**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q/A**

 

**AMENDMENTNO. 2**

 

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ý                                  **QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**FOR THEQUARTER ENDED September 30, 2005.**

 

o                                  **TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**COMMISSIONFILE NUMBER: 0-51552**

 

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**FEDERALSERVICES ACQUISITION CORPORATION**

(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **11-3747850**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction ofincorporation  or organization) |       | (I.R.S.  EmployerIdentification  No.) |

 

**900 ThirdAvenue, 33rd FloorNew York, 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months and (2) hasbeen subject to such filing requirements for the past 90 days.    Yes  o    No  ý.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).    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 was filed to revise Exhibits 31.1 and32.1 and to add Exhibits 31.2 and 32.2.

 

##### **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 ofFinancial Condition and Results of Operations.**

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

Although we believe that theassumptions on which these forward-looking statements are based are reasonable,any of those assumptions could prove to be inaccurate, and as a result, theforward-looking statements based on those assumptions also could be incorrect.In light of these and other uncertainties, the inclusion of a projection orforward-looking statement in this Quarterly Report should not be regarded as arepresentation by us that our plans and objectives will be achieved. You shouldnot place undue reliance on these forward-looking statements, which apply onlyas of the date of this Quarterly Report. We undertake no obligation to updatesuch statements to reflect subsequent events.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

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

 

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

 

**Critical Accounting Policies**

 

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

 

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of the financial statements,and revenues and expenses during the periods reported. Actual results couldmaterially differ from those estimates. We have determined that we currentlyare not subject to any critical accounting policies.

 

**Recent Developments**

 

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

 

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

 

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

 

•                  may significantly reduce the equity interestof our stockholders;

 

•                  will likely cause a change in control if asubstantial number of our shares of common stock or voting preferred stock areissued, which may affect, among other things, our ability to use our net operatingloss carry forwards, if any, and may also result in the resignation or removalof one or more of our present officers and directors; and

 

•                  mayadversely affect prevailing market prices for our common stock.

 

Similarly, if we issue debtsecurities, it could result in:

 

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

 

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

 

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

 

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

 

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

 

•                  approximately $1,000,000 of expenses forlegal and accounting and other expenses attendant to the

 

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due diligence investigations, structuring andnegotiating of a business combination; 

 

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

 

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

 

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

 

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

 

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

 

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

 

Wehave agreed to pay CM Equity Management, L.P. a company where certain of ourinitial stockholders serve in executive capacities, an administrative fee of$7,500 per month for office space and general and administrative services from October 19,2005 through the effective date of the acquisition of a target business.

 

**RISKFACTORS**

 

*An investment in our securities involves a high degree ofrisk. You should consider carefully all of the material risks described below,before making a decision to invest in our securities. If any of the followingrisks occur, our business, financial condition and results of operations may bematerially adversely affected. In that event, the trading price of oursecurities could decline, and you could lose all or part of your investment.Although we believe that the risks described below represent all of thematerial risks we face, additional risks not currently known to us may alsoharm us or affect your investment.*

 

**Risks associatedwith our business**

 

***We are adevelopment stage company with no operating history and, accordingly, you willhave no basis upon which to evaluate our ability to achieve our businessobjective.***

 

We are a recentlyincorporated development stage company with no operating results to date. Sincewe do not have an operating history, you have no basis upon which to evaluateour ability to achieve our business objective, which is to acquire an operatingbusiness in the federal services and defense industries. We will not generateany revenues (other than interest income on the proceeds of our public offeringthat have been placed in trust) until, at the earliest, after the consummationof a business combination. We cannot assure you as to when or if a business combinationwill occur.

 

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***We may not beable to consummate a business combination within the required time frame, inwhich case, we would be forced to liquidate.***

 

We must complete a businesscombination with a fair market value of at least 80% of our net assets at thetime of acquisition within 18 months after the consummation of our public offering(or within 24 months after such date if a letter of intent, agreement inprinciple or a definitive agreement has been executed within 18 monthsafter the consummation of our public offering and the business combinationrelating thereto has not yet been consummated within such 18-month period). Ifwe fail to consummate a business combination within the required time frame, wewill be forced to liquidate our assets. We may not be able to find a suitabletarget business within the required time frame. In addition, our negotiatingposition and our ability to conduct adequate due diligence on any potentialtarget may be reduced as we approach the deadline for the consummation for abusiness combination.

