**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-Q**

 

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| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------|

 

**FORTHE QUARTER ENDED September 30, 2005.**

 

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

 

**COMMISSIONFILE NUMBER: 0-51552**

 

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**FEDERALSERVICES ACQUISITION CORPORATION**

(Exact name of registrant as specified in itscharter)

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| **Delaware**                                                      | ** ** | **11-3747850**      |
|-------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                                   |       | (I.R.S. Employer    |
| incorporation or organization)                                    |       | Identification No.) |
|                                                              |       |                |
| **900  Third Avenue, 33rd Floor  New York, New York, 10022-4775** |
| (Address of principal executive office)                           |

 

**(646) 403-9765**

(Registrant’s telephone number, including areacode)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has been subject tosuch filing requirements for the past 90 days.  Yes o   No ý.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes o   No ý.

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

The number of shares of the issuer’s Common Stock,$0.0001 par value, outstanding as of November 23, 2005 was 26,250,000.

 

 

 

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**Table of Contents**

 

**TABLEOF CONTENTS**

** **
|                                     |                                                                                           |   |
|------------------------------------------|------------------------------------------------------------------------------------------------|--------|
| **PART I — FINANCIAL  INFORMATION** |                                                                                           |   |
|                                     |                                                                                           |   |
| **Item 1.**                              | **Financial Statements  (Unaudited)**                                                          |   |
|                                     | Balance  Sheet                                                                                 |   |
|                                     | Statement of  Operations                                                                       |   |
|                                     | Statement of  Stockholders Equity                                                              |   |
|                                     | Statement of Cash  Flows                                                                       |   |
|                                     | Notes to  Unaudited Financial Statements                                                       |   |
|                                     |                                                                                           |   |
| **Item 2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operation** |   |
| **Item 3.**                         | **Quantitative  and Qualitative Disclosures about Market Risk**                                |   |
| **Item 4.**                         | **Controls and  Procedures**                                                                   |   |
|                                     |                                                                                           |   |
| **PART II — OTHER  INFORMATION**    |                                                                                           |
|                                     |                                                                                           |   |
| **Item 1.**                         | **Legal Proceedings**                                                                          |   |
| **Item 2.**                         | **Unregistered  Sales of Equity Securities and Use of Proceeds**                               |   |
| **Item 3.**                         | **Exhibits**                                                                                   |   |
|                                     |                                                                                           |   |
| **SIGNATURES**                           |                                                                                           |
|                                          |                                                                                                |        |  |

 

 

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**PARTI — FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

Reference is made to ourfinancial statements and accompanying notes beginning on Page F-1 of thisreport.

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

The information containedin this section should be read in conjunction with our financial statements andrelated notes and schedules thereto appearing elsewhere in this QuarterlyReport. This Quarterly Report, including the Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements that involve substantial risks and uncertainties.These forward-looking statements are not historical facts, but rather are basedon current expectations, estimates and projections about our industry, ourbeliefs, and our assumptions. Words such as “anticipates”, “expects”, “intends”,“plans”, “believes”, “seeks”, and “estimates” and variations of these words andsimilar expressions are intended to identify forward-looking statements. Thesestatements are not guarantees of future performance and are subject to risks,uncertainties, and other factors, some of which are beyond our control anddifficult to predict and could cause actual results to differ materially fromthose expressed or forecasted in the forward-looking statements.

 

Although we believe thatthe assumptions on which these forward-looking statements are based arereasonable, any of those assumptions could prove to be inaccurate, and as aresult, the forward-looking statements based on those assumptions also could beincorrect. In light of these and other uncertainties, the inclusion of aprojection or forward-looking statement in this Quarterly Report should not be regardedas a representation by us that our plans and objectives will be achieved. Youshould not place undue reliance on these forward-looking statements, whichapply only as of the date of this Quarterly Report. We undertake no obligationto update such statements to reflect subsequent events.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with our financial statements and the related notes andschedules thereto.

 

We are a “blank check”company organized under the laws of the State of Delaware on April 12,2005 and were formed for the purpose of acquiring, through a merger, capitalstock exchange, asset acquisition, stock purchase or other similar businesscombination, an operating business in the federal services and defenseindustries. We intend to use cash derived from the net proceeds of our initialpublic offering, which closed on October 25, 2005, together with any additionalfinancing arrangements that we undertake, to effect a business combination.

 

Through September 30,2005, our efforts have been limited to organizational activities and activitiesrelating to our initial public offering; we have neither engaged in anyoperations nor generated any revenues. As of September 30, 2005, we had accruedexpenses and accrued offering costs of approximately $1,000 and $280,000,respectively. In addition, we had cash of approximately $56,500, which wasprincipally funded pursuant to $154,000 in notes issued to two of our initialstockholders.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements and related disclosures in conformity with generallyaccepted accounting principles in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date

 

 

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of the financial statements, and revenues and expensesduring the periods reported. Actual results could materially differ from thoseestimates. We have determined that we currently are not subject to any criticalaccounting policies.

 

**RecentDevelopments**

 

On October 25, 2005, weconsummated our initial public offering. The net proceeds from our initialpublic offering were approximately $119,180,000, after deducting offeringexpenses of approximately $520,000 and underwriting discounts of $6,300,000. Ofthis amount, $117,180,000 was placed in trust, with approximately $2,000,000remaining.

 

We will use substantiallyall of the net proceeds discussed above to acquire an operating business,including identifying and evaluating prospective acquisition candidates, selectingan operating business, and structuring, negotiating and consummating thebusiness combination, including the making of a down payment or the payment ofexclusivity or similar fees and expenses, if any. However, we may not use allof the proceeds held in the trust account in connection with a businesscombination, either because the consideration for the business combination isless than the proceeds in trust or because we finance a portion of theconsideration with capital stock or debt securities that we can issue. In thatevent, the proceeds held in the trust account as well as any other net proceedsnot expended will be used to finance the operations of the target business.

 

We may issue additionalcapital stock or debt securities to finance a business combination. Theissuance of additional capital stock, including upon conversion of anyconvertible debt securities we may issue, or the incurrence of debt, could havematerial consequences on our business and financial condition. The issuance ofadditional shares of our capital stock (including upon conversion ofconvertible debt securities):

 

•      maysignificantly reduce the equity interest of our stockholders; 

 

•      willlikely cause a change in control if a substantial number of our shares of commonstock or voting preferred stock are issued, which may affect, among otherthings, our ability to use our net operating loss carry forwards, if any, andmay also result in the resignation or removal of one or more of our presentofficers and directors; and 

 

•      mayadversely affect prevailing market prices for our common stock. 

 

Similarly, if we issuedebt securities, it could result in:

 

•      defaultand foreclosure on our assets if our operating revenues after a businesscombination are insufficient to pay our debt obligations; 

 

•      accelerationof our obligations to repay the indebtedness even if we make all principal andinterest payments when due if we breach the covenants contained in any debtsecurities, such as covenants that require the satisfaction or maintenance ofcertain financial ratios or reserves, without a waiver or renegotiation of suchcovenants; 

 

•      anobligation to immediately repay all principal and accrued interest, if any,upon demand to the extent any debt securities are payable on demand; and 

 

•      ourinability to obtain additional financing, if necessary, to the extent any debtsecurities contain covenants restricting our ability to obtain additionalfinancing while such security is outstanding, or to the extent our existingleverage discourages other potential investors. 

 

We believe that we havesufficient funds to allow us to operate for at least the 24 months followingthe date we consummated our initial public offering (October 25, 2005),assuming that a business combination is not consummated during that time. Overthis time period, we anticipate making the following expenditures:

 

•      approximately$1,000,000 of expenses for legal and accounting and other expenses attendant tothe 

 

 

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due diligence investigations, structuring andnegotiating of a business combination; 

 

•      approximately$80,000 of expenses in legal and accounting fees relating to our SEC reportingobligations;

 

•      approximately$180,000 of expenses in administrative fees relating to our office space; and 

 

•      approximately$740,000 for general working capital that will be used for miscellaneousexpenses and reserves, including approximately $200,000 for director andofficer liability insurance premiums and $154,000 to repay the loans from JoelR. Jacks and Peter M. Schulte as discussed below.

 

We do not believe we willneed additional financing during the 24 months following our initial publicoffering in order to meet the expenditures required for operating ourbusiness.  However, we may need to obtainadditional financing through a private offering of debt or equity securities ifsuch funds are required to consummate a business combination that is presentedto us.  We may consummate such afinancing in connection with the consummation of a business combination.

