**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q/A**

**AMENDMENTNO. 1**

 

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

 

**FOR THEQUARTER 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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**FEDERAL SERVICES ACQUISITION CORPORATION**

(Exactname of registrant as specified in its charter)

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

 

**900Third Avenue, 33rd Floor**

**NewYork, New York, 10022-4775**

(Addressof principal executive office)

** **

**(646) 403-9765**

(Registrant’stelephone number, including area code)

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 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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##### **Purpose of Amendment**

##### ** **

This amendment is being filed to add Exhibits 31.1 and31.2.

 

##### **Table of Contents**

##### ** **

**TABLE OFCONTENTS**

 
| **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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**PART I– FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

Reference is made to our financial statements andaccompanying notes beginning on Page F-1 of this report.

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

The information contained in this section shouldbe read in conjunction with our financial statements and related notes andschedules thereto appearing elsewhere in this Quarterly Report. This QuarterlyReport, including the Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statements thatinvolve substantial risks and uncertainties. These forward-looking statementsare not historical facts, but rather are based on current expectations,estimates and projections about our industry, our beliefs, and our assumptions.Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”,“seeks”, and “estimates” and variations of these words and similar expressionsare intended to identify forward-looking statements. These statements are notguarantees of future performance and are subject to risks, uncertainties, andother factors, some of which are beyond our control and difficult to predictand could cause actual results to differ materially from those expressed orforecasted in the forward-looking statements.

 

Although we believe that the assumptions on whichthese forward-looking statements are based are reasonable, any of thoseassumptions could prove to be inaccurate, and as a result, the forward-lookingstatements based on those assumptions also could be incorrect. In light ofthese and other uncertainties, the inclusion of a projection or forward-lookingstatement in this Quarterly Report should not be regarded as a representationby us that our plans and objectives will be achieved. You should not placeundue reliance on these forward-looking statements, which apply only as of thedate of this Quarterly Report. We undertake no obligation to update suchstatements to reflect subsequent events.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations should be read in conjunctionwith our financial statements and the related notes and schedules thereto.

 

We are a “blank check” company organized under thelaws of the State of Delaware on April 12, 2005 and were formed for thepurpose of acquiring, through a merger, capital stock exchange, assetacquisition, stock purchase or other similar business combination, an operatingbusiness in the federal services and defense industries. We intend to use cashderived from the net proceeds of our initial public offering, which closed onOctober 25, 2005, together with any additional financing arrangements thatwe undertake, to effect a business combination.

 

Through September 30, 2005, our efforts have beenlimited to organizational activities and activities relating to our initialpublic offering; we have neither engaged in any operations nor generated anyrevenues. As of September 30, 2005, we had accrued expenses and accruedoffering costs of approximately $1,000 and $280,000, respectively. In addition,we had cash of approximately $56,500, which was principally funded pursuant to$154,000 in notes issued to two of our initial stockholders.

 

**Critical Accounting Policies**

 

The preparation of financial statements and relateddisclosures in conformity with generally accepted accounting principles in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities at the date 

 

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of thefinancial statements, and revenues and expenses during the periods reported.Actual results could materially differ from those estimates. We have determinedthat we currently are not subject to any critical accounting policies.

 

**Recent Developments**

 

On October 25, 2005, we consummated our initialpublic offering. The net proceeds from our initial public offering wereapproximately $119,180,000, after deducting offering expenses of approximately$520,000 and underwriting discounts of $6,300,000. Of this amount, $117,180,000was placed in trust, with approximately $2,000,000 remaining.

 

We will use substantially all of the net proceeds discussedabove to acquire an operating business, including identifying and evaluatingprospective acquisition candidates, selecting an operating business, andstructuring, negotiating and consummating the business combination, includingthe making of a down payment or the payment of exclusivity or similar fees andexpenses, if any. However, we may not use all of the proceeds held in the trustaccount in connection with a business combination, either because theconsideration for the business combination is less than the proceeds in trustor because we finance a portion of the consideration with capital stock or debtsecurities that we can issue. In that event, the proceeds held in the trustaccount as well as any other net proceeds not expended will be used to financethe operations of the target business.

 

We may issue additional capital stock or debtsecurities to finance a business combination. The issuance of additionalcapital stock, including upon conversion of any convertible debt securities wemay issue, or the incurrence of debt, could have material consequences on ourbusiness and financial condition. The issuance of additional shares of ourcapital stock (including upon conversion of convertible debt securities):

 

•                            maysignificantly reduce the equity interest of our stockholders;

 

•                            willlikely cause a change in control if a substantial number of our shares ofcommon stock or voting preferred stock are issued, which may affect, amongother things, our ability to use our net operating loss carry forwards, if any,and may 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 issue debt securities, it couldresult 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 have sufficient funds to allow usto operate for at least the 24 months following the date we consummated ourinitial public offering (October 25, 2005), assuming that a businesscombination is not consummated during that time. Over this time period, weanticipate making the following expenditures:

 

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

 

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due diligenceinvestigations, structuring and negotiating of a business combination; 

 

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

 

•         approximately $180,000 of expenses inadministrative 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 will need additional financingduring the 24 months following our initial public offering in order to meet theexpenditures required for operating our business. However, we may need toobtain additional financing through a private offering of debt or equitysecurities if such funds are required to consummate a business combination thatis presented to us. We may consummate such a financing in connection with theconsummation of a business combination.

 

On October 25, 2005, we used $154,000 of our netproceeds from the public offering to repay the notes payable to our initialstockholders, Mr. Jacks and Mr. Schulte. The loans were repaid infull, without interest, and cancelled.

 

On October 25, 2005, we used $85,000 of ourgeneral working capital to pay premiums associated with our directors andofficers liability insurance.