 

***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, basedupon publicly available information, approximately 38 similarly structured “blankcheck” companies have completed initial public offerings. Of these companies,only three companies have consummated a business combination, while six othercompanies have announced they have entered into a letter of intent or adefinitive agreement for a business combination, but have not consummated suchbusiness combination. Accordingly, there are approximately 29 “blank check”companies with approximately $1.6 billion in trust that are seeking tocarry out a business 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 this reportand prior to our completion of a business combination. While some of thosecompanies must complete a business combination in specific industries, a numberof them may consummate a business combination in any industry they choose orhave a very broad definition of the industry they will target. Therefore, wemay be subject to competition from these and other companies seeking toconsummate a business plan similar to ours. Because of this competition, wecannot assure you that we will be able to effectuate a business combinationwithin the required time period. Further, because only nine of such companieshave either consummated a business combination or entered into a letter ofintent or a definitive agreement for a business combination, it may indicatethat there are fewer attractive target businesses available to such entities orthat many privately held target businesses are not inclined to enter into thesetypes of transactions with publicly held “blank check” companies like ours. Ifwe are unable to consummate a business combination with a target businesswithin the prescribed time period, we will be forced to liquidate.

 

***If we are forcedto liquidate before a business combination, our public stockholders willreceive less than $6.00 per share upon distribution of the trust account, andour warrants will expire worthless.***

 

If we are unable to completea business combination and are forced to liquidate our assets, the per-shareliquidation value will be less than $6.00 because of the expenses related to ourpublic offering, our general and administrative expenses and the anticipatedcosts of seeking a business combination. Furthermore, the warrants will expireworthless if we liquidate 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 ourpublic offering are intended to be used to complete a business combination withan operating business that has not been identified, we may be deemed to be a “blankcheck” company under the federal securities laws. However, since we have nettangible assets 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, webelieve that we are exempt from rules promulgated by the Securities andExchange Commission, or SEC, to protect investors of “blank check” companiessuch as Rule 419. Accordingly, investors will not be afforded the benefitsor protections of those rules. Because we do not believe we are subject to Rule 419,our units will be immediately tradeable and we have a longer period of timewithin which 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 intrust may not protect those funds from third party claims against us. Althoughwe will seek to have all vendors, prospective target businesses or otherentities we engage execute agreements with us waiving any right, title,interest or claim of any kind in or to any monies held in the trust account,there is no guarantee that they will execute such agreements. Nor is there anyguarantee that such entities will agree to waive any claims they may have inthe future as a result of, or arising out of, any negotiations, contracts oragreements with us and will not seek recourse against the trust account for anyreason. Accordingly, the proceeds held in trust could be subject to claimswhich could take priority over the claims of our public stockholders and theper-share liquidation price could be less than $5.58, plus interest (net oftaxes payable), due to claims of such creditors. If we are unable to complete abusiness combination and are forced to liquidate, Joel R. Jacks, our chairmanand chief executive officer, and Peter M. Schulte, our president and secretary,may be personally liable under certain circumstances to ensure that theproceeds in the trust account are not reduced by the claims of various vendorsor other entities that are owed money by us for services rendered or productssold to us or claims of prospective target businesses. However, we cannotassure you that they will be able 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 yetidentified any prospective target businesses, investors in our securities haveno current basis to evaluate the possible merits or risks of any particulartarget business’ operations. To the extent we complete a business combinationwith a financially unstable company or an entity in its development stage, wemay be affected by numerous risks inherent in the business operations of thoseentities. Although our management will endeavor to evaluate the risks inherentin a particular target business, we cannot assure you that we will properlyascertain or assess all of the significant risk factors, or that we will haveadequate time to complete due diligence. We also cannot assure you that an investmentin our units 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 issueshares of our capital stock, including convertible debt securities, to completea business combination, which could reduce the equity interest of ourstockholders and possibly cause a change in control of our ownership.***

 

Our certificate ofincorporation authorizes the issuance of up to 100,000,000 shares of commonstock, par value $.0001 per share, and 1,000,000 shares of preferred stock, parvalue $.0001 per share. We have 31,750,000 authorized but unissued shares ofour common stock available for issuance (after appropriate reservation for theissuance of shares upon full exercise of our outstanding warrants) and1,000,000 shares of preferred stock available for issuance. Although we currentlyhave no commitments to issue any securities, we may issue a substantial numberof additional shares of our common stock or preferred stock, or a combinationof both, including convertible debt securities, to complete a businesscombination. The issuance of additional shares of our common stock or anynumber of shares of preferred stock, including upon conversion of any debtsecurities:

 

• may significantly reduce the equity interestof investors in our securities;

 

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• may cause a change in control if asubstantial number of our shares of common stock or voting preferred stock areissued, which may affect, among other things, our ability to use our netoperating loss carry forwards, if any, and may also result in the resignationor removal of our present officers and directors; and

 

• may adversely affect prevailing marketprices for our common stock.