 

On October 25, 2005, weused $154,000 of our net proceeds from the public offering to repay the notespayable to our initial stockholders, Mr. Jacks and Mr. Schulte. The loans wererepaid in full, without interest, and cancelled.

 

On October 25, 2005, weused $85,000 of our general working capital to pay premiums associated with ourdirectors and officers liability insurance.

 

We have agreed to pay CMEquity Management, L.P. a company where certain of our initial stockholdersserve in executive capacities, an administrative fee of $7,500 per month foroffice space and general and administrative services from October 19, 2005through the effective date of the acquisition of a target business.

 

 

**RISKFACTORS**

 

*Aninvestment in**our**securities involves a high degree of risk. You shouldconsider carefully all of the material risks described below, before making adecision to invest in our securities. If any of the following risks occur, ourbusiness, financial**condition**and results of operations may be materially adverselyaffected. In that event, the trading price of our securities could decline, andyou could lose all or part of your investment. Although we believe that therisks described below represent all of the material risks we face, additionalrisks not currently known to us may also harm us or affect your investment.*

 

 

**Risksassociated with our business**

 

***We are a development stage company with no operating historyand, accordingly, you will have no basis upon which to evaluate our ability toachieve our business objective.***

 

We are a recentlyincorporated development stage company with no operating results to date. Sincewe do not have an operating history,you have no basis upon which to evaluate our ability to achieve our businessobjective, which is to acquire an operating business in the federal servicesand defense industries. We will not generate any revenues (other than interestincome on the proceeds of our public offering that have been placed in trust)until, at the earliest, after the consummation of a business combination. Wecannot assure you as to when or if a business combination will occur.

 

 

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***We may not be able to consummate a business combinationwithin the required time frame, in which case, we would be forced to liquidate.***

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We must complete abusiness combination with a fair market value of at least 80% of our net assetsat the time of acquisition within 18 months after the consummation of ourpublic offering (or within 24 months after such date if a letter ofintent, agreement in principle or a definitive agreement has been executedwithin 18 months after the consummation of our public offering and thebusiness combination relating thereto has not yet been consummated within such18-month period). If we fail to consummate a business combination within therequired time frame, we will be forced to liquidate our assets. We may not beable to find a suitable target business within the required time frame. Inaddition, our negotiating position and our ability to conduct adequate duediligence on any potential target may be reduced as we approach the deadlinefor the consummation for a business combination.

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***Because there are numerous companies with a business plansimilar to ours seeking to effectuate a business combination, it may be moredifficult for us to do so.***

 

Since May 2003,based upon publicly available information, approximately 38 similarlystructured “blank check” companies have completed initial public offerings. Ofthese companies, only three companies have consummated a business combination,while six other companies have announced they have entered into a letter ofintent or a definitive agreement for a business combination, but have not consummated such businesscombination. Accordingly, there are approximately 29 “blank check” companieswith approximately $1.6 billion in trust that are seeking to carry out abusiness plan similar to our business plan. Furthermore, there areapproximately 42 additional offerings for “blank check” companies that arestill in the registration process but have not completed initial publicofferings and there are likely to be more “blank check” companies filingregistration statements for initial public offerings after the date of thisreport and prior to our completion of a business combination. While some ofthose companies must complete a business combination in specific industries, anumber of them may consummate a business combination in any industry theychoose or have a very broad definition of the industry they will target.Therefore, we may be subject to competition from these and other companiesseeking to consummate a business plan similar to ours. Because of thiscompetition, we cannot assure you that we will be able to effectuate a businesscombination within the required time period. Further, because only nine of suchcompanies have either consummated a business combination or entered into aletter of intent or a definitive agreement for a business combination, it mayindicate that there are fewer attractive target businesses available to suchentities or that many privately held target businesses are not inclined toenter into these types of transactions with publicly held “blank check”companies like ours. If we are unable to consummate a business combination witha target business within the prescribed time period, we will be forced toliquidate.

 

***If we are forced to liquidate before a business combination,our public stockholders will receive less than $6.00 per share upondistribution of the trust account, and our warrants will expire worthless.***

 

If we are unable tocomplete a business combination and are forced to liquidate our assets, theper-share liquidation value will be less than $6.00 because of the expensesrelated to our public offering, our general and administrative expenses and theanticipated costs of seeking a business combination. Furthermore, the warrantswill expire worthless if we liquidate before the completion of a businesscombination.

 

***You will not be entitled to protections normally afforded toinvestors of “blank check” companies under federal securities laws.***

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Since the net proceeds ofour public offering are intended to be used to complete a business combinationwith an operating business that has not been identified, we may be deemed to bea “blank check” company under the federal securities laws. However, since wehave net tangible assets in excess of $5,000,000 and have filed a CurrentReport on Form 8-K with the SEC, including an audited balance sheet

 

 

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demonstrating this fact, we believe that we are exemptfrom rules promulgated by the Securities and Exchange Commission, or SEC, toprotect investors of “blank check” companies such as Rule 419.Accordingly, investors will not be afforded the benefits or protections ofthose rules. Because we do not believe we are subject to Rule 419, ourunits will be immediately tradeable and we have a longer period of time withinwhich to complete a business combination in certain circumstances.

 

***If third parties bring claims against us, the proceeds heldin trust could be reduced and the per-share liquidation price received bystockholders will be less than $5.58 per share.***

 

Our placing of funds intrust may not protect those funds from third party claims against us. Althoughwe will seek to have all vendors, prospective target businesses or otherentities we engage execute agreements with us waiving any right, title,interest or claim of any kind inor to any monies held in the trust account, there is no guarantee that theywill execute such agreements. Nor is there any guarantee that such entitieswill agree to waive any claims they may have in the future as a result of, orarising out of, any negotiations, contracts or agreements with us and will notseek recourse against the trust account for any reason. Accordingly, theproceeds held in trust could be subject to claims which could take priorityover the claims of our public stockholders and the per-share liquidation pricecould be less than $5.58, plus interest (net of taxes payable), due to claimsof such creditors. If we are unable to complete a business combination and areforced to liquidate, Joel R. Jacks, our chairman and chief executive officer,and Peter M. Schulte, our president and secretary, may be personally liableunder certain circumstances to ensure that the proceeds in the trust accountare not reduced by the claims of various vendors or other entities that areowed money by us for services rendered or products sold to us or claims ofprospective target businesses. However, we cannot assure you that they will beable to satisfy those obligations.

 

***Since we have not currently selected any prospective targetbusinesses with which to complete a business combination, investors in oursecurities are unable to currently ascertain the merits or risks of anyparticular target business’ operations.***

 

Since we have not yetidentified any prospective target businesses, investors in our securities haveno current basis to evaluate the possible merits or risks of any particulartarget business’ operations. To the extent we complete a business combinationwith a financially unstable company or an entity in its development stage, wemay be affected by numerous risks inherent in the business operations of those entities.Although our management will endeavor to evaluate the risks inherent in aparticular target business, we cannot assure you that we will properlyascertain or assess all of the significant risk factors, or that we will haveadequate time to complete due diligence. We also cannot assure you that aninvestment in our units will not ultimately prove to be less favorable toinvestors in our securities than a direct investment, if an opportunity wereavailable, in any particular target business.

 

***We may issue shares of our capital stock, includingconvertible debt securities, to complete a business combination, which couldreduce the equity interest of our stockholders and possibly cause a change incontrol of our ownership.***

 

Our certificate ofincorporation authorizes the issuance of upto 100,000,000 shares of common stock, par value $.0001 per share, and1,000,000 shares of preferred stock, par value $.0001 per share. We have31,750,000 authorized but unissued shares of our common stock available forissuance (after appropriate reservation for the issuance of shares upon fullexercise of our outstanding warrants) and 1,000,000 shares of preferred stockavailable for issuance. Although we currently have no commitments to issue anysecurities, we may issue a substantial number of additional shares of ourcommon stock or preferred stock, or a combination of both, includingconvertible debt securities, to complete a business combination. The issuanceof additional shares of our common stock or any number of shares of preferredstock, including upon conversion of any debt securities:

 

•      maysignificantly reduce the equity interest of investors in our securities;

 

 

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•      maycause a change in control if a substantial number of our shares of common stockor voting preferred stock are issued, which may affect, among other things, ourability to use our net operating loss carry forwards, if any, and may alsoresult in the resignation or removal of our present officers and directors; and

 

•      mayadversely affect prevailing market prices for our common stock.