 

We have agreed to pay CM Equity Management, L.P. acompany where certain of our initial stockholders serve in executivecapacities, an administrative fee of $7,500 per month for office space andgeneral and administrative services from October 19, 2005 through theeffective date of the acquisition of a target business.

 

**RISK FACTORS**

 

*An investment in our securitiesinvolves a high degree of risk. You should consider carefully all of thematerial risks described below, before making a decision to invest in oursecurities. If any of the following risks occur, our business, financialcondition and results of operations may be materially adversely affected. Inthat event, the trading price of our securities could decline, and you couldlose all or part of your investment. Although we believe that the risksdescribed below represent all of the material risks we face, additional risksnot currently known to us may also harm us or affect your investment.*

 

**Risksassociated with our business**

 

***We are a developmentstage company with no operating history and, accordingly, you will have nobasis upon which to evaluate our ability to achieve our business objective.***

 

We are a recently incorporated development stagecompany with no operating results to date. Since we do not have an operatinghistory, you have no basis upon which to evaluate our ability to achieve ourbusiness objective, which is to acquire an operating business in the federalservices and defense industries. We will not generate any revenues (other thaninterest income on the proceeds of our public offering that have been placed intrust) until, at the earliest, after the consummation of a businesscombination. We cannot assure you as to when or if a business combination willoccur.

 

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***We may not be ableto consummate a business combination within the required time frame, in whichcase, we would be forced to liquidate.***

 

We must complete a business combination with a fairmarket value of at least 80% of our net assets at the time of acquisitionwithin 18 months after the consummation of our public offering (or within24 months after such date if a letter of intent, agreement in principle ora definitive agreement has been executed within 18 months after theconsummation of our public offering and the business combination relatingthereto has not yet been consummated within such 18-month period). If we failto consummate a business combination within the required time frame, we will beforced to liquidate our assets. We may not be able to find a suitable targetbusiness within the required time frame. In addition, our negotiating positionand our ability to conduct adequate due diligence on any potential target maybe reduced as we approach the deadline for the consummation for a businesscombination.

 

***Because there arenumerous companies with a business plan similar to ours seeking to effectuate abusiness combination, it may be more difficult for us to do so.***

 

Since May 2003, based upon publicly availableinformation, approximately 38 similarly structured “blank check” companies havecompleted initial public offerings. Of these companies, only three companieshave consummated a business combination, while six other companies haveannounced they have entered into a letter of intent or a definitive agreementfor a business combination, but have not consummated such business combination.Accordingly, there are approximately 29 “blank check” companies withapproximately $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 toliquidate before a business combination, our public stockholders will receiveless than $6.00 per share upon distribution of the trust account, and ourwarrants will expire worthless.***

 

If we are unable to complete a business combinationand are forced to liquidate our assets, the per-share liquidation value will beless than $6.00 because of the expenses related to our public offering, ourgeneral and administrative expenses and the anticipated costs of seeking abusiness combination. Furthermore, the warrants will expire worthless if weliquidate before the completion of a business combination.

 

***You will not beentitled to protections normally afforded to investors of “blank check”companies under federal securities laws.***

 

Since the net proceeds of our public offering areintended to be used to complete a business combination with an operatingbusiness that has not been identified, we may be deemed to be a “blank check”company under the federal securities laws. However, since we have net tangibleassets in excess of $5,000,000 and have filed a Current Report onForm 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,to protect 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 partiesbring claims against us, the proceeds held in trust could be reduced and theper-share liquidation price received by stockholders will be less than $5.58per share.***

 

Our placing of funds in trust may not protect thosefunds from third party claims against us. Although we will seek to have allvendors, prospective target businesses or other entities we engage executeagreements 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 notcurrently selected any prospective target businesses with which to complete abusiness combination, investors in our securities are unable to currentlyascertain the merits or risks of any particular target business’ operations.***

 

Since we have not yet identified any prospectivetarget businesses, investors in our securities have no current basis toevaluate the possible merits or risks of any particular target business’operations. To the extent we complete a business combination with a financiallyunstable company or an entity in its development stage, we may be affected bynumerous risks inherent in the business operations of those entities. Althoughour management will endeavor to evaluate the risks inherent in a particulartarget business, we cannot assure you that we will properly ascertain or assessall of the significant risk factors, or that we will have adequate time tocomplete due diligence. We also cannot assure you that an investment in ourunits will not ultimately prove to be less favorable to investors in oursecurities than a direct investment, if an opportunity were available, in anyparticular target business.

 

***We may issue sharesof our capital stock, including convertible debt securities, to complete abusiness combination, which could reduce the equity interest of ourstockholders and possibly cause a change in control of our ownership.***

 

Our certificate of incorporation authorizes theissuance of up to 100,000,000 shares of common stock, par value $.0001 pershare, and 1,000,000 shares of preferred stock, par value $.0001 per share. Wehave 31,750,000 authorized but unissued shares of our common stock availablefor issuance (after appropriate reservation for the issuance of shares uponfull exercise of our outstanding warrants) and 1,000,000 shares of preferredstock available for issuance. Although we currently have no commitments toissue any securities, we may issue a substantial number of additional shares ofour common 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:

 

• may significantlyreduce the equity interest of investors in our securities;

 

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• may causea change in control if a substantial number of our shares of common stock orvoting 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 notesor other debt securities, or otherwise incur substantial debt, to complete abusiness combination, which may adversely affect our leverage and financialcondition.***

 

Although we currently have no commitments to issue anynotes or other debt securities, or to otherwise incur outstanding debt, we maychoose to incur substantial debt to complete a business combination. Theincurrence of debt:

 

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

 

