others performing the internal audit function, and with the independent
auditor.
Half of the members of the Committee shall be a quorum to transact
business. The
Committee shall maintain minutes of each meeting and shall report on
matters
considered at Committee meetings to the Board at its next regularly
scheduled
Board meeting.
Except
as
otherwise permitted on a transition basis under NASDAQ rules, the Committee
shall be composed entirely of independent directors, determined in
accordance
with the Securities Exchange Act of 1934, SEC regulations and application
NASDAQ
criteria. The members of the Committee, as determined by the Board,
shall be
“financially literate” in accordance with applicable SEC regulations and NASDAQ
criteria, and at least one member shall have accounting or related
financial
management expertise. Upon the departure of a Committee member with
accounting
or related financial management expertise, the Company will use its
best efforts
to identify a replacement with accounting/financial management expertise
within
ninety (90) days. Each Committee member shall satisfy the experience
requirements of NASDAQ.
The
Committee will be directly responsible for the appointment, compensation,
retention and oversight of the work of any independent auditor engaged
(including resolution of disagreements between management and the auditor
regarding financial reporting) for the purpose of preparing or issuing
an audit
report or performing other audit, review or attest services for the
Company. The
independent auditor shall be engaged by and accountable to the Committee
and the
Board and shall report directly to the Committee. The Committee shall
have the
sole authority to engage and terminate the independent auditor, to
approve all
audit engagement fees and terms, to review with the independent auditor
the
nature and scope of any disclosed relationships or professional services,
and to
take, or recommend that the Board take, appropriate action to ensure
the
continuing independence of the auditor. The Committee shall also set
clear
policies and standards relating to the Company’s hiring of employees or former
employees of the independent auditor to ensure continued
independence.
The
Committee shall, on an annual basis, obtain from the independent auditor
a
written disclosure delineating all of its relationships and professional
services as required by applicable professional standards. The Committee
will
also obtain and review a report of the independent auditor describing
its
G-2
internal
quality-control procedures, material issues raised by the most recent
internal
quality-control review of the independent auditor or an inquiry or
investigation
by a governmental authority involving one or more audits carried out
by the
independent auditor in the preceding five years, and any steps or procedures
taken to deal with any such issues. After reviewing the independent
auditor’s
report, the Committee shall evaluate the auditor’s qualifications, performance,
and independence. The Committee may consider the opinions of the Company’s
management and internal audit function in making such evaluation. As
required by
law, the Committee shall assure the regular rotation of the lead and
concurring
audit partner, and consider whether there should be a regular rotation
of the
independent auditor itself.
The
independent auditor shall ascertain that the Committee is made aware
of, and
timely report to the Committee, and upon receipt thereof, the Committee
shall
review, all necessary accounting policies and practices to be used,
all
alternative treatments of financial information within generally accepted
accounting principles that have been discussed with management and
the risks of
using such alternative treatments, and inform the Committee of other
material
written communications between the independent auditor and
management.
In
discharging its responsibilities to oversee governmental and public
reporting of
financial information, the Committee shall:
·
review
and discuss the annual audited financial statements, footnotes and
related
disclosures included in the Company’s annual report to stockholders and its
annual report on Form 10-K with financial management, the independent
auditor, and the internal auditors prior to the release and filing
of such
documents (including the Company’s disclosures under “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations”) (this review
shall cover discussion of all items required by generally accepted
auditing
standards regarding required communications with Committees);
·
review
with the independent auditor the results of its annual examination
of the
financial statements, including their report thereon, and determine
its
satisfaction with the disclosures and content of the financial statements
(this
review shall cover discussion of all items required by generally
accepted
auditing standards regarding required communications with
Committees);
·
ascertain
that the results of any internal audit activity or regulatory reports
were
appropriately considered in preparing the financial statements;
·
review
and discuss the quarterly financial results and information and the
disclosures
with financial management, the independent auditor, and the internal
auditors to
determine that the independent auditor does not take exception to
the disclosure
and content of the financial statements included in quarterly reports
on
Form 10-Q (including the Company’s disclosures under “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations”), to
determine that the results of any internal audit activity or regulatory
reports
were appropriately considered in preparing the financial statements,
and to
discuss any other matters required to be communicated to the Committee
by the
independent auditor;
·
review
and discuss the types of presentation and information to be included
in earnings
press releases (particularly, any use of “pro forma” or “adjusted” non-GAAP
information), and any additional financial information and earning
guidance
generally provided to analysts and rating agencies;
·
inquire
of management, the internal auditors, and the independent auditor
about
significant risks or exposures to risk and discuss guidelines and
policies to
govern the steps management has taken to minimize such risk to the
Company;
G-3
·
review
the effect of regulatory or accounting initiatives, including off-balance
sheet
structures and transactions, on the financial statements of the
Company;
·
review
and discuss the form and content of the certification documents for
the
quarterly reports on Form 10-Q and the annual report on Form 10-K with
the internal audit function, the independent auditor, the chief financial
officer, and the chief executive officer;
·
review
the basis for the disclosures made in the annual report to stockholders
under
the heading “Management’s Report on Internal Controls” regarding the control
environment of the Company; and
·
consider,
produce and approve the annual proxy disclosure regarding the activities
and
report of the Committee for the year.
F.
LINES
OF
COMMUNICATION
The
internal auditors and the independent auditors shall have the ability
to
communicate directly with the Chairman of the Committee if necessary
or desired.