 

***We may issue notes or other debt securities, or otherwiseincur substantial debt, to complete a business combination, which may adverselyaffect our leverage and financial condition.***

 

Although we currentlyhave no commitments to issue any notes or other debt securities, or tootherwise incur outstanding debt, we may choose to incur substantial debt tocomplete a business combination. The incurrence of debt:

 

•      maylead to default and foreclosure on our assets if our operating earnings after abusiness combination are insufficient to pay our debt obligations;

 

•      maycause an acceleration of our obligations to repay the indebtedness even if wemake all principal and interest payments when due if we breach the covenantscontained in any debt agreements, such as covenants that require themaintenance of certain financial ratios or reserves, without a waiver orrenegotiation of such covenants;

 

•      maycreate an obligation to immediately repay all principal and accrued interest,if any, upon demand to the extent any debts are payable on demand; and

 

•      mayhinder our ability to obtain additional financing, if necessary, to the extentany debt agreements contain covenants restricting our ability to obtainadditional financing while such debt is outstanding, or to the extent ourexisting leverage discourages other potential investors.

 

***Our ability to successfully effect a business combinationand to be successful afterwards will be completely dependent upon the effortsof our key personnel, some of whom may join us following a business combinationand may be unfamiliar with the requirements of operating a public company,which may adversely affect our operations.***

 

Our ability tosuccessfully effect a business combination will be completely dependent uponthe efforts of our key personnel. The future role of our key personnelfollowing a business combination, however, cannot presently be fullyascertained. Specifically, the members of our current management are notobligated to remain with us subsequent to a business combination, and we cannotassure you that the resignation or retention of our current management will beincluded as a term or condition in any agreement with respect to a businesscombination. Although we expect one or more members of our management to serveon our Board of Directors following a business combination, subject tocontinued election by the stockholders, it is unlikely that they will operatethe target company on a day-to-day basis. Accordingly, we anticipate employingother personnel following the business combination. While we intend to closelyscrutinize any additional individuals we engage after a business combination,we cannot assure you that our assessment of these individuals will prove to becorrect. These individuals may be unfamiliar with the requirements of operatinga public company as well as United States securities laws which could cause usto expend time and resources helping them become familiar with such laws. Thiscould be expensive and time-consuming and could lead to various regulatoryissues that may adversely affect our operations.

 

Our officers anddirectors are not required to, and will not, commit their full time to ouraffairs, which may result in a conflict of interest in allocating their timebetween our operations and other businesses. This could have a negative impacton our ability to consummate a business combination. We do not intend to haveany full time employees prior to the consummation of a business combination.Each of our officers is

 

 

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engaged in other business endeavors and is notobligated to contribute any specific number of hours per week to our affairs.If our officers’ other business affairs require them to devote substantialamounts of time to such affairs in excess of their current commitment levels,it could limit their ability to devote time to our affairs and could have anegative impact on our ability to consummate a business combination. We cannotassure you that these conflicts will be resolved in our favor.

 

***Our officers and directors are and may in the future becomeaffiliated with entities engaged in business activities similar to thoseintended to be conducted by us and, accordingly, may have conflicts of interestin determining to which entity a particular business opportunity should bepresented.***

 

Our officers anddirectors may in the future become affiliated with entities, including other “blankcheck” companies, engaged in business activities similar to those intended tobe conducted by us. Additionally, our officers and directors may become awareof business opportunities which may be appropriate for presentation to us aswell as the other entities with which they are or may be affiliated. Further,certain of our officers and directors are currently involved in otherbusinesses that are similar to the business activities that we intend toconduct following a business combination. For example, Joel R. Jacks, ourchairman and chief executive officer, and Peter M. Schulte, our president andsecretary, have preexisting fiduciary obligations that arise as a result oftheir affiliations with the private equity funds for which they act asprincipals and their directorships with those funds’ portfolio companies. Inaddition, Dr. Edward H. Bersoff, our vice-chairman, and Arthur L. Money,our non-executive director, serve on the boards of various companies in thefederal services and defense industries. Due to these existing affiliations,our officers and directors may have fiduciary obligations to present potentialbusiness opportunities to those entities prior to presenting them to us whichcould cause additional conflicts of interest. Accordingly, they may haveconflicts of interest in determining to which entity a particular businessopportunity should be presented. We cannot assure you that these conflicts willbe resolved in our favor.

 

***Because all of our directors own shares of our securitiesthat will not participate in liquidation distributions, they may have aconflict of interest in determining whether a particular target business isappropriate for a business combination.***

 

All of our directors ownstock in our company, but have, solely with respect to those shares of commonstock acquired by them prior to our public offering, waived their right toreceive distributions upon our liquidation in the event we fail to complete abusiness combination. Additionally, Joel R. Jacks, Peter M. Schulte,Dr. Edward H. Bersoff and FSAC Partners, LLC have agreed with CRT CapitalGroup LLC that during the 40 trading day period beginning 60 days after the endof the “restricted period” under Regulation M, they collectively will spend upto $2,000,000 to purchase warrants in the public marketplace at prices not toexceed $.65 per warrant. It was determined that $2,000,000 is anappropriate amount by CRT Capital Group LLC and our management to demonstrateconfidence in our ultimate ability to effect a business combination because thewarrants will expire with no value if we are unable to consummate a businesscombination. None of our executive directors or any of their affiliates isprecluded from acquiring additional warrants in the aftermarket if any of themso chooses. All of the shares of common stock owned by our directorsimmediately prior to our public offering and any warrants owned by ourdirectors will be worthless if we do not consummate a business combination. Thepersonal and financial interests of our directors may influence theirmotivation in identifying and selecting a target business and completing abusiness combination in a timely manner. Consequently, our directors’discretion in identifying and selecting a suitable target business may resultin a conflict of interest when determining whether the terms, conditions andtiming of a particular business combination are appropriate and in ourstockholders’ best interest.

 

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***If our common stock becomes subject to the SEC’s penny stockrules, broker-dealers may experience difficulty in completing customertransactions and trading activity in our securities may be adversely affected.***

 

If at any time we havenet tangible assets of $5,000,000 or less and our common stock has a marketprice per share of less than $5.00, transactions in our common stock may besubject to the “penny stock” rules promulgated under the Securities ExchangeAct of 1934, as amended. Under these rules, broker-dealers who recommend suchsecurities to persons other than institutional accredited investors must:

 

•      makea special written suitability determination for the purchaser;

 

•      receivethe purchaser’s written agreement to a transaction prior to sale;

 

•      providethe purchaser with risk disclosure documents which identify certain risksassociated with investing in “penny stocks” and which describe the market forthese “penny stocks” as well as a purchaser’s legal remedies; and

 

•      obtaina signed and dated acknowledgment from the purchaser demonstrating that thepurchaser has actually received the required risk disclosure document before atransaction in a “penny stock” can be completed.

 

If our common stockbecomes subject to these rules, broker-dealers may find it difficult to effectcustomer transactions and trading activity in our securities may be adverselyaffected. As a result, the market price of our securities may be depressed, andyou may find it more difficult to sell our securities.

 

***We will only be able to complete one business combinationwith the proceeds of our public offering, which will cause us to be solelydependent on a single business which may have a limited number of services orproducts.***

 

The net proceeds from ourpublic offering have provided us with approximately $119,180,000, which we mayuse to complete our initial business combination. Our initial businesscombination must be with an operating business with a fair market value of atleast 80% of our net assets at the time of such business combination. It isprobable that the company we acquire in our initial business combination willhave only a limited number of services or products. The resulting lack ofdiversification:

 

•      willresult in our dependency upon the performance of a single operating business;

 

•      mayresult in our dependency upon the development or market acceptance of a singleor limited number of services, processes or products; and

 

•      maysubject us to numerous economic, competitive and regulatory developments, any orall of which may have a substantial adverse impact upon the particular industryin which we may operate subsequent to a business combination.

 

In this case, we will notbe able to diversify our operations or benefit from the possible spreading ofrisks or offsetting of losses, unlike other entities which may have theresources to complete several business combinations in different industries ordifferent areas of a single industry so as to diversify risks and offsetlosses. Further, the prospects for our success may be entirely dependent uponthe performance of the initial target business we acquire and such targetbusiness may not be successful.