• may causean acceleration of our obligations to repay the indebtedness even if we makeall 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 tosuccessfully effect a business combination and to be successful afterwards willbe completely dependent upon the efforts of our key personnel, some of whom mayjoin us following a business combination and may be unfamiliar with therequirements of operating a public company, which may adversely affect ouroperations.***

 

Our ability to successfully effect a businesscombination will be completely dependent upon the efforts of our key personnel.The future role of our key personnel following a business combination, however,cannot presently be fully ascertained. Specifically, the members of our currentmanagement are not obligated to remain with us subsequent to a business combination,and we cannot assure you that the resignation or retention of our currentmanagement will be included as a term or condition in any agreement withrespect to a business combination. Although we expect one or more members ofour management to serve on our Board of Directors following a businesscombination, subject to continued election by the stockholders, it is unlikelythat they will operate the target company on a day-to-day basis. Accordingly,we anticipate employing other personnel following the business combination.While we intend to closely scrutinize any additional individuals we engageafter a business combination, we cannot assure you that our assessment of theseindividuals will prove to be correct. These individuals may be unfamiliar withthe requirements of operating a public company as well as United Statessecurities laws which could cause us to expend time and resources helping thembecome familiar with such laws. This could be expensive and time-consuming andcould lead to various regulatory issues that may adversely affect ouroperations.

 

Our officers and directors are not required to, andwill not, commit their full time to our affairs, which may result in a conflictof interest in allocating their time between our operations and otherbusinesses. This could have a negative impact on our ability to consummate abusiness combination. We do not intend to have any full time employees prior tothe 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 anddirectors are and may in the future become affiliated with entities engaged inbusiness activities similar to those intended to be conducted by us and,accordingly, may have conflicts of interest in determining to which entity aparticular business opportunity should be presented.***

 

Our officers and directors may in the future becomeaffiliated with entities, including other “blank check” companies, engaged inbusiness activities similar to those intended to be conducted by us. Additionally,our officers and directors may become aware of business opportunities which maybe appropriate for presentation to us as well as the other entities with whichthey are or may be affiliated. Further, certain of our officers and directorsare currently involved in other businesses that are similar to the businessactivities that we intend to conduct following a business combination. Forexample, Joel R. Jacks, our chairman and chief executive officer, and Peter M.Schulte, our president and secretary, have preexisting fiduciary obligationsthat arise as a result of their affiliations with the private equity funds forwhich they act as principals and their directorships with those funds’portfolio companies. In addition, Dr. Edward H. Bersoff, our vice-chairman,and Arthur L. Money, our non-executive director, serve on the boards of variouscompanies in the federal services and defense industries. Due to these existingaffiliations, our officers and directors may have fiduciary obligations topresent potential business opportunities to those entities prior to presentingthem to us which could cause additional conflicts of interest. Accordingly,they may have conflicts of interest in determining to which entity a particularbusiness opportunity should be presented. We cannot assure you that theseconflicts will be resolved in our favor.

 

***Because all of ourdirectors own shares of our securities that will not participate in liquidationdistributions, they may have a conflict of interest in determining whether aparticular target business is appropriate for a business combination.***

 

All of our directors own stock in our company, buthave, solely with respect to those shares of common stock acquired by themprior to our public offering, waived their right to receive distributions uponour liquidation in the event we fail to complete a business combination.Additionally, Joel R. Jacks, Peter M. Schulte, Dr. Edward H. Bersoff andFSAC Partners, LLC have agreed with CRT Capital Group LLC that during the 40trading day period beginning 60 days after the end of the “restricted period”under Regulation M, they collectively will spend up to $2,000,000 to purchasewarrants in the public marketplace at prices not to exceed $.65 perwarrant. It was determined that $2,000,000 is an appropriate amount by CRTCapital Group LLC and our management to demonstrate confidence in our ultimateability to effect a business combination because the warrants will expire withno value if we are unable to consummate a business combination. None of ourexecutive directors or any of their affiliates is precluded from acquiringadditional warrants in the aftermarket if any of them so chooses. All of theshares of common stock owned by our directors immediately prior to our publicoffering and any warrants owned by our directors will be worthless if we do notconsummate a business combination. The personal and financial interests of ourdirectors may influence their motivation in identifying and selecting a targetbusiness and completing a business combination in a timely manner.Consequently, our directors’ discretion in identifying and selecting a suitabletarget business may result in a conflict of interest when determining whetherthe terms, conditions and timing of a particular business combination areappropriate and in our stockholders’ best interest.

 

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***If our common stockbecomes subject to the SEC’s penny stock rules, broker-dealers may experiencedifficulty in completing customer transactions and trading activity in oursecurities may be adversely affected.***

 

If at any time we have net tangible assets of$5,000,000 or less and our common stock has a market price per share of lessthan $5.00, transactions in our common stock may be subject to the “pennystock” rules promulgated under the Securities Exchange Act of 1934, asamended. Under these rules, broker-dealers who recommend such securities topersons other than institutional accredited investors must:

 

• make aspecial 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

 

• obtain asigned 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 stock becomes subject to these rules,broker-dealers may find it difficult to effect customer transactions andtrading activity in our securities may be adversely affected. As a result, themarket price of our securities may be depressed, and you may find it moredifficult to sell our securities.

 

***We will only beable to complete one business combination with the proceeds of our publicoffering, which will cause us to be solely dependent on a single business whichmay have a limited number of services or products.***

 

The net proceeds from our public offering haveprovided us with approximately $119,180,000, which we may use to complete ourinitial business combination. Our initial business combination must be with anoperating business with a fair market value of at least 80% of our net assetsat the time of such business combination. It is probable that the company weacquire in our initial business combination will have only a limited number ofservices or products. The resulting lack of diversification:

 

• 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, anyor all of which may have a substantial adverse impact upon the particularindustry in which we may operate subsequent to a business combination.