 

***We may issuenotes or other debt securities, or otherwise incur substantial debt, tocomplete a business combination, which may adversely affect our leverage andfinancial condition.***

 

Although we currently have nocommitments to issue any notes or other debt securities, or to otherwise incuroutstanding debt, we may choose to incur substantial debt to complete abusiness combination. The incurrence of debt:

 

• may lead to default and foreclosure on ourassets if our operating earnings after a business combination are insufficientto pay our debt obligations;

 

• may cause an acceleration of our obligations to repay the indebtednesseven if we make all principal and interest payments when due if we breach thecovenants contained in any debt agreements, such as covenants that require themaintenance of certain financial ratios or reserves, without a waiver orrenegotiation of such covenants;

 

• may create an obligation to immediately repay all principal and accruedinterest, if any, upon demand to the extent any debts are payable on demand;and

 

• may hinder our ability to obtain additional financing, if necessary, tothe extent any debt agreements contain covenants restricting our ability toobtain additional financing while such debt is outstanding, or to the extentour existing 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 successfullyeffect a business combination will be completely dependent upon the efforts ofour key personnel. The future role of our key personnel following a businesscombination, however, cannot presently be fully ascertained. Specifically, themembers of our current management are not obligated to remain with ussubsequent to a business combination, and we cannot assure you that theresignation or retention of our current management will be included as a termor condition in any agreement with respect to a business combination. Althoughwe expect one or more members of our management to serve on our Board ofDirectors following a business combination, subject to continued election bythe stockholders, it is unlikely that they will operate the target company on aday-to-day basis. Accordingly, we anticipate employing other personnelfollowing the business combination. While we intend to closely scrutinize anyadditional individuals we engage after a business combination, we cannot assureyou that our assessment of these individuals will prove to be correct. Theseindividuals may be unfamiliar with the requirements of operating a publiccompany as well as United States securities laws which could cause us to expendtime and resources helping them become familiar with such laws. This could beexpensive and time-consuming and could lead to various regulatory issues thatmay adversely affect our operations.

 

Our officers and directorsare not required to, and will not, commit their full time to our affairs, whichmay result in a conflict of interest in allocating their time between ouroperations and other businesses. This could have a negative impact on ourability to consummate a business combination. We do not intend to have any fulltime employees prior to the consummation of a business combination. Each of ourofficers is

 

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engaged in other businessendeavors and is not obligated to contribute any specific number of hours perweek to our affairs. If our officers’ other business affairs require them todevote substantial amounts of time to such affairs in excess of their currentcommitment levels, it could limit their ability to devote time to our affairsand could have a negative impact on our ability to consummate a businesscombination. We cannot assure you that these conflicts will be resolved in ourfavor.

 

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

 

***Because all ofour directors own shares of our securities that will not participate inliquidation distributions, they may have a conflict of interest in determiningwhether a particular target business is appropriate for a business combination.***

 

All of our directors ownstock in our company, but have, solely with respect to those shares of commonstock acquired by them prior to our public offering, waived their right toreceive distributions upon our liquidation in the event we fail to complete abusiness combination. Additionally, Joel R. Jacks, Peter M. Schulte, Dr. EdwardH. Bersoff and FSAC Partners, LLC have agreed with CRT Capital Group LLC thatduring the 40 trading day period beginning 60 days after the end of the “restrictedperiod” under Regulation M, they collectively will spend up to $2,000,000 topurchase warrants in the public marketplace at prices not to exceed$.65 per warrant. It was determined that $2,000,000 is an appropriateamount by CRT Capital Group LLC and our management to demonstrate confidence inour ultimate ability to effect a business combination because the warrants willexpire with no value if we are unable to consummate a business combination.None of our executive directors or any of their affiliates is precluded fromacquiring additional warrants in the aftermarket if any of them so chooses. Allof the shares of common stock owned by our directors immediately prior to ourpublic offering and any warrants owned by our directors will be worthless if wedo not consummate a business combination. The personal and financial interestsof our directors may influence their motivation in identifying and selecting atarget business 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 commonstock becomes subject to the SEC’s penny stock rules, broker-dealers mayexperience difficulty in completing customer transactions and trading activityin our securities may be adversely affected.***

 

If at any time we have nettangible assets of $5,000,000 or less and our common stock has a market priceper share of less than $5.00, transactions in our common stock may be subjectto the “penny stock” rules promulgated under the Securities Exchange Actof 1934, as amended. Under these rules, broker-dealers who recommend suchsecurities to persons other than institutional accredited investors must:

 

• make a special written suitabilitydetermination for the purchaser;

 

• receive the purchaser’s written agreement to a transaction prior tosale;

 

• provide the purchaser with risk disclosure documents which identifycertain risks associated with investing in “penny stocks” and which describethe market for these “penny stocks” as well as a purchaser’s legal remedies;and

 

• obtain a signed and dated acknowledgment from the purchaserdemonstrating that the purchaser has actually received the required riskdisclosure document before a transaction in a “penny stock” can be completed.

 

If our common stock becomessubject to these rules, broker-dealers may find it difficult to effect customertransactions and trading activity in our securities may be adversely affected.As a result, the market price of our securities may be depressed, and you mayfind it more difficult to sell our securities.