 

***Because of our limited resources and the significantcompetition for business combination opportunities, we may not be able toconsummate an attractive business combination.***

 

We expect to encounterintense competition from other entities having a business objective similar toours, including venture capital funds, leveraged buyout funds and operatingbusinesses competing for acquisitions. Many of these entities are wellestablished and have extensive experience in identifying and effecting businesscombinations directly or through affiliates. Many of these competitors possessgreater

 

 

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technical, human and other resources than we do andour financial resources will be relatively limited when contrasted with thoseof many of these competitors. While we believe that there are numerouspotential target businesses that we could acquire with the net proceeds of ourinitial public offering, together with additional financing if available, ourability to compete in acquiring certain sizable target businesses will belimited by our available financial resources. This inherent competitivelimitation gives others an advantage in pursuing the acquisition of certaintarget businesses. Further:

 

•      ourobligation to seek stockholder approval of a business combination may delay theconsummation of a transaction;

 

•      ourobligation to convert into cash certain shares of common stock in the event abusiness combination is consummated and public stockholders owning less than20% of the shares sold in our initial public offering vote against suchbusiness combination and exercise their conversion rights may reduce theresources available for a business combination; and

 

•      ouroutstanding warrants, and the future dilution they potentially represent, maynot be viewed favorably by certain target businesses.

 

Any of these obligationsmay place us at a competitive disadvantage in successfully negotiating abusiness combination.

 

***We may have insufficient resources to cover our operatingexpenses and the expenses of consummating a business combination.***

 

We have reservedapproximately $2,000,000 from the proceeds of our initial public offering tocover our operating expenses for at least 24 months following the date weconsummated our initial public offering (October 25, 2005), and to cover theexpenses incurred in connection with a business combination. This amount isbased on management’s estimates of the costs needed to fund our operations forsuch period and consummate a business combination. Those estimates may proveinaccurate, especially if a portion of the available proceeds is used to make adown payment or pay exclusivity or similar fees in connection with a businesscombination or if we expend a significant portion of the available proceeds inpursuit of a business combination that is not consummated. If we do not havesufficient proceeds available to fund our expenses, we may be forced to obtainadditional financing, either from our management or our existing stockholdersor from third parties. We may not be able to obtain additional financing andour existing stockholders and management are not obligated to provide anyadditional financing. If we do not have sufficient proceeds and cannot findadditional financing when needed to consummate a particular businesscombination, we would be compelled to restructure or abandon that particular businesscombination or seek alternate target businesses, and eventually may be forcedto liquidate prior to consummating a business combination. In addition, if weconsummate a business combination, we may require additional financing to fundthe operations or growth of the target business. The failure to secureadditional financing could have a material adverse effect on the continueddevelopment or growth of the target business.

*** ***

***Our initial stockholders control a substantial interest inus and thus may influence certain actions requiring stockholder vote.***

 

Our initial stockholderscollectively own approximately 20% of our issued and outstanding shares ofcommon stock. Additionally, four of our initial stockholders, Joel R. Jacks,Peter M. Schulte, Dr. Edward H. Bersoff and FSAC Partners, LLC, haveagreed with CRT Capital Group LLC that they collectively will spend up to$2,000,000 to purchase warrants, at prices not to exceed $.65 per warrant,subject to certain conditions, through open market transactions during the 40trading day period beginning 60 days after the end of the “restrictedperiod” under Regulation M.

 

 

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Furthermore, our initialstockholders are not precluded from purchasing additional warrants or shares ofcommon stock in the aftermarket. Any exercise of these warrants by theseinitial stockholders would substantially increase their relative percentageownership in us.

 

Our board of directors isdivided into three classes, each of which will generally serve for a term ofthree years with only one class of directors being elected in each year. It isunlikely that there will be an annual meeting of stockholders to elect newdirectors prior to the consummation of a business combination, in which caseall of the current directors will continue in office at least until theconsummation of the business combination. If there is an annual meeting, as aconsequence of our “staggered” board of directors, only a minority of the boardof directors will be considered for election and our initial stockholders,because of their ownership position, will have considerable influence regardingthe outcome. Accordingly, our initial stockholders will continue to exertcontrol at least until the consummation of a business combination. In addition,our initial stockholders and their affiliates and relatives are not prohibitedfrom purchasing units or shares in the aftermarket, and have full voting rightswith respect to any shares of common stock they may acquire in subsequentmarket transactions. If they do, we cannot assure you that our initialstockholders will not have considerable influence upon the vote on a businesscombination.

 

***Our amended and restated certificate of incorporation andby-laws contain certain provisions that may make it more difficult, expensiveor otherwise discourage, a tender offer or a change in control or takeoverattempt by a third party, even if such a transaction would be beneficial to ourstockholders.***

 

The existence of certainprovisions in our amended and restated certificate of incorporation and by-lawsmay have a negative impact on the price of our common stock by discouraging athird party from purchasing our common stock. These provisions could also havethe effect of discouraging a third party from pursuing a non-negotiatedtakeover of our company and preventing certain changes of control. In additionto our staggered board, our by-laws require that, subject to certainexceptions, any stockholder desiring to propose business or nominate a personto the board of directors at a stockholders meeting must give notice of anyproposals or nominations within a specified time frame. Our by-laws also limitthe ability of stockholders to remove directors, call stockholders meetings andact by written consent and provide that vacancies of the board of directors mayonly be filled by a majority of the remaining directors.

 

***Our outstanding warrants may have an adverse effect on themarket price of common stock and make it more difficult to effect a businesscombination.***

 

In connection with ourinitial public offering, as part of the units, we issued warrants to purchase42,000,000 shares of common stock. To the extent we issue shares of commonstock to effect a business combination, the potential for the issuance ofsubstantial numbers of additional shares upon exercise of these warrants couldmake us a less attractive acquisition vehicle in the eyes of a target businessas such securities, when exercised, will increase the number of issued and outstandingshares of our common stock and reduce the value of the shares issued tocomplete the business combination. Accordingly, our warrants may make it moredifficult to effectuate a business combination or increase the cost of a targetbusiness. Additionally, the sale, or even the possibility of sale, of theshares underlying the warrants could have an adverse effect on the market pricefor our securities or on our ability to obtain future public financing. If andto the extent these warrants are exercised, you will experience dilution toyour holdings.

 

***If our initial stockholders exercise their registrationrights, it may have an adverse effect on the market price of our common stockand the existence of these rights may make it more difficult to effect abusiness combination.***

 

Our initial stockholdersare entitled to demand that we register the resale of their shares of commonstock in certain circumstances. If our initial stockholders exercise theirregistration rights with respect to all of their shares of common stock, thenthere will be an additional 5,250,000 shares of common stock eligible fortrading in the public market. The presence of this additional number of sharesof common stock eligible for trading in the public market may have an adverse effecton the market price of our common

 

 

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stock. In addition, the existence of these rights maymake it more difficult to effect a business combination or increase the cost ofa target business, as the stockholders of a particular target business may bediscouraged from entering into a business combination with us or will request ahigher price for their securities as a result of these registration rights andthe potential future effect their exercise may have on the trading price of ourcommon stock.

 

***Our securities are quoted on the OTC Bulletin Board, whichlimits the liquidity and price of our securities more than if our securitieswere quoted or listed on the Nasdaq Stock Market or a national exchange.***

 

Our securities are tradedin the over-the-counter market and are quoted on the OTC Bulletin Board, aninter-dealer automated quotation system for equity securities sponsored andoperated by the National Association of Securities Dealers, Inc., or NASD,but not included in the Nasdaq Stock Market. We cannot assure you that oursecurities will continue to be quoted on the OTC Bulletin Board. Quotation ofour securities on the OTC Bulletin Board may limit the liquidity and price ofour securities more than if our securities were quoted or listed on The NasdaqStock Market or a national exchange. Lack of liquidity may limit the price atwhich you may be able to sell our securities or your ability to sell oursecurities at all.

 

***If we are deemed to be an investment company, we may berequired to institute burdensome compliance requirements and our activities maybe restricted, which may make it difficult for us to complete a businesscombination.***

 

If we are deemed to be aninvestment company under the Investment Company Act of 1940, as amended, ouractivities may be restricted, including:

 

•      restrictionson the nature of our investments; and

 

•      restrictionson the issuance of securities, each of which may make it difficult for us tocomplete a business combination.

 

In addition, we may have burdensome requirements imposed upon us,including:

 

•      registrationas an investment company;

 

•      adoptionof a specific form of corporate structure; and

 

•      reporting,record keeping, voting, proxy and disclosure requirements and other rules andregulations.

 

We do not believe thatour anticipated principal activities will subject us to the Investment CompanyAct of 1940. To this end, the proceeds held in trust may only be invested bythe trust agent in “government securities” with specific maturity dates or inmoney market funds meeting certain conditions under Rule 2a-7 promulgated underthe Investment Company Act of 1940. By restricting the investment of theproceeds to these instruments, we intend to meet the requirements for theexemption provided in Rule 3a-1 promulgated under the Investment CompanyAct of 1940. If we were deemed to be subject to the act, compliance with theseadditional regulatory burdens would require additional expense that we have notprovided for.