 

In this case, we will not be able to diversify ouroperations or benefit from the possible spreading of risks or offsetting oflosses, unlike other entities which may have the resources to complete severalbusiness combinations in different industries or different areas of a singleindustry so as to diversify risks and offset losses. Further, the prospects forour success may be entirely dependent upon the performance of the initialtarget business we acquire and such target business may not be successful.

 

***Because of ourlimited resources and the significant competition for business combinationopportunities, we may not be able to consummate an attractive businesscombination.***

 

We expect to encounter intense competition from otherentities having a business objective similar to ours, including venture capitalfunds, leveraged buyout funds and operating businesses competing foracquisitions. Many of these entities are well established and have extensiveexperience in identifying and effecting business combinations directly orthrough affiliates. Many of these competitors possess greater

 

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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 obligations may place us at a competitivedisadvantage in successfully negotiating a business combination.

 

***We may haveinsufficient resources to cover our operating expenses and the expenses ofconsummating a business combination.***

 

We have reserved approximately $2,000,000 from theproceeds of our initial public offering to cover our operating expenses for atleast 24 months following the date we consummated our initial public offering(October 25, 2005), and to cover the expenses incurred in connection witha business combination. This amount is based on management’s estimates of thecosts needed to fund our operations for such period and consummate a business combination.Those estimates may prove inaccurate, especially if a portion of the availableproceeds is used to make a down payment or pay exclusivity or similar fees inconnection with a business combination or if we expend a significant portion ofthe available proceeds in pursuit of a business combination that is notconsummated. If we do not have sufficient proceeds available to fund ourexpenses, we may be forced to obtain additional financing, either from ourmanagement or our existing stockholders or from third parties. We may not beable to obtain additional financing and our existing stockholders andmanagement are not obligated to provide any additional financing. If we do nothave sufficient proceeds and cannot find additional financing when needed toconsummate a particular business combination, we would be compelled torestructure or abandon that particular business combination or seek alternatetarget businesses, and eventually may be forced to liquidate prior toconsummating a business combination. In addition, if we consummate a businesscombination, we may require additional financing to fund the operations orgrowth of the target business. The failure to secure additional financing couldhave a material adverse effect on the continued development or growth of thetarget business.

 

***Our initialstockholders control a substantial interest in us and thus may influencecertain actions requiring stockholder vote.***

 

Our initial stockholders collectively ownapproximately 20% of our issued and outstanding shares of common stock.Additionally, four of our initial stockholders, Joel R. Jacks, Peter M.Schulte, Dr. Edward H. Bersoff and FSAC Partners, LLC, have agreed withCRT Capital Group LLC that they collectively will spend up to $2,000,000 to purchasewarrants, at prices not to exceed $.65 per warrant, subject to certainconditions, through open market transactions during the 40 trading day periodbeginning 60 days after the end of the “restricted period” underRegulation M.

 

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Furthermore, our initial stockholders are notprecluded from purchasing additional warrants or shares of common stock in theaftermarket. Any exercise of these warrants by these initial stockholders wouldsubstantially increase their relative percentage ownership in us.

 

Our board of directors is divided into three classes,each of which will generally serve for a term of three years with only oneclass of directors being elected in each year. It is unlikely that there willbe an annual meeting of stockholders to elect new directors prior to theconsummation of a business combination, in which case all of the currentdirectors will continue in office at least until the consummation of thebusiness combination. If there is an annual meeting, as a consequence of our“staggered” board of directors, only a minority of the board of directors willbe considered for election and our initial stockholders, because of theirownership position, will have considerable influence regarding the outcome.Accordingly, our initial stockholders will continue to exert control at leastuntil the consummation of a business combination. In addition, our initialstockholders and their affiliates and relatives are not prohibited frompurchasing units or shares in the aftermarket, and have full voting rights withrespect to any shares of common stock they may acquire in subsequent markettransactions. If they do, we cannot assure you that our initial stockholderswill not have considerable influence upon the vote on a business combination.

 

***Our amended andrestated certificate of incorporation and by-laws contain certain provisionsthat may make it more difficult, expensive or otherwise discourage, a tenderoffer or a change in control or takeover attempt by a third party, even if sucha transaction would be beneficial to our stockholders.***

 

The existence of certain provisions in our amended andrestated certificate of incorporation and by-laws may have a negative impact onthe price of our common stock by discouraging a third party from purchasing ourcommon stock. These provisions could also have the effect of discouraging athird party from pursuing a non-negotiated takeover of our company andpreventing certain changes of control. In addition to our staggered board, ourby-laws require that, subject to certain exceptions, any stockholder desiringto propose business or nominate a person to the board of directors at astockholders meeting must give notice of any proposals or nominations within aspecified time frame. Our by-laws also limit the ability of stockholders toremove directors, call stockholders meetings and act by written consent andprovide that vacancies of the board of directors may only be filled by amajority of the remaining directors.

 

***Our outstandingwarrants may have an adverse effect on the market price of common stock andmake it more difficult to effect a business combination.***

 

In connection with our initial public offering, aspart of the units, we issued warrants to purchase 42,000,000 shares of commonstock. To the extent we issue shares of common stock to effect a businesscombination, the potential for the issuance of substantial numbers ofadditional shares upon exercise of these warrants could make us a lessattractive acquisition vehicle in the eyes of a target business as suchsecurities, 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 initialstockholders exercise their registration rights, it may have an adverse effecton the market price of our common stock and the existence of these rights maymake it more difficult to effect a business combination.***

 

Our initial stockholders are entitled to demand thatwe register the resale of their shares of common stock in certaincircumstances. If our initial stockholders exercise their registration rightswith respect to all of their shares of common stock, then there will be anadditional 5,250,000 shares of common stock eligible for trading in the publicmarket. The presence of this additional number of shares of common stockeligible for trading in the public market may have an adverse effect on themarket 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 arequoted on the OTC Bulletin Board, which limits the liquidity and price of oursecurities more than if our securities were quoted or listed on the NasdaqStock Market or a national exchange.***

 

Our securities are traded in the over-the-countermarket and are quoted on the OTC Bulletin Board, an inter-dealer automatedquotation system for equity securities sponsored and operated by the NationalAssociation of Securities Dealers, Inc., or NASD, but not included in theNasdaq Stock Market. We cannot assure you that our securities will continue tobe quoted on the OTC Bulletin Board. Quotation of our securities on the OTCBulletin Board may limit the liquidity and price of our securities more than ifour securities were quoted or listed on The Nasdaq Stock Market or a nationalexchange. Lack of liquidity may limit the price at which you may be able tosell our securities or your ability to sell our securities at all.