 

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

 

The net proceeds from our publicoffering have provided us with approximately $119,180,000, which we may use tocomplete our initial business combination. Our initial business combinationmust be with an operating business with a fair market value of at least 80% ofour net assets at the time of such business combination. It is probable thatthe company we acquire in our initial business combination will have only alimited number of services or products. The resulting lack of diversification:

 

• will result in our dependency upon the performance of a singleoperating business;

 

• may result in our dependency upon the development or market acceptanceof a single or limited number of services, processes or products; and

 

• may subject us to numerous economic, competitive and regulatorydevelopments, any or all of which may have a substantial adverse impact uponthe particular industry in which we may operate subsequent to a businesscombination.

 

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

 

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

 

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

 

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technical, human and otherresources than we do and our financial resources will be relatively limitedwhen contrasted with those of many of these competitors. While we believe thatthere are numerous potential target businesses that we could acquire with thenet proceeds of our initial public offering, together with additional financingif available, our ability to compete in acquiring certain sizable targetbusinesses will be limited by our available financial resources. This inherentcompetitive limitation gives others an advantage in pursuing the acquisition ofcertain target businesses. Further:

 

• our obligation to seek stockholderapproval of a business combination may delay the consummation of a transaction;

 

• our obligation to convert into cash certain shares of common stock inthe event a business combination is consummated and public stockholders owningless than 20% of the shares sold in our initial public offering vote againstsuch business combination and exercise their conversion rights may reduce theresources available for a business combination; and

 

• our outstanding warrants, and the future dilution they potentiallyrepresent, may not be viewed favorably by certain target businesses.

 

Any of these obligations mayplace us at a competitive disadvantage in successfully negotiating a businesscombination.

 

***We may have insufficientresources to cover our operating expenses and the expenses of consummating abusiness combination.***

 

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

 

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

 

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

 

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Furthermore, our initial stockholdersare not precluded from purchasing additional warrants or shares of common stockin the aftermarket. Any exercise of these warrants by these initial stockholderswould substantially increase their relative percentage ownership in us.

 

Our board of directors isdivided into three classes, each of which will generally serve for a term ofthree years with only one class of directors being elected in each year. It isunlikely that there will be an annual meeting of stockholders to elect newdirectors prior to the consummation of a business combination, in which caseall of the current directors will continue in office at least until theconsummation of the business combination. If there is an annual meeting, as aconsequence of our “staggered” board of directors, only a minority of the boardof directors will be considered for election and our initial stockholders,because of their ownership position, will have considerable influence regardingthe outcome. Accordingly, our initial stockholders will continue to exertcontrol at least until the consummation of a business combination. In addition,our initial stockholders and their affiliates and relatives are not prohibitedfrom purchasing units or shares in the aftermarket, and have full voting rightswith respect to any shares of common stock they may acquire in subsequentmarket transactions. If they do, we cannot assure you that our 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 certainprovisions in our amended and restated certificate of incorporation and by-lawsmay have a negative impact on the price of our common stock by discouraging athird party from purchasing our common stock. These provisions could also havethe effect of discouraging a third party from pursuing a non-negotiatedtakeover of our company and preventing certain changes of control. In additionto our staggered board, our by-laws require that, subject to certainexceptions, any stockholder desiring to propose business or nominate a personto the board of directors at a stockholders meeting must give notice of anyproposals or nominations within a specified time frame. Our by-laws also limitthe ability of stockholders to remove directors, call stockholders meetings andact by written consent and provide that vacancies of the board of directors mayonly be filled by a majority of the remaining directors.

 

***Our 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 ourinitial public offering, as part of the units, we issued warrants to purchase42,000,000 shares of common stock. To the extent we issue shares of commonstock to effect a business combination, the potential for the issuance ofsubstantial numbers of additional shares upon exercise of these warrants couldmake us a less attractive acquisition vehicle in the eyes of a target businessas such securities, when exercised, will increase the number of issued andoutstanding shares of our common stock and reduce the value of the sharesissued to complete the business combination. Accordingly, our warrants may makeit more difficult to effectuate a business combination or increase the cost ofa target business. Additionally, the sale, or even the possibility of sale, ofthe shares underlying the warrants could have an adverse effect on the marketprice for our securities or on our ability to obtain future public financing.If and to the extent these warrants are exercised, you will experience dilutionto your holdings.