 

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***Our directors may not be considered “independent” under thepolicies of the North American Securities Administrators Association, Inc.and, therefore, may take actions or incur expenses that are not deemed to beindependently approved or independently determined to be in our best interest.***

 

Under the policies of theNorth American Securities Administrators Association, Inc., aninternational organization devoted to investor protection, because each of ourdirectors owns shares of our securities and may receive reimbursement forout-of-pocket expenses incurred by them in connection with activities on ourbehalf such as identifying potential target businesses and performing duediligence on suitable business combinations, state securities administratorscould take the position that such individuals are not “independent.” If thiswere the case, they would take the position that we would not have the benefitof independent directors examining the propriety of expenses incurred on ourbehalf and subject to reimbursement by us. Additionally, there is no limit onthe out-of-pocket expenses that could be incurredby our directors and there will be no review of thereasonableness of the expenses we reimburse by anyone other than our board ofdirectors, which would include persons who may seek reimbursement or a court ofcompetent jurisdiction if such reimbursements are challenged. To the extentsuch out-of-pocket expenses exceed the available proceeds not deposited in the trustaccount, such out-of-pocket expenses would not be reimbursed by us unless weconsummate a business combination. Although we believe that all actions takenby our directors on our behalf will be in our best interests, whether or notthey are deemed to be “independent,” we cannot assure you that this willactually be the case. If actions are taken or expenses are incurred that areactually not in our best interests, it could have a material adverse effect onour business and operations and the price of our stock held by the publicstockholders.

 

**Risks associated with the federalservices and defense industries**

We may acquire anoperating business that contracts directly with the federal government and itsagencies, in which case the risks below would directly affect us. We may alsoacquire an operating business that acts as a subcontractor, supplier or partnerwith another party or parties that contract with the federal government and itsagencies, in which case the risk factors below would still affect us directlyor indirectly.

 

***The loss or impairment of our relationship with the federalgovernment and its agencies could adversely affect our business.***

 

Our target company mayderive a substantial portion of its revenue from government contracts, eitherdirectly or as a subcontractor, partner or supplier to a party working undersuch a contract. If our target company or other company with which it had anysuch relationship were suspended or prohibited from contracting with thefederal government or its agencies, or with a significant agency of thegovernment, or if any of these agencies ceased doing business with them orsignificantly decreased the amount of business it does with them, our targetcompany’s business, prospects, financial condition and operating results couldbe significantly impaired.

 

***Changes by the federal government in its spending prioritiesmay cause a reduction in the demand for the products or services that we mayultimately offer, which could adversely affect our business.***

 

Because our targetcompany will derive a significant portion of its revenues from contracts withthe federal government or its agencies, we believe that the success anddevelopment of the target company’s business will depend on its successfulparticipation in the federal contract program. Changes in the federalgovernment budgetary priorities could directly affect the target company’sfinancial performance. Government expenditures tend to fluctuate based on avariety of political, economic and social factors. A significant decline ingovernment expenditures, or a shift of expenditures away from programs ourtarget company supports, or a change in federal government contracting policiescausing its agencies to reduce their expenditures under contracts, to exercisetheir right to terminate contracts at any time without penalty, not to exerciseoptions to renew contracts or to delay or not enter into new contracts, couldadversely affect our target company’s business, prospects, financial conditionor operating results. Moreover, although contracts with governmental agenciesoften contemplate that the services will be performed over a period of severalyears, Congress usually must approve funds for a given program each governmentfiscal year and may significantly reduce or eliminate funding for a program.Significant reductions in these appropriations by Congress or the failure byCongress to pass a budget resolution in a timely manner could have a materialadverse effect on our target company’s business.

 

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*** ***

***Federal government contracts often contain provisions thatare unfavorable, which could adversely affect our business.***

 

Federal governmentcontracts contain provisions and are subject to laws and regulations that givethe federal government rights and remedies not typically found in commercialcontracts, including without limitation, allowing the federal government to:

 

•      terminateexisting contracts for convenience, as well as for default;

 

•      reduceor modify contracts or subcontracts;

 

•      cancelmulti-year contracts and related orders if funds for contract performance forany subsequent year become unavailable;

 

•      declineto exercise an option to renew a multi-year contract;

 

•      claimrights in services or products provided by the target company;

 

•      suspendor bar the target company from doing business with the federal government orwith a governmental agency; and

 

•      controlor prohibit the export of products.

 

If the federal governmentterminates a contract “for convenience” (for instance, due to a change in itsperceived needs or its desire to consolidate work under another contract), ourtarget company may recover only its incurred or committed costs, settlementexpenses and profit on services completed prior to the termination. If thegovernment terminates a contract for default, our target company may notrecover even those amounts, and instead may be liable for excess costs incurredby the government or agency in procuring undelivered services or products fromanother source. As is common with government contractors, some of our targetcompany’s contracts may experience performance issues in the future. Our targetcompany may in the future receive “show cause” or cure notices under contractsthat, if not addressed to the government’s satisfaction, could give thegovernment the right to terminate those contracts for default or to ceaseprocuring services under those contracts in the future. Even if the targetcompany is not directly the party to a government contract, as in the case of asubcontract relationship, the impact of the above on the prime contractor wouldlikely have a material adverse effect on our target company.

 

***We will likely have to comply with complex procurement lawsand regulations, and the cost of compliance with these laws and regulations andpenalties and sanctions for any non-compliance could adversely affect ourbusiness.***

*** ***

Our target company willlikely have to comply with and will be affected by laws and regulationsrelating to the formation, administration and performance of federal governmentcontracts, which affect how the target company does business with its customersand may impose added costs on its business. For example, our target company orparties with which it does business will likely be subject to the FederalAcquisition Regulations and all supplements, which comprehensively regulate theformation, administration and performance of federal government contracts, andto the Truth-in-Negotiations Act, which requires certification and disclosureof cost and pricing data in connection with contract negotiations. If agovernment review or investigation uncovers improper or illegal activities, ourtarget company may be subject to civil and criminal penalties andadministrative sanctions, including termination of contracts, forfeiture ofprofits, suspension of payments, fines and suspension or debarment from doingbusiness with federal government agencies, which could materially adverselyaffect our target company’s business, prospects, financial condition oroperating results. In addition, our target company or parties with which itdoes business will likely be subject to industrial security regulations of the Departmentof Defense and other federal agencies that are designed to safeguard againstforeigners’ access to classified information. The

 

 

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target company may also be liable for systems andservices failure and security breaks with respect to the solutions, services orproducts, or other applications it sells to the government. If the targetcompany were to come under foreign ownership, control or influence, its federalgovernment customers could terminate or decide not to renew their contracts,and it could impair their ability to grant new contracts to our target company.

 

***The federal government may reform its procurement or otherpractices in a manner adverse to us.***

 

The federal governmentmay reform its procurement practices or adopt new contracting rules andregulations, including cost-accounting standards, that could be costly tosatisfy or that could impair our target company’s ability to obtain newcontracts. It also could adopt new contracting methods to General ServicesAdministration, or GSA, or other government-wide contracts, or adopt newstandards for contract awards intended to achieve certain social or otherpolicy objectives, such as establishing new set-aside programs for small orminority-owned businesses. In addition, the federal government may facerestrictions from new legislation or regulations, as well as pressure fromgovernment employees and their unions, on the nature and amount of services thefederal government may obtain from private contractors. These changes couldimpair our target company’s ability to obtain new contracts. Any newcontracting methods could be costly or administratively difficult for ourtarget company to implement and, as a result, could harm its operating results.

 

***Government contracts are usually awarded through acompetitive bidding process which entails risks not present in othercircumstances.***

 

A meaningful amount ofthe business that our target company may expect to seek directly or throughparties with which it does business in the foreseeable future will likely beawarded through competitive bidding. Competitive bidding presents a number ofrisks, including without limitation:

 

•      theneed to bid on programs in advance of the completion of their design, which mayresult in unforeseen technological difficulties and cost overruns;

 

•      thesubstantial cost and managerial time and effort that our target company mayspend to prepare bids and proposals for contracts that may not be awarded toour target company;

 

•      theneed to accurately estimate the resources and cost structure that will berequired to service any contract our target company is awarded; and

 

•      theexpense and delay that may arise if our target company’s or its partners’competitors protest or challenge contract awards made to our target company orpartners pursuant to competitive bidding, and the risk that any such protest orchallenge could result in the resubmission of bids on modified specifications,or in termination, reduction or modification of the awarded contract.