 

***If we are deemed tobe an investment company, we may be required to institute burdensome compliancerequirements and our activities may be restricted, which may make it difficultfor us to complete a business combination.***

 

If we are deemed to be an investment company under theInvestment Company Act of 1940, as amended, our activities may be restricted,including:

 

•restrictions on 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 requirementsimposed upon us, including:

 

•registration as an investment company;

 

• adoptionof a specific form of corporate structure; and

 

•reporting, record keeping, voting, proxy and disclosure requirements and otherrules and regulations.

 

We do not believe that our anticipated principalactivities will subject us to the Investment Company Act of 1940. To this end,the proceeds held in trust may only be invested by the trust agent in“government securities” with specific maturity dates or in money market fundsmeeting certain conditions under Rule 2a-7 promulgated under theInvestment Company Act of 1940. By restricting the investment of the proceedsto these instruments, we intend to meet the requirements for the exemptionprovided in Rule 3a-1 promulgated under the Investment Company Act of1940. 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 maynot be considered “independent” under the policies of the North American SecuritiesAdministrators Association, Inc. and, therefore, may take actions or incurexpenses that are not deemed to be independently approved or independentlydetermined to be in our best interest.***

 

Under the policies of the North American SecuritiesAdministrators Association, Inc., an international organization devoted toinvestor protection, because each of our directors owns shares of oursecurities and may receive reimbursement for out-of-pocket expenses incurred bythem in connection with activities on our behalf such as identifying potentialtarget businesses and performing due diligence on suitable businesscombinations, state securities administrators could take the position that suchindividuals are not “independent.” If this were the case, they would take theposition that we would not have the benefit of independent directors examiningthe propriety of expenses incurred on our behalf and subject to reimbursementby us. Additionally, there is no limit on the out-of-pocket expenses that couldbe incurred by our directors and there will be no review of the reasonablenessof the expenses we reimburse by anyone other than our board of directors, whichwould include persons who may seek reimbursement or a court of competentjurisdiction if such reimbursements are challenged. To the extent suchout-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.

 

**Risksassociated with the federal services and defense industries**

 

We may acquire an operating business that contractsdirectly with the federal government and its agencies, in which case the risksbelow would directly affect us. We may also acquire an operating business thatacts as a subcontractor, supplier or partner with another party or parties thatcontract with the federal government and its agencies, in which case the riskfactors below would still affect us directly or indirectly.

 

***The loss orimpairment of our relationship with the federal government and its agenciescould adversely affect our business.***

 

Our target company may derive a substantial portion ofits revenue from government contracts, either directly or as a subcontractor,partner or supplier to a party working under such a contract. If our targetcompany or other company with which it had any such relationship were suspendedor prohibited from contracting with the federal government or its agencies, orwith a significant agency of the government, or if any of these agencies ceaseddoing business with them or significantly decreased the amount of business itdoes with them, our target company’s business, prospects, financial conditionand operating results could be significantly impaired.

 

***Changes by thefederal government in its spending priorities may cause a reduction in thedemand for the products or services that we may ultimately offer, which couldadversely affect our business.***

 

Because our target company will derive a significantportion of its revenues from contracts with the federal government or itsagencies, we believe that the success and development of the target company’sbusiness will depend on its successful participation in the federal contractprogram. Changes in the federal government budgetary priorities could directlyaffect the target company’s financial performance. Government expenditures tendto fluctuate based on a variety of political, economic and social factors. Asignificant decline in government expenditures, or a shift of expenditures awayfrom programs our target company supports, or a change in federal governmentcontracting policies causing its agencies to reduce their expenditures undercontracts, to exercise their right to terminate contracts at any time withoutpenalty, not to exercise options to renew contracts or to delay or not enterinto new contracts, could adversely affect our target company’s business,prospects, financial condition or operating results. Moreover, althoughcontracts with governmental agencies often contemplate that the services willbe performed over a period of several years, Congress usually must approvefunds for a given program each government fiscal year and may significantlyreduce or eliminate funding for a program. Significant reductions in theseappropriations by Congress or the failure by Congress to pass a budget resolutionin a timely manner could have a material adverse effect on our target company’sbusiness.

 

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***Federal governmentcontracts often contain provisions that are unfavorable, which could adverselyaffect our business.***

 

Federal government contracts contain provisions andare subject to laws and regulations that give the federal government rights andremedies not typically found in commercial contracts, including withoutlimitation, allowing the federal government to:

 

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

 

• reduce ormodify 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 government terminates a contract “forconvenience” (for instance, due to a change in its perceived needs or itsdesire to consolidate work under another contract), our target company may recoveronly its incurred or committed costs, settlement expenses and profit onservices completed prior to the termination. If the government terminates acontract for default, our target company may not recover even those amounts,and instead may be liable for excess costs incurred by the government or agencyin procuring undelivered services or products from another source. As is commonwith government contractors, some of our target company’s contracts mayexperience performance issues in the future. Our target company may in thefuture receive “show cause” or cure notices under contracts that, if notaddressed to the government’s satisfaction, could give the government the rightto terminate those contracts for default or to cease procuring services under thosecontracts in the future. Even if the target company is not directly the partyto a government contract, as in the case of a subcontract relationship, theimpact of the above on the prime contractor would likely have a materialadverse effect on our target company.