 

***If our initial stockholdersexercise their registration rights, it may have an adverse effect on the marketprice of our common stock and the existence of these rights may make it moredifficult to effect a business combination.***

 

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

 

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stock. In addition, theexistence of these rights may make it more difficult to effect a businesscombination or increase the cost of a target business, as the stockholders of aparticular target business may be discouraged from entering into a businesscombination with us or will request a higher price for their securities as aresult of these registration rights and the potential future effect theirexercise may have on the trading price of our common 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 inthe over-the-counter market and are quoted on the OTC Bulletin Board, an inter-dealerautomated quotation system for equity securities sponsored and operated by theNational Association of Securities Dealers, Inc., or NASD, but notincluded in the Nasdaq Stock Market. We cannot assure you that our securitieswill continue to be quoted on the OTC Bulletin Board. Quotation of oursecurities on the OTC Bulletin Board may limit the liquidity and price of oursecurities more than if our securities were quoted or listed on The NasdaqStock Market or a national exchange. Lack of liquidity may limit the price atwhich you may be able to sell our securities or your ability to sell oursecurities at all.

 

***If we are deemedto be an investment company, we may be required to institute burdensomecompliance requirements and our activities may be restricted, which may make itdifficult for us to complete a business combination.***

 

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

 

• restrictions on the nature of ourinvestments; and

 

• restrictions on the issuance of securities, each of which may make itdifficult for us to complete a business combination.

 

In addition, we may have burdensome requirementsimposed upon us, including:

 

• registration as an investment company;

 

• adoption of a specific form of corporate structure; and

 

• reporting, record keeping, voting, proxy and disclosure requirementsand other rules and regulations.

 

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

 

 

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

 

Under the policies of theNorth American Securities Administrators Association, Inc., aninternational organization devoted to investor protection, because each of ourdirectors owns shares of our securities and may receive reimbursement forout-of-pocket expenses incurred by them in connection with activities on ourbehalf such as identifying potential target businesses and performing duediligence on suitable business combinations, state securities administratorscould take the position that such individuals are not “independent.” If thiswere the case, they would take the position that we would not have the benefitof independent directors examining the propriety of expenses incurred on ourbehalf and subject to reimbursement by us. Additionally, there is no limit onthe out-of-pocket expenses that could be incurred byour directors and there will be no review of the reasonableness of the expenseswe reimburse by anyone other than our board of directors, which would includepersons who may seek reimbursement or a court of competent jurisdiction if suchreimbursements are challenged. To the extent such out-of-pocket expenses exceedthe available proceeds not deposited in the trust account, such out-of-pocketexpenses would not be reimbursed by us unless we consummate a business combination.Although we believe that all actions taken by our directors on our behalf willbe in our best interests, whether or not they are deemed to be “independent,”we cannot assure you that this will actually be the case. If actions are takenor expenses are incurred that are actually not in our best interests, it couldhave a material adverse effect on our business and operations and the price ofour stock held by the public stockholders.

 

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

 

We may acquire an operatingbusiness that contracts directly with the federal government and its agencies,in which case the risks below would directly affect us. We may also acquire anoperating business that acts as a subcontractor, supplier or partner withanother party or parties that contract with the federal government and itsagencies, in which case the risk factors below would still affect us directlyor indirectly.

 

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

 

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

 

***Changes by 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 companywill derive a significant portion of its revenues from contracts with thefederal government or its agencies, we believe that the success and developmentof the target company’s business will depend on its successful participation inthe federal contract program. Changes in the federal government budgetarypriorities could directly affect the target company’s financial performance.Government expenditures tend to fluctuate based on a variety of political,economic and social factors. A significant decline in government expenditures,or a shift of expenditures away from programs our target company supports, or achange in federal government contracting policies causing its agencies toreduce their expenditures under contracts, to exercise their right to terminatecontracts at any time without penalty, not to exercise options to renewcontracts or to delay or not enter into new contracts, could adversely affectour target company’s business, prospects, financial condition or operatingresults. Moreover, although contracts with governmental agencies oftencontemplate that the services will be performed over a period of several years,Congress usually must approve funds for a given program each government fiscalyear and may significantly reduce or eliminate funding for a program.Significant reductions in these appropriations by Congress or the failure byCongress to pass a budget resolution in a timely manner could have a materialadverse effect on our target company’s business.

 

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***Federalgovernment contracts often contain provisions that are unfavorable, which couldadversely affect our business.***

 

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

 

• terminate existing contracts forconvenience, as well as for default;

 

• reduce or modify contracts orsubcontracts;

 

• cancel multi-year contracts and related orders if funds for contractperformance for any subsequent year become unavailable;

 

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

 

• claim rights in services or products provided by the target company;

 

• suspend or bar the target company from doing business with the federalgovernment or with a governmental agency; and

 

• control or prohibit the export of products.

 

If the federal governmentterminates a contract “for convenience” (for instance, due to a change in its perceivedneeds or its desire to consolidate work under another contract), our targetcompany may recover only its incurred or committed costs, settlement expensesand profit on services completed prior to the termination. If the governmentterminates a contract for default, our target company may not recover eventhose amounts, and instead may be liable for excess costs incurred by thegovernment or agency in procuring undelivered services or products from anothersource. As is common with government contractors, some of our target company’scontracts may experience performance issues in the future. Our target companymay in the future receive “show cause” or cure notices under contracts that, ifnot addressed to the government’s satisfaction, could give the government theright to terminate those contracts for default or to cease procuring servicesunder those contracts in the future. Even if the target company is not directlythe party to a government contract, as in the case of a subcontractrelationship, the impact of the above on the prime contractor would likely havea material adverse effect on our target company.