 

Our target company maynot be provided the opportunity to bid on contracts that are held by othercompanies and are scheduled to expire if the government determines to extendthe existing contracts. If our target company is unable to win particularcontracts that are awarded through the competitive bidding process or ourtarget company is unable to consistently win new contract awards over anyextended period its business and prospects could be adversely affected.

 

***Federal government customers sometimes spend theirprocurement budgets through multiple award contracts and our target company’sfailure to successfully compete for post-award orders under these contractscould adversely affect its business.***

 

Budgetary pressure andreforms in the procurement process may cause the federal government to increaseits use of task order or delivery order contracts (commonly known in theindustry as “indefinite delivery, indefinite quantity” contracts, or ID/IQcontracts), including GSA Contracts, and other

 

 

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government-wide acquisition contracts, or GWAC contracts,to purchase services or products. Under a task order or delivery ordercontract, the federal government may submit, but is not required to submit,orders for services or products. Thus, the revenue that may be realized underthese contracts is not guaranteed, but instead depends, among other things, onthe quantity of orders that the government in fact submits to the contractor.Such contracts, some of which are awarded to multiple contractors, haveincreased pricing pressure and require that contractors make sustainedpost-award efforts to procure service orders in order to realize revenue undersuch contracts. Our target company may not be able to successfully sell itsservices or products or otherwise increase its revenues under these contracts.Our target company’s failure to compete effectively in the procurementenvironment could have a material adverse effect on our target company’sbusiness, prospects, financial condition and results of operations.

*** ***

***We may lose money on some contracts if we underestimate theresources we need to perform under the contract.***

 

Our target company mayprovide services or products to the federal government under three types ofcontracts: cost-plus-fee, time-and-materials, and fixed-price. Each of thesetypes of contracts, to differing degrees, involves the risk that our targetcompany could underestimate its cost of fulfilling the contract, which mayreduce the profit it earns or lead to a financial loss on the contract.

 

•      Undercost-plus-fee contracts, which are subject to a ceiling amount, our targetcompany may be reimbursed for allowable costs and paid a fee, which may befixed or performance-based. However, if its costs exceed the ceiling or are notallowable under the terms of the contract or applicable regulations, our targetcompany may not be able to recover those costs.

 

•      Undertime-and-materials contracts, our target company may be reimbursed for labor atnegotiated hourly billing rates and for certain expenses, and our targetcompany assumes the risk that its costs of performance may exceed thenegotiated hourly rates.

 

•      Underfixed-price contracts, our target company performs specific tasks for a fixedprice. Compared to cost-plus-fee contracts and time-and-materials contracts,fixed-price contracts involve greater financial risk because our target companybears the impact of cost overruns. To the extent its actual costs exceed theestimates upon which the price was negotiated, our target company will generateless than the anticipated amount of profit or could incur a loss.

 

***Our contracts with the federal government and its agencieswill be subject to audits and cost adjustments.***

 

The federal governmentaudits and reviews performance on contracts, pricing practices, cost structureand compliance with applicable laws, regulations and standards. Like mostgovernment contractors, our target company’s contract costs will be audited andreviewed on a continual basis. In addition, nonaudit reviews by the governmentmay still be conducted on all government contracts. An audit of work performedby our target company could result in a substantial adjustment to its revenuesbecause any costs found to be improperly allocated to a specific contract willnot be reimbursed, and revenues our target company may have already recognizedmay need to be refunded. If a government audit uncovers improper or illegalactivities, our target company may be subject to civil and criminal penaltiesand administrative sanctions, including termination of contracts, forfeiture ofprofits, suspension of payments, fines and suspension or debarment from doingbusiness with federal government agencies. In addition, our target companycould suffer serious harm to its reputation if allegations of impropriety weremade.

 

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***Our business depends upon obtaining and maintaining requiredsecurity clearances, and our failure to do so could result in termination ofcertain of our contracts or cause us to be unable to bid or rebid on certaincontracts.***

 

Many federal governmentcontracts will require our target company’s employees to maintain variouslevels of security clearances, and our target company may be required tomaintain certain facility security clearances complying with federal governmentrequirements. Obtaining and maintaining security clearances for employeesinvolves a lengthy process, and it is difficult to identify, recruit and retainemployees who already hold security clearances. If our target company’semployees are unable to obtain or retain security clearances or if suchemployees who hold security clearances terminate employment with the targetcompany, the customer whose work requires cleared employees could terminate thecontract or decide not to renew it upon its expiration. In addition, we expectthat some of the contracts on which our target company will bid will require itto demonstrate its ability to obtain facility security clearances and performwork with employees who hold specified types of security clearances. To theextent our target company is not able to obtain facility security clearances orengage employees with the required security clearances for a particularcontract, it may not be able to bid on or win new contracts, or effectivelyrebid on expiring contracts.

 

***Failure to maintain strong relationship with othercontractors could result in a decline in our revenue.***

 

Our target company mayact as a subcontractor or under a “teaming” arrangement in which the targetcompany and other contractors jointly bid on particular contracts or programs.As a subcontractor or team member, the target company will often lack controlover fulfillment of a contract, and poor performance on the contract couldtarnish its reputation, even when the target company performs as required.Moreover, our target company’s revenue and operating results could be adverselyaffected if any prime contractor or teammate chooses to offer a client servicesof the types that the target company provides or if any prime contractor orteammate teams with other companies to independently provide those services.

 

***We may rely on third-party manufacturers or subcontractorsto complete our contracts, and any delay or failure to perform by thesemanufacturers or subcontractors may result in a decline in our revenue.***

 

Our target company mayuse third-party manufacturers in addition to or instead of any internalmanufacturing capacity that it may have. This arrangement affords less controlover the reliability of supply, quality and price of products or componentsthan internal manufacturing. Our target company may risk disruptions in itssupply of key products and components if its suppliers fail to perform becauseof strikes, natural disasters, financial condition or other factors beyond thecontrol of our target business. Products that are supplied by a third-partymanufacturer may not perform as expected, and these performance failures mayresult in delays in completion of a project or additional costs to complete aproject. Any delay by subcontractors to complete their portion of a project, orany failure by a subcontractor to satisfactorily complete its portion of aproject, may result in delays in the overall progress of the project and maycause our target business to incur additional costs. The additional costsincurred by our target company due to the delay or failure to perform by athird-party manufacturer or a subcontractor may be substantial. While ourtarget company may recover some of these additional costs from the responsiblethird-party manufacturer or subcontractor, it may not be able to recover all ofthese costs in all circumstances.

 

***We may be unable to protect or enforce our intellectualproperty rights.***

 

After completing abusiness combination, the protection of our target company’s trade secrets,proprietary know-how, technological innovations and other proprietary rightsthrough patents and other intellectual property protections in the U.S. andother countries may be critical to our success. We may rely on a combination ofpatent, copyright, trademark, trade secret laws and contractual restrictions toprotect any proprietary technology or other rights that we may acquire. Despiteour efforts, we may not be able to prevent misappropriation of thoseproprietary rights or deter independent development of technologies thatcompete with the business we acquire. Our competitors may file patentapplications or obtain patents and proprietary rights that block or competewith our patents. Litigation may be necessary in the future to enforce ourintellectual property rights, to protect our trade secrets, or to determine thevalidity and scope of the proprietary rights of others. It is also possiblethat third parties may claim we have infringed their patent, trademark,copyright or other proprietary rights. Claims or litigation, with or withoutmerit, could

 

 

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result in substantial costs and diversions ofresources, either of which could have a material adverse effect on ourcompetitive position and business.

 

**Item 3.Quantitative and Qualitative Disclosures about Market Risk.**

 

To date, our efforts havebeen limited to organizational activities and activities relating to ourinitial public offering and the identification of a target business.  We have neither engaged in any operations norgenerated any revenues. As the proceeds from our initial public offering heldin trust have been invested in short term investments, our only market riskexposure relates to fluctuations in interest rates.

 

As of October 25, 2005,approximately $117,180,000 of the net proceeds of our initial public offeringwas held in trust for the purposes of consummating a business combination. Theproceeds held in trust have been invested in United States Treasury Bills in atrust account at JPMorgan Chase NY Bank maintained by Continental StockTransfer & Trust Company acting as trustee.  As of October 25, 2005, the effectiveannualized interest rate payable on our investment was approximately 3.69%. Assumingno other changes to our holdings as of October 25, 2005, a 1% decrease in theunderlying interest rate payable on our investment in the United StatesTreasury Bills as of October 25, 2005 would result in a decrease ofapproximately $300,000 in the interest earned on our investment for the following90-day period, and a corresponding decrease in our net increase in stockholders’equity resulting from operations, if any, for that period.