 

***We will likely haveto comply with complex procurement laws and regulations, and the cost ofcompliance with these laws and regulations and penalties and sanctions for anynon-compliance could adversely affect our business.***

 

Our target company will likely have to comply with andwill be affected by laws and regulations relating to the formation,administration and performance of federal government contracts, which affecthow the target company does business with its customers and may impose addedcosts on its business. For example, our target company or parties with which itdoes business will likely be subject to the Federal Acquisition Regulations andall supplements, which comprehensively regulate the formation, administrationand performance of federal government contracts, and to theTruth-in-Negotiations Act, which requires certification and disclosure of costand pricing data in connection with contract negotiations. If a governmentreview or investigation uncovers improper or illegal activities, our targetcompany may be subject to civil and criminal penalties and administrativesanctions, including termination of contracts, forfeiture of profits,suspension of payments, fines and suspension or debarment from doing businesswith federal government agencies, which could materially adversely affect ourtarget company’s business, prospects, financial condition or operating results.In addition, our target company or parties with which it does business willlikely be subject to industrial security regulations of the Department ofDefense 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 federalgovernment may reform its procurement or other practices in a manner adverse tous.***

 

The federal government may reform its procurementpractices or adopt new contracting rules and regulations, includingcost-accounting standards, that could be costly to satisfy or that could impairour target company’s ability to obtain new contracts. It also could adopt newcontracting methods to General Services Administration, or GSA, or othergovernment-wide contracts, or adopt new standards for contract awards intendedto achieve certain social or other policy objectives, such as establishing newset-aside programs for small or minority-owned businesses. In addition, thefederal government may face restrictions from new legislation or regulations,as well as pressure from government employees and their unions, on the natureand amount of services the federal government may obtain from privatecontractors. These changes could impair our target company’s ability to obtainnew contracts. Any new contracting methods could be costly or administrativelydifficult for our target company to implement and, as a result, could harm itsoperating results.

 

***Governmentcontracts are usually awarded through a competitive bidding process whichentails risks not present in other circumstances.***

 

A meaningful amount of the business that our targetcompany may expect to seek directly or through parties with which it doesbusiness in the foreseeable future will likely be awarded through competitivebidding. Competitive bidding presents a number of risks, including withoutlimitation:

 

• the needto 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;

 

• the needto accurately estimate the resources and cost structure that will be requiredto service any contract our target company is awarded; and

 

• theexpense and delay that may arise if our target company’s or its partners’ competitorsprotest or challenge contract awards made to our target company or partnerspursuant 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 may not be provided the opportunityto bid on contracts that are held by other companies and are scheduled toexpire if the government determines to extend the existing contracts. If our targetcompany is unable to win particular contracts that are awarded through thecompetitive bidding process or our target company is unable to consistently winnew contract awards over any extended period its business and prospects couldbe adversely affected.

 

***Federal governmentcustomers sometimes spend their procurement budgets through multiple awardcontracts and our target company’s failure to successfully compete forpost-award orders under these contracts could adversely affect its business.***

 

Budgetary pressure and reforms in the procurementprocess may cause the federal government to increase its use of task order ordelivery order contracts (commonly known in the industry as “indefinitedelivery, indefinite quantity” contracts, or ID/IQ contracts), including GSAContracts, and other

 

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government-wide acquisition contracts, or GWACcontracts, to purchase services or products. Under a task order or deliveryorder contract, the federal government may submit, but is not required tosubmit, orders for services or products. Thus, the revenue that may be realizedunder these contracts is not guaranteed, but instead depends, among otherthings, on the quantity of orders that the government in fact submits to thecontractor. Such contracts, some of which are awarded to multiple contractors,have increased 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 moneyon some contracts if we underestimate the resources we need to perform underthe contract.***

 

Our target company may provide services or products tothe federal government under three types of contracts: cost-plus-fee,time-and-materials, and fixed-price. Each of these types of contracts, todiffering degrees, involves the risk that our target company couldunderestimate its cost of fulfilling the contract, which may reduce the profitit earns or lead to a financial loss on the contract.

 

**•**Under cost-plus-fee contracts, which are subject to a ceiling amount, ourtarget company may be reimbursed for allowable costs and paid a fee, which maybe fixed or performance-based. However, if its costs exceed the ceiling or arenot allowable under the terms of the contract or applicable regulations, ourtarget company 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 withthe federal government and its agencies will be subject to audits and cost adjustments.***

 

The federal government audits and reviews performanceon contracts, pricing practices, cost structure and compliance with applicablelaws, regulations and standards. Like most government contractors, our targetcompany’s contract costs will be audited and reviewed on a continual basis. Inaddition, nonaudit reviews by the government may still be conducted on allgovernment contracts. An audit of work performed by our target company couldresult in a substantial adjustment to its revenues because any costs found tobe improperly allocated to a specific contract will not be reimbursed, andrevenues our target company may have already recognized may need to berefunded. If a government audit 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. In addition, our target companycould suffer serious harm to its reputation if allegations of impropriety weremade.