 

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

 

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The target company may alsobe liable for systems and services failure and security breaks with respect tothe solutions, services or products, or other applications it sells to thegovernment. If the target company were to come under foreign ownership, controlor influence, its federal government customers could terminate or decide not torenew their contracts, and it could impair their ability to grant new contractsto our target company.

 

***The federalgovernment may reform its procurement or other practices in a manner adverse tous.***

 

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

 

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

 

A meaningful amount of thebusiness that our target company may expect to seek directly or through partieswith which it does business in the foreseeable future will likely be awardedthrough competitive bidding. Competitive bidding presents a number of risks,including without limitation:

 

• the need to bid on programs in advanceof the completion of their design, which may result in unforeseen technologicaldifficulties and cost overruns;

 

• the substantial cost and managerial time and effort that our targetcompany may spend to prepare bids and proposals for contracts that may not beawarded to our target company;

 

• the need to accurately estimate the resources and cost structure thatwill be required to service any contract our target company is awarded; and

 

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

 

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

 

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

 

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

 

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government-wide acquisitioncontracts, or GWAC contracts, to purchase services or products. Under a taskorder or delivery order contract, the federal government may submit, but is notrequired to submit, orders for services or products. Thus, the revenue that maybe realized under these contracts is not guaranteed, but instead depends, amongother things, on the quantity of orders that the government in fact submits tothe contractor. Such contracts, some of which are awarded to multiplecontractors, have increased pricing pressure and require that contractors makesustained post-award efforts to procure service orders in order to realizerevenue under such contracts. Our target company may not be able tosuccessfully sell its services or products or otherwise increase its revenuesunder these contracts. Our target company’s failure to compete effectively inthe procurement environment could have a material adverse effect on our targetcompany’s business, 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 mayprovide services or products to the federal government under three types ofcontracts: cost-plus-fee, time-and-materials, and fixed-price. Each of thesetypes of contracts, to differing degrees, involves the risk that our targetcompany could underestimate its cost of fulfilling the contract, which mayreduce the profit it earns or lead to a financial loss on the contract.

 

• Under cost-plus-fee contracts, whichare subject to a ceiling amount, our target company may be reimbursed forallowable costs and paid a fee, which may be fixed or performance-based.However, if its costs exceed the ceiling or are not allowable under the termsof the contract or applicable regulations, our target company may not be ableto recover those costs.

 

• Under time-and-materials contracts, our target company may bereimbursed for labor at negotiated hourly billing rates and for certainexpenses, and our target company assumes the risk that its costs of performancemay exceed the negotiated hourly rates.

 

• Under fixed-price contracts, our target company performs specific tasksfor a fixed price. Compared to cost-plus-fee contracts and time-and-materialscontracts, fixed-price contracts involve greater financial risk because ourtarget company bears the impact of cost overruns. To the extent its actualcosts exceed the estimates upon which the price was negotiated, our targetcompany will generate less than the anticipated amount of profit or could incura loss.

 

***Our contractswith the federal government and its agencies will be subject to audits and costadjustments.***

 

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

 

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

 

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

 

***Failure tomaintain strong relationship with other contractors could result in a decline inour revenue.***

 

Our target company may actas a subcontractor or under a “teaming” arrangement in which the target companyand other contractors jointly bid on particular contracts or programs. As asubcontractor or team member, the target company will often lack control overfulfillment of a contract, and poor performance on the contract could tarnishits reputation, even when the target company performs as required. Moreover,our target company’s revenue and operating results could be adversely affectedif any prime contractor or teammate chooses to offer a client services of thetypes that the target company provides or if any prime contractor or teammateteams with 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 usethird-party manufacturers in addition to or instead of any internalmanufacturing capacity that it may have. This arrangement affords less controlover the reliability of supply, quality and price of products or componentsthan internal manufacturing. Our target company may risk disruptions in itssupply of key products and components if its suppliers fail to perform becauseof strikes, natural disasters, financial condition or other factors beyond thecontrol of our target business. Products that are supplied by a third-partymanufacturer may not perform as expected, and these performance failures mayresult in delays in completion of a project or additional costs to complete aproject. Any delay by subcontractors to complete their portion of a project, orany failure by a subcontractor to satisfactorily complete its portion of aproject, may result in delays in the overall progress of the project and maycause our target business to incur additional costs. The additional costsincurred by our target company due to the delay or failure to perform by athird-party manufacturer or a subcontractor may be substantial. While ourtarget company may recover some of these additional costs from the responsiblethird-party manufacturer or subcontractor, it may not be able to recover all ofthese costs in all circumstances.