 

We have not engaged inany hedging activities since our inception on April 12, 2005. We do not expectto engage in any hedging activities with respect to the market risk to which weare exposed.

 

**Item 4.Controls and Procedures.**

 

As of September 30, 2005,we, including our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on that evaluation, our management, includingthe Chief Executive Officer, concluded that our disclosure controls andprocedures were effective in timely alerting management, including the ChiefExecutive Officer of material information about us required to be included inperiodic Securities and Exchange Commission filings. However, in evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

There have been nochanges in our internal control over financial reporting since our inception onApril 12, 2005 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

PART II — OTHERINFORMATION

 

**Item 1. Legal Proceedings.**

 

We are not currentlysubject to any material legal proceedings, nor, to our knowledge, is anymaterial legal proceeding threatened against us. From time to time, we may be aparty to certain legal proceedings incidental to the normal course of ourbusiness. While the outcome of these legal proceedings cannot be predicted withcertainty, we do not expect that these proceedings will have a material effectupon our financial condition or results of operations.

 

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

 

We have not engaged inany unregistered sales of equity securities during the three months endedSeptember 30, 2005.

 

The net proceeds from ourinitial public offering was approximately $119,180,000, after deductingoffering expenses of approximately $520,000 and underwriting discounts of$6,300,000. As of October 25, 2005, $117,180,000 of this amount had been placedin trust for purposes of consummating a business combination, with approximately$2,000,000 remaining.

 

 

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On October 25, 2005, weused $154,000 of our general working capital to repay the notes payable to ourinitial stockholders, Mr. Jacks and Mr. Schulte. The loans were repaid in full,without interest, and cancelled.

 

On October 25, 2005, weused $85,000 of our general working capital to pay premiums associated with ourdirectors and officers liability insurance.

 

As of October 25, 2005,approximately $117,180,000 was held in trust and we had approximately$2,000,000 of our offering proceeds not held in trust remaining and availableto us for our activities in connection with identifying and conducting duediligence of a suitable business combination, and for general corporatematters.

 

 

**Item 3. Exhibits.**

 
|   3.1 |   | Form of Amended and  Restated Certificate of Incorporation*                                                                          |   |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|
|   3.2 |   | By-laws*                                                                                                                             |   |
|   4.1 |   | Specimen Unit Certificate*                                                                                                           |   |
|   4.2 |   | Specimen Common Stock  Certificate*                                                                                                  |   |
|   4.3 |   | Specimen Warrant  Certificate*                                                                                                       |   |
|   4.4 |   | Form of Warrant Agreement  between Continental Stock Transfer & Trust Company and the  Registrant*                     |   |
| 10.1            |   | Letter Agreement between  the Registrant and Joel R. Jacks*                                                                     |   |
| 10.2            |   | Letter Agreement between  the Registrant and Peter M. Schulte*                                                                  |   |
| 10.3            |   | Letter Agreement between  the Registrant and Dr. Edward H. Bersoff*                                                        |   |
| 10.4            |   | Letter Agreement between  the Registrant and Arthur L. Money*                                                                        |   |
| 10.5            |   | Letter Agreement between  the Registrant and FSAC Partners, LLC*                                                                     |   |
| 10.6            |   | Letter Agreement between  CRT Capital Group LLC and Joel R. Jacks*                                                              |   |
| 10.7            |   | Letter Agreement between  CRT Capital Group LLC and Peter M. Schulte*                                                           |   |
| 10.8            |   | Letter Agreement between  CRT Capital Group LLC and Dr. Edward H. Bersoff*                                                      |   |
| 10.9            |   | Letter Agreement between  CRT Capital Group LLC and Arthur L. Money*                                                                 |   |
| 10.10           |   | Letter Agreement between  CRT Capital Group LLC and FSAC Partners, LLC*                                                              |   |
| 10.11           |   | Form of Investment  Management Trust Agreement between Continental Stock Transfer &  Trust Company and the Registrant* |   |
| 10.14           |   | Form of Registration  Rights Agreement among the Registrant and each of the Initial Stockholders*                                    |   |
| 10.15           |   | Form of Warrant Purchase  Agreement among CRT Capital Group LLC and one or more of the Initial  Stockholders*                        |   |
| 10.16           |   | Office Service Agreement  between the Registrant and CM Equity Management, L.P.*                                                     |   |
| 10.17           |   | Form of Stock Escrow  Agreement between the Registrant and Continental Stock Transfer &  Trust Company*                     |   |
|            |   |                                                                                                                                 |   |

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*Previouslyfiled as exhibits to our registration statements on Form S-1 (file no.333-124638).

 

 

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##### **SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused the report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                   |                                     |
|------------------------|------------------------------------------|
|                   | Federal Services Acquisition Corporation |
|                   |                                     |
|                   | By:                                 | /s/ Joel R. Jacks |   |
|                   |                                     | Chairman of the Board and |   |
|                   |                                     | Chief Executive Officer |   |
|                   |                                     |   |   |
|                   | By:                                 | /s/ Peter M. Schulte |   |
|                   |                                     | President and |   |
|                   |                                     | Chief Financial Officer |   |
| Date: December 1, 2005 |                                     |   |   |

 

 

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**Federal Services Acquisition Corporation**(a developmentstage company)

**BalanceSheet (Unaudited)**

 
| ** **                                                                                           | ** ** | **September  30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                           |       |                     |       |
| Current assets:                                                                                      |       |                     |       |
| Cash                                                                                                 |       | $                        | 56,598     |   |
|                                                                                                 |       |                     |       |
| Deferred offering costs                                                                              |       | 383,494                  |       |
| Total assets                                                                                         |       | $                        | 440,092    |   |
|                                                                                                 |       |                     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                        |       |                     |       |
| Current liabilities:                                                                                 |       |                     |       |
| Accrued expenses                                                                                     |       | $                        | 1,000      |   |
| Accrued offering costs                                                                               |       | 280,000                  |       |
| Notes payable to stockholders                                                                        |       | 154,000                  |       |
| Total current liabilities                                                                            |       | 435,000                  |       |
|                                                                                                 |       |                     |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                    |       |                     |       |
|                                                                                                 |       |                     |       |
| **STOCKHOLDERS’ EQUITY**                                                                        |       |                     |       |
| ** **                                                                                           |       |                     |       |
| Preferred stock—$.0001 par  value; 1,000,000 shares authorized, 0 issued and outstanding        |       | 0                        |       |
| Common stock—$.0001 par  value; 100,000,000 shares authorized, 5,250,000 issued and outstanding |       | 525                      |       |
| Additional paid-in capital                                                                           |       | 5,475                    |       |
| Deficit accumulated during  the development stage                                                    |       | (908                     | )          |
| Total stockholders’ equity                                                                      |       | 5,092                    |       |
| Total liabilities and  stockholders’ equity                                                     |       | $                        | 440,092    |   |
|                                                                                                      |            |                          |            |  |  |  |

 

See Notes to Unaudited Financial Statements.

 

F-1

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**FederalServices Acquisition Corporation**

(adevelopment stage company)

** **

**Statementof Operations (Unaudited)**

 
| ** **                                                            | ** ** | **April 12, 2005  (date of inception)  through  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Organization costs                                                    |       | $                                                                         | (1,000     | ) |
| Interest income                                                       |       | 92                                                                        |       |
| Net loss for the period                                               |       | $                                                                         | (908       | ) |
| Net loss per share—basic  and diluted                            |       | $                                                                         | .00        |   |
| Weighted average number of  shares outstanding—basic and diluted |       | 5,250,000                                                                 |       |

See Notes to Unaudited Financial Statements.

 

F-2

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**FederalServices Acquisition Corporation**

(adevelopment stage company)

** **

**Statementof Stockholders’ Equity (Unaudited)**

 
| ** **                                               | ** ** | ** **       | ** ** | ** **     | ** ** | **Deficit  Accumulated  During the** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|----------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Development**                      | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Paid-In Capital**                  | ** ** | **Stage**  | ** ** | **Total** | ** ** |
| **Balance—April 12, 2005 (date of inception)** |       |             |       |           |       |                                 |       |       |       |   |   |
| Initial capitalization from founding stockholders        |       | 5,250,000        |       | $              | 525        |                                 | $          | 5,475      |       | $ | — |   | $ | 6,000 |   |
| Net loss                                                 |       | —           |       | —         |       | —                               |       | (908       | )          | (908 | ) |
| Balance—September 30, 2005                          |       | 5,250,000        |       | $              | 525        |                                 | $          | 5,475      |       | $ | (908 | ) | $ | 5,092 |   |

See Notes to Unaudited Financial Statements.