 

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***Our businessdepends upon obtaining and maintaining required security clearances, and our failureto do so could result in termination of certain of our contracts or cause us tobe unable to bid or rebid on certain contracts.***

 

Many federal government contracts will require ourtarget company’s employees to maintain various levels of security clearances,and our target company may be required to maintain certain facility securityclearances complying with federal government requirements. Obtaining andmaintaining security clearances for employees involves a lengthy process, andit is difficult to identify, recruit and retain employees who already holdsecurity clearances. If our target company’s employees are unable to obtain orretain security clearances or if such employees who hold security clearancesterminate employment with the target company, the customer whose work requirescleared employees could terminate the contract or decide not to renew it uponits expiration. In addition, we expect that some of the contracts on which ourtarget company will bid will require it to demonstrate its ability to obtainfacility security clearances and perform work with employees who hold specifiedtypes of security clearances. To the extent our target company is not able toobtain facility security clearances or engage employees with the requiredsecurity clearances for a particular contract, it may not be able to bid on orwin new contracts, or effectively rebid on expiring contracts.

 

***Failure to maintainstrong relationship with other contractors could result in a decline in ourrevenue.***

 

Our target company may act as a subcontractor or undera “teaming” arrangement in which the target company and other contractorsjointly bid on particular contracts or programs. As a subcontractor or teammember, the target company will often lack control over fulfillment of acontract, and poor performance on the contract could tarnish its reputation,even when the target company performs as required. Moreover, our targetcompany’s revenue and operating results could be adversely affected if anyprime contractor or teammate chooses to offer a client services of the typesthat the target company provides or if any prime contractor or teammate teamswith other companies to independently provide those services.

 

***We may rely onthird-party manufacturers or subcontractors to complete our contracts, and anydelay or failure to perform by these manufacturers or subcontractors may resultin a decline in our revenue.***

 

Our target company may use third-party manufacturersin addition to or instead of any internal manufacturing capacity that it mayhave. This arrangement affords less control over the reliability of supply,quality and price of products or components than internal manufacturing. Ourtarget company may risk disruptions in its supply of key products andcomponents if its suppliers fail to perform because of strikes, naturaldisasters, financial condition or other factors beyond the control of ourtarget business. Products that are supplied by a third-party manufacturer maynot perform as expected, and these performance failures may result in delays incompletion of a project or additional costs to complete a project. Any delay bysubcontractors to complete their portion of a project, or any failure by asubcontractor to satisfactorily complete its portion of a project, may resultin delays in the overall progress of the project and may cause our targetbusiness to incur additional costs. The additional costs incurred by our targetcompany due to the delay or failure to perform by a third-party manufacturer ora subcontractor may be substantial. While our target company may recover someof these additional costs from the responsible third-party manufacturer orsubcontractor, it may not be able to recover all of these costs in allcircumstances.

 

***We may be unable toprotect or enforce our intellectual property rights.***

 

After completing a business combination, theprotection of our target company’s trade secrets, proprietary know-how,technological innovations and other proprietary rights through patents andother intellectual property protections in the U.S. and other countries may becritical to our success. We may rely on a combination of patent, copyright,trademark, trade secret laws and contractual restrictions to protect anyproprietary technology or other rights that we may acquire. Despite ourefforts, we may not be able to prevent misappropriation of those proprietaryrights or deter independent development of technologies that compete with thebusiness we acquire. Our competitors may file patent applications or obtainpatents and proprietary rights that block or compete with our patents.Litigation may be necessary in the future to enforce our intellectual propertyrights, to protect our trade secrets, or to determine the validity and scope ofthe proprietary rights of others. It is also possible that third parties mayclaim we have infringed their patent, trademark, copyright or other proprietaryrights. Claims or litigation, with or without merit, 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 have been limited to organizationalactivities and activities relating to our initial public offering and theidentification of a target business. We have neither engaged in any operationsnor generated any revenues. As the proceeds from our initial public offeringheld in trust have been invested in short term investments, our only marketrisk exposure relates to fluctuations in interest rates.

 

As of October 25, 2005, approximately$117,180,000 of the net proceeds of our initial public offering was held intrust for the purposes of consummating a business combination. The proceedsheld in trust have been invested in United States Treasury Bills in a trustaccount at JPMorgan Chase NY Bank maintained by Continental StockTransfer & Trust Company acting as trustee. As of October 25,2005, the effective annualized interest rate payable on our investment wasapproximately 3.69%. Assuming no other changes to our holdings as ofOctober 25, 2005, a 1% decrease in the underlying interest rate payable onour investment in the United States Treasury Bills as of October 25, 2005would result in a decrease of approximately $300,000 in the interest earned onour investment for the following 90-day period, and a corresponding decrease inour net increase in stockholders’ equity resulting from operations, if any, forthat period.

 

We have not engaged in any hedging activities sinceour inception on April 12, 2005. We do not expect to engage in any hedgingactivities with respect to the market risk to which we are exposed.

 

**Item 4.Controls and Procedures.**

 

As of September 30, 2005, we, including our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures. Based onthat evaluation, our management, including the Chief Executive Officer,concluded that our disclosure controls and procedures were effective in timelyalerting management, including the Chief Executive Officer of materialinformation about us required to be included in periodic Securities andExchange Commission filings. However, in evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

There have been no changes in our internal controlover financial reporting since our inception on April 12, 2005 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

We are not currently subject to any material legalproceedings, nor, to our knowledge, is any material legal proceeding threatenedagainst us. From time to time, we may be a party to certain legal proceedingsincidental to the normal course of our business. While the outcome of theselegal proceedings cannot be predicted with certainty, we do not expect thatthese proceedings will have a material effect upon our financial condition orresults of operations.

 

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

 

We have not engaged in any unregistered sales ofequity securities during the three months ended September 30, 2005.

 

The net proceeds from our initial public offering wasapproximately $119,180,000, after deducting offering 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 placed in trust for purposes ofconsummating a business combination, with approximately $2,000,000 remaining.