 

***We may be unableto protect or enforce our intellectual property rights.***

 

After completing a businesscombination, the protection of our target company’s trade secrets, proprietaryknow-how, technological innovations and other proprietary rights through patentsand other intellectual property protections in the U.S. and other countries maybe critical 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 costsand diversions of resources, either of which could have a material adverseeffect on our competitive position and business.

 

**Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk.**

 

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

 

As of October 25, 2005,approximately $117,180,000 of the net proceeds of our initial public offeringwas held in trust for the purposes of consummating a business combination. Theproceeds held in trust have been invested in United States Treasury Bills in atrust account at JPMorgan Chase NY Bank maintained by Continental StockTransfer & Trust Company acting as trustee.  As of October 25, 2005, the effectiveannualized interest rate payable on our investment was approximately 3.69%.Assuming no other changes to our holdings as of October 25, 2005, a 1%decrease in the underlying interest rate payable on our investment in the UnitedStates Treasury Bills as of October 25, 2005 would result in a decrease ofapproximately $300,000 in the interest earned on our investment for thefollowing 90-day period, and a corresponding decrease in our net increase instockholders’ equity resulting from operations, if any, for that period.

 

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

 

**Item 4. Controls and Procedures.**

 

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

 

There have been no changesin our internal control over financial reporting since our inception on April 12,2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

PART II – OTHERINFORMATION

 

**Item 1. Legal Proceedings.**

 

We are not currently subjectto any material legal proceedings, nor, to our knowledge, is any material legalproceeding threatened against us. From time to time, we may be a party tocertain legal proceedings incidental to the normal course of our business.While the outcome of these legal proceedings cannot be predicted withcertainty, we do not expect that these proceedings will have a material effectupon our financial condition or results of operations.

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds.**

 

We have not engaged in anyunregistered sales of equity securities during the three months ended September 30,2005.

 

The net proceeds from ourinitial public offering was approximately $119,180,000, after deducting offeringexpenses of approximately $520,000 and underwriting discounts of $6,300,000. Asof October 25, 2005, $117,180,000 of this amount had been placed in trustfor purposes of consummating a business combination, with approximately $2,000,000remaining.

 

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

 

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

 

As of October 25, 2005,approximately $117,180,000 was held in trust and we had approximately $2,000,000of our offering proceeds not held in trust remaining and available to us forour activities 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 pursuant to Rule 13a-14  of the Securities Exchange Act of 1934, as amended                      |
| 31.2  |   | Certification of Chief Financial Officer pursuant to Rule 13a-14  of the Securities Exchange Act of 1934, as amended                      |
| 32.1  |   | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                       |
| 32.2  |   | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                       |

 

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*Previously filed as exhibits toour registration statements on Form S-1 (file no. 333-124638).

 

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##### **SIGNATURES**

##### ** **

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

 

 
|                         | Federal Services Acquisition Corporation |
|------------------------------|------------------------------------------|
|                         |                                     |   |
|                         | By:                                      | /s/ Joel R. Jacks |   |
|                         |                                     | Chairman of the Board and |
|                         |                                     | Chief Executive Officer |
|                         |                                     |   |
|                         | By:                                      | /s/ Peter M. Schulte |   |
|                         |                                     | President and |
|                         |                                     | Chief Financial Officer |
| Date: December 23, 2005 |                                     |   |

 

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**Federal Services AcquisitionCorporation**(a development stagecompany)

**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 Unaudited FinancialStatements.

 

F-1

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**FederalServices Acquisition Corporation**(a development stagecompany)****

**Statement of Operations (Unaudited)**

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

 

See Notes to Unaudited FinancialStatements.

 

F-2

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**Federal Services AcquisitionCorporation**(a development stagecompany)****

**Statement of Stockholders’ Equity (Unaudited)**

 
| ** **                                               | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deficit  Accumulated  During the  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 stagecompany)****

**Statement of 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 stagecompany) 

**Notes to Unaudited Financial Statements**

 

**NOTE A—ORGANIZATION AND BUSINESSOPERATIONS**

 

Federal Services AcquisitionCorporation (the “Company”) was incorporated in Delaware on April 12,2005. The Company was formed to serve as a vehicle for the acquisition of anoperating business in the federal services and defense industries through amerger, capital stock exchange, asset acquisition, stock purchase or othersimilar business combination. The Company has neither engaged in any operationsnor generated revenue to date. The Company is considered to be in thedevelopment stage and is subject to the risks associated with activities ofdevelopment stage companies.  The Company has selected December 31 asits fiscal year end.

 

The financial information inthis 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.  Operating results for the interim period arenot necessarily indicative of the results to be expected for the full year.