 

F-3

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**FederalServices Acquisition Corporation**

(adevelopment stage company)

 

**Statementof Cash Flows (Unaudited)**

** **
| ** **                                                                       | ** ** | **April 12, 2005  (date of inception)  through  September 30, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Cash flows from operating  activities:**                                       |       |                                                                      |       |
| Net loss                                                                         |       | $                                                                         | (908       | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |       |                                                                      |       |
| Changes in:                                                                      |       |                                                                      |       |
| Accrued expenses                                                                 |       | 1,000                                                                     |       |
| Net cash provided by operating activities                                        |       | 92                                                                        |       |
| **Cash flows from financing  activities:**                                       |       |                                                                      |       |
| Proceeds from notes payable to stockholders                                      |       | 154,000                                                                   |       |
| Proceeds from sale of common stock                                               |       | 6,000                                                                     |       |
| Payments of deferred offering costs                                              |       | (103,494                                                                  | )          |
| Net cash provided by financing activities                                        |       | 56,506                                                                    |       |
| **Net increase in cash**                                                         |       | 56,598                                                                    |       |
| Cash—beginning of period                                                    |       | 0                                                                         |       |
| Cash—end of period                                                          |       | $                                                                         | 56,598     |   |
| **Supplemental disclosures of non  cash transactions:**                          |       |                                                                      |       |
| Accrued offering costs                                                           |       | $                                                                         | 280,000    |   |

See Notes to (Unaudited) Financial Statements.

 

F-4

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**Federal Services Acquisition Corporation**

(a development stage company)

**Notes toUnaudited Financial Statements**

**NOTE A—ORGANIZATION AND BUSINESS OPERATIONS**

Federal Services Acquisition Corporation (the “Company”)was incorporated in Delaware on April 12, 2005. The Company was formed toserve as a vehicle for the acquisition of an operating business in the federalservices and defense industries through a merger, capital stock exchange, assetacquisition, stock purchase or other similar business combination. The Companyhas neither engaged in any operations nor generated revenue to date. TheCompany is considered to be in the development stage and is subject to therisks associated with activities of development stage companies.  TheCompany has selected December 31 as its fiscal year end.

The financial information in this report has not beenaudited, but in the opinion of management, all adjustments (consisting only ofnormal recurring adjustments) considered necessary to present fairly suchinformation have been included. Operating results for the interim period are not necessarily indicativeof the results to be expected for the full year.

The registration statement for the Company’s initialpublic offering (“Offering”) was declared effective on October 19, 2005. The Company consummated the offering on October 25, 2005 and received netproceeds of $119,700,000, after deducting the underwriting discount but beforededucting expenses of the Offering. The Company’s management has broaddiscretion with respect to the specific application of the net proceeds of thisOffering of Units (as defined in Note C below), although substantially all ofthe net proceeds of the Offering are intended to be generally applied towardconsummating a business combination with (or acquisition of) an operatingbusiness in the federal services and defense industries (“Business Combination”).Nonetheless, there is no assurance that the Company will be able tosuccessfully effect a Business Combination. An amount of $117,180,000 of the netproceeds is being held in a trust account (“Trust Account”) and is invested inU.S. government securities until the earlier of (i) the consummation of the BusinessCombination or (ii) the distribution of the Trust Fund as described below. Theremaining proceeds may be used to pay for business, legal and accounting duediligence on prospective acquisitions and continuing general and administrativeexpenses. The Company, after signing a definitive agreement for the acquisitionof a target business, will submit such transaction for stockholder approval. Inthe event that public stockholders of 20% or more of the outstanding stock(excluding, for this purpose, those shares of common stock issued prior to theOffering) vote against the Business Combination and exercise their conversionrights, the Business Combination will not be consummated.

In the event that the Company does not consummate aBusiness Combination within 18 months from the date of the consummation ofthe Offering, or 24 months from the consummation of the Offering ifcertain extension criteria have been satisfied (the “Acquisition Period”), theproceeds held in the Trust Fund will be distributed to the Company’s publicstockholders, excluding the Founding Stockholders to the extent of their initialstock holdings. However, the persons who were stockholders prior to theOffering (the “Founding Stockholders”) will participate in any liquidationdistribution with respect to any shares of the common stock acquired inconnection with or following the Offering. In the event of such distribution,it is likely that the per share value of the residual assets remainingavailable for distribution (including Trust Fund assets) will be less than theinitial public offering price per share in the Offering (assuming no value isattributed to the Warrants contained in the Units to be offered in the Offeringdiscussed in Note C).

 

F-5

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**NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**[1]    Cash and cash equivalents:**

The Company considers all highly liquid investmentswith original maturities of three months or less to be cash equivalents.

**[2]    Loss per common share:**

Loss per share is computed by dividing net lossapplicable to common stockholders by the weighted average number of commonshares outstanding for the period.

**[3]    Use of estimates:**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results could differfrom those estimates.

**[4]    Income taxes:**

Deferred income taxes are provided for the differencesbetween the bases of assets and liabilities for financial reporting and incometax purposes. A valuation allowance is established when necessary to reducedeferred tax assets to the amount expected to be realized.

The Company recorded a deferred income tax asset forthe tax effect of start-up costs and temporary differences, aggregatingapproximately $309. In recognition of the uncertainty regarding the ultimateamount of income tax benefits to be derived, the Company has recorded a fullvaluation allowance at September 30, 2005.

The effective tax rate differs from the statutory rateof 34% due to the increase in the valuation allowance.

**[5]    Deferred offering costs:**

Deferred offering costs consist principally of legaland underwriting fees incurred through the balance sheet date that are relatedto the Offering and that will be charged to capital in the period in which theOffering was consummated.

**NOTE C—INITIAL PUBLIC OFFERING**

On October 25, 2005 the Company sold 21,000,000 Units(“Units”).  Each Unit consists of one share of the Company’s common stock,$.0001 par value, and two warrants (“Warrants”). Each Warrant entitles theholder to purchase from the Company one share of common stock at an exerciseprice of $5.00.  Each Warrant is exercisable on the later of (a) thecompletion of a Business Combination or (b) October 19, 2006

 

F-6

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andexpires October 19, 2009, or earlier upon redemption.  The Warrants areredeemable at a price of $.01 per Warrant upon 30 days notice after theWarrants become exercisable, only in the event that the last sale price of thecommon stock is at least $8.50 per share for any 20 trading days within a 30trading day period ending on the third day prior to the date on which notice ofredemption is given.

In connection with the Offering, the Company paid CRTCapital Group LLC an underwriter’s discount of 5% of the gross proceeds of theOffering.

**NOTE D—NOTES PAYABLE TO STOCKHOLDERS**

The Company issued two $77,000 unsecured non-interestbearing promissory notes to two of the Founding Stockholders of the Company onApril 18, 2005. The Notes were repaid in accordance with their terms onOctober 25, 2005 from the proceeds of the Offering.

**NOTE E—RELATED PARTY TRANSACTION**

The Company has agreed to pay CM Equity Management,L.P. a company where certain of the Founding Stockholders serve in executivecapacities, an administrative fee of $7,500 per month for office space andgeneral and administrative services from October 19, 2005 through the effectivedate of the acquisition of a target business.

**NOTE F—COMMITMENTS AND OTHER MATTERS**

The Company has a commitment to pay to CRT CapitalGroup LLC a 2% fee of the gross offering proceeds, or $2,520,000, payable uponthe Company’s consummation of a Business Combination.

The Company has engaged CRT Capital Group LLC, on anon-exclusive basis, as their agent for the solicitation of the exercise of thewarrants. The Company has agreed to pay CRT Capital Group LLC a commissionequal to 2% of the exercise price for each warrant exercised more than one yearfrom October 19, 2005 if the exercise was solicited by CRT Capital Group LLC.

**NOTEG—COMMON STOCK RESERVED FOR ISSUANCE**

At October 25, 2005, 42,000,000 shares of common stockwere reserved for issuance upon exercise of redeemable warrants.

**NOTE H—FOUNDING STOCKHOLDERS**

One or more of the Founding Stockholders have agreedwith the Company that during the 40 trading day period beginning 60 daysafter the end of the “restricted period” under Regulation M, theycollectively will spend up to $2,000,000 to purchase warrants in the publicmarketplace at prices not to exceed $.65 per warrant. They have further agreedthat any warrants purchased by them or their affiliates or designees will notbe sold or transferred until the completion of a Business Combination.

 

F-7

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