 

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On October 25, 2005, we used $154,000 of ourgeneral working capital to repay the notes payable to our initial stockholders,Mr. Jacks and Mr. Schulte. The loans were repaid in full, withoutinterest, and cancelled.

 

On October 25, 2005, we used $85,000 of ourgeneral working capital to pay premiums associated with our directors andofficers liability insurance.

 

As of October 25, 2005, approximately$117,180,000 was held in trust and we had approximately $2,000,000 of ouroffering proceeds not held in trust remaining and available to us for ouractivities in connection with identifying and conducting due diligence of asuitable business combination, and for general corporate matters.

 

**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*                                   |
| 31.1  |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as  amended |
| 31.2  |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   |

 

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* Previously filed as exhibits to our registration statements onForm S-1 (file no. 333-124638).

 

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##### **SIGNATURES**

##### ** **

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused the report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                        | 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 6, 2005 |                                     |   |

 

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**Federal Services AcquisitionCorporation**(a development stage company)

 

**Balance Sheet (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 UnauditedFinancial Statements.

 

F-1

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**Federal Services AcquisitionCorporation**(a development 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 UnauditedFinancial Statements.

 

F-2

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**Federal Services AcquisitionCorporation**(a development stage company)

** **

**Statementof Stockholders’ Equity (Unaudited)**

 
| ** **                                           | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                           | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the**  | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Development** | ** ** | ** **      | ** ** |
| ** **                                           | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **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 UnauditedFinancial Statements.

 

F-3

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**Federal Services AcquisitionCorporation**(a development 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 AcquisitionCorporation**(a development stage company) 

 

**Notes toUnaudited Financial Statements**

 

**NOTE A—ORGANIZATION AND BUSINESSOPERATIONS**

 

        FederalServices Acquisition Corporation (the “Company”) was incorporated in Delawareon April 12, 2005. The Company was formed to serve as a vehicle for theacquisition of an operating business in the federal services and defenseindustries through a merger, capital stock exchange, asset acquisition, stockpurchase or other similar business combination. The Company has neither engagedin any operations nor generated revenue to date. The Company is considered tobe in the development stage and is subject to the risks associated withactivities of development stage companies.  The Company has selectedDecember 31 as its fiscal year end.

 

The financial informationin this report has not been audited, but in the opinion of management, alladjustments (consisting only of normal recurring adjustments) considerednecessary to present fairly such information have been included. Operatingresults for the interim period are not necessarily indicative of the results tobe expected for the full year.

 

        Theregistration statement for the Company’s initial public offering (“Offering”)was declared effective on October 19, 2005.  The Company consummatedthe offering on October 25, 2005 and received net proceeds of$119,700,000, after deducting the underwriting discount but before deductingexpenses of the Offering. The Company’s management has broad discretion withrespect to the specific application of the net proceeds of this Offering ofUnits (as defined in Note C below), although substantially all of the netproceeds of the Offering are intended to be generally applied toward consummatinga business combination with (or acquisition of) an operating business in thefederal services and defense industries (“Business Combination”). Nonetheless,there is no assurance that the Company will be able to successfully effect aBusiness Combination. An amount of $117,180,000 of the net proceeds is beingheld in a trust account (“Trust Account”) and is invested in U.S. governmentsecurities until the earlier of (i) the consummation of the BusinessCombination or (ii) the distribution of the Trust Fund as described below.The remaining proceeds may be used to pay for business, legal and accountingdue diligence on prospective acquisitions and continuing general andadministrative expenses. The Company, after signing a definitive agreement for theacquisition of a target business, will submit such transaction for stockholderapproval. In the event that public stockholders of 20% or more of theoutstanding stock (excluding, for this purpose, those shares of common stockissued prior to the Offering) vote against the Business Combination andexercise their conversion rights, the Business Combination will not beconsummated.

 

        In theevent that the Company does not consummate a Business Combination within18 months from the date of the consummation of the Offering, or24 months from the consummation of the Offering if certain extensioncriteria have been satisfied (the “Acquisition Period”), the proceeds held inthe Trust Fund will be distributed to the Company’s public stockholders, excludingthe Founding Stockholders to the extent of their initial stock holdings.However, the persons who were stockholders prior to the Offering (the “FoundingStockholders”) will participate in any liquidation distribution with respect toany shares of the common stock acquired in connection with or following theOffering. In the event of such distribution, it is likely that the per sharevalue of the residual assets remaining available for distribution (includingTrust Fund assets) will be less than the initial public offering price pershare in the Offering (assuming no value is attributed to the Warrantscontained in the Units to be offered in the Offering discussed in Note C).

 

F-5

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**NOTE B—SUMMARY OF SIGNIFICANTACCOUNTING 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 loss applicableto common stockholders by the weighted average number of common sharesoutstanding 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 21,000,000Units (“Units”).  Each Unit consists of one share of the Company’s commonstock, $.0001 par value, and two warrants (“Warrants”). Each Warrant entitlesthe holder to purchase from the Company one share of common stock at anexercise price of $5.00.  Each Warrant is exercisable on the later of(a) the completion of a Business Combination or (b) October 19,2006

 

F-6

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and expires October 19, 2009, or earlier uponredemption.  The Warrants are redeemable at a price of $.01 per Warrantupon 30 days notice after the Warrants become exercisable, only in theevent that the last sale price of the common stock is at least $8.50 per sharefor any 20 trading days within a 30 trading day period ending on the third dayprior to the date on which notice of redemption 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 theeffective date 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 GroupLLC.

 

**NOTE G—COMMON STOCK RESERVED FORISSUANCE**

 

At October 25, 2005, 42,000,000 shares of commonstock were 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 public marketplaceat prices not to exceed $.65 per warrant. They have further agreed that anywarrants purchased by them or their affiliates or designees will not be sold ortransferred until the completion of a Business Combination.

 

F-7

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