The Committee shall provide sufficient opportunity at its meetings
for the
independent auditors and the internal auditors to meet with the members
of the
Audit Committee without members of management present.
The
Company’s counsel shall report directly to the Committee about legal compliance.
The Committee may directly contact any employee in the Company, and
any employee
may inform the Committee of matters involving questionable, illegal,
or improper
practices or transactions. The Company’s Code of Ethics shall ensure a
confidential and anonymous complaint process. The Committee shall establish
procedures for the receipt, retention and treatment of complaints received
by
the Company regarding accounting, internal accounting controls or auditing
matters.
The
Committee shall establish and maintain free and open means of communication
between employees and the Committee for the processing of complaints
received by
the Company regarding questionable accounting or auditing matters,
including
suspicions of fraudulent activity.
G-4
FOLD
AND DETACH HERE AND READ THE REVERSE SIDE
PROXY
FORTRESS
AMERICA ACQUISITION CORPORATION
4100
North Fairfax Drive, Suite 1150
Arlington,
Virginia 22203
SPECIAL
MEETING OF STOCKHOLDERS
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF
FORTRESS AMERICA ACQUISITION CORPORATION
The
undersigned appoints C. Thomas McMillen and Harvey L. Weiss, and each
of them,
with full power to act without the other, as proxies, each with the power
to
appoint a substitute, and hereby authorizes either of them to represent
and to
vote, as designated on the reverse side, all shares of common stock of
Fortress
America Acquisition Corporation (“FAAC”) held of record by the undersigned on
,
2006, at the Special Meeting of Stockholders to be held on
,
2006, or any postponement or adjournment thereof.
THIS
PROXY REVOKES ALL PRIOR PROXIES GIVEN BY THE UNDERSIGNED.
THIS
PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTIONS ARE GIVEN, THIS PROXY
WILL NOT BE VOTED FOR OR AGAINST PROPOSAL NUMBER 1, BUT WILL BE VOTED
“FOR”
PROPOSAL NUMBERS 2, 3, 4 AND 5.
THE
FAAC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH PROPOSAL SHOWN
ON THE REVERSE SIDE.
(Continued
and to be signed on reverse side)
FOLD
AND DETACH HERE AND READ THE REVERSE SIDE
PROXY
THIS
PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTIONS ARE GIVEN, THIS PROXY
WILL NOT
BE VOTED FOR OR AGAINST PROPOSAL NUMBER 1, BUT WILL BE VOTED “FOR” PROPOSAL
NUMBERS 2, 3, 4 AND 5. THE BOARD OF DIRECTORS OF FAAC UNANIMOUSLY RECOMMENDS
A
VOTE “FOR” THE FOLLOWING PROPOSALS.
|
1. To
approve the acquisition of VTC, L.L.C. (“VTC”) and Vortech, LLC
(“Vortech”) substantially on the terms set forth in the Second Amended
and
Restated Membership Interest Purchase Agreement dated July
__, 2006, by
and among FAAC, VTC, Vortech, Thomas P. Rosato and Gerald J.
Gallagher as
selling members, and Thomas P. Rosato as the members’
representative.
|
|
FOR
o
|
|
AGAINST
o
|
|
ABSTAIN
o
|
|
|
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|
If
you voted “AGAINST” Proposal Number 1 and you hold shares of FAAC common
stock issued in FAAC’s initial public offering, you may exercise your
conversion rights and demand that FAAC convert your shares
of common stock
into a pro rata portion of the trust account by marking the
“Exercise My
Conversion Rights” box to the right. If you exercise your conversion
rights, then you will be exchanging your shares of FAAC common
stock for
cash and will no longer own these shares. You will only be
entitled to
receive cash for these shares if the acquisition is completed
and you
continue to hold these shares through the effective time of
the
acquisition and tender your stock certificate to FAAC. Failure
to
(a) vote against proposal Number 1, (b) check the “Exercise My
Conversion Rights” box to the right and (c) submit this proxy in a
timely manner will result in the loss of your conversion
rights.
|
|
I
HEREBY
EXERCISE MY
CONVERSION
RIGHTS
o
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2. To
amend and restate FAAC’s Amended and Restated Certificate of Incorporation
to change FAAC’s name from “Fortress America Acquisition Corporation” to
“Fortress International Group, Inc.” and to remove certain provisions only
applicable to FAAC prior to its completion of a business
combination
|
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FOR
o
|
|
AGAINST
o
|
|
ABSTAIN
o
|
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|
3. To
approve the 2006 Omnibus Incentive Compensation Plan
|
|
FOR
o
|
|
AGAINST
o
|
|
ABSTAIN
o
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4.
Election
of Class __ Director
Nominee: David
J. Mitchell
|
FOR
nominee
listed
at left
|
WITHHOLD
authority
to vote
for
nominee
listed
at left
|
||||||||||
|
o
|
o
|
|||||||||||
|
5.
To
approve any adjournments or postponements of the special meeting
for
the
purpose of soliciting additional proxies
|
|
FOR
o
|
|
AGAINST
o
|
|
ABSTAIN
o
|
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Signature
|
|
|
|
Signature
|
|
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|
Date
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|
Sign
exactly as name appears on this proxy card. If shares are held jointly,
each
holder should sign. Executors, administrators, trustees, guardians, attorneys
and agents should give their full titles. If stockholder is a corporation,
sign
in full name by an authorized officer.