 

The registration statementfor the Company’s initial public offering (“Offering”) was declared effectiveon October 19, 2005.  The Company consummated the offering on October 25,2005 and received net proceeds of $119,700,000, after deducting theunderwriting discount but before deducting expenses of the Offering. TheCompany’s management has broad discretion with respect to the specificapplication of the net proceeds of this Offering of Units (as defined in Note Cbelow), although substantially all of the net proceeds of the Offering areintended to be generally applied toward consummating a business combinationwith (or acquisition of) an operating business in the federal services anddefense industries (“Business Combination”). Nonetheless, there is no assurancethat the Company will be able to successfully effect a Business Combination. Anamount of $117,180,000 of the net proceeds is being held in a trust account (“TrustAccount”) and is invested in U.S. government securities until the earlier of (i) theconsummation of the Business Combination or (ii) the distribution of theTrust Fund as described below. The remaining proceeds may be used to pay forbusiness, legal and accounting due diligence on prospective acquisitions andcontinuing general and administrative expenses. The Company, after signing adefinitive agreement for the acquisition of a target business, will submit suchtransaction for stockholder approval. In the event that public stockholders of20% or more of the outstanding stock (excluding, for this purpose, those sharesof common stock issued prior to the Offering) vote against the BusinessCombination and exercise their conversion rights, the Business Combination willnot be consummated.

 

In the event that theCompany does not consummate a Business Combination within 18 months fromthe date of the consummation of the Offering, or 24 months from theconsummation of the Offering if certain extension criteria have been satisfied(the “Acquisition Period”), the proceeds held in the Trust Fund will bedistributed to the Company’s public stockholders, excluding the FoundingStockholders to the extent of their initial stock holdings. However, thepersons who were stockholders prior to the Offering (the “Founding Stockholders”)will participate in any liquidation distribution with respect to any shares ofthe common stock acquired in connection with or following the Offering. In theevent of such distribution, it is likely that the per share value of theresidual assets remaining available for distribution (including Trust Fundassets) will be less than the initial public offering price per share in theOffering (assuming no value is attributed to the Warrants contained in theUnits to be offered in the Offering discussed in Note C).

 

F-5

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**NOTE B—SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**[1]     Cashand cash equivalents:**

 

The Company considers allhighly liquid investments with original maturities of three months or less tobe cash equivalents.

 

**[2]     Lossper common share:**

 

Loss per share is computedby dividing net loss applicable to common stockholders by the weighted averagenumber of common shares outstanding for the period.

 

**[3]     Useof estimates:**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.Actual results could differ from those estimates.

 

**[4]     Incometaxes:**

 

Deferred income taxes areprovided for the differences between the bases of assets and liabilities forfinancial reporting and income tax purposes. A valuation allowance isestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.

 

The Company recorded adeferred income tax asset for the tax effect of start-up costs and temporarydifferences, aggregating approximately $309. In recognition of the uncertaintyregarding the ultimate amount of income tax benefits to be derived, the Companyhas recorded a full valuation allowance at September 30, 2005.

 

The effective tax ratediffers from the statutory rate of 34% due to the increase in the valuationallowance.

 

**[5]     Deferredoffering costs:**

 

Deferred offering costsconsist principally of legal and underwriting fees incurred through the balancesheet date that are related to the Offering and that will be charged to capitalin the period in which the Offering was consummated.

 

**NOTE C—INITIAL PUBLIC OFFERING**

 

On October 25, 2005 theCompany sold 21,000,000 Units (“Units”).  Each Unit consists of one shareof the Company’s common stock, $.0001 par value, and two warrants (“Warrants”).Each Warrant entitles the holder to purchase from the Company one share of commonstock at an exercise price of $5.00.  Each Warrant is exercisable on thelater 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 Companypaid CRT Capital Group LLC an underwriter’s discount of 5% of the grossproceeds of the Offering.

 

**NOTE D—NOTES PAYABLE TOSTOCKHOLDERS**

 

The Company issued two$77,000 unsecured non-interest bearing promissory notes to two of the FoundingStockholders of the Company on April 18, 2005. The Notes were repaid inaccordance with their terms on October 25, 2005 from the proceeds of the Offering.

 

**NOTE E—RELATED PARTY TRANSACTION**

 

The Company has agreed topay CM Equity Management, L.P. a company where certain of the FoundingStockholders serve in executive capacities, an administrative fee of $7,500 permonth for office space and general and administrative services from October 19,2005 through the effective date of the acquisition of a target business.

 

**NOTE F—COMMITMENTS AND OTHERMATTERS**

 

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

 

The Company has engaged CRTCapital Group LLC, on a non-exclusive basis, as their agent for thesolicitation of the exercise of the warrants. The Company has agreed to pay CRTCapital Group LLC a commission equal to 2% of the exercise price for eachwarrant exercised more than one year from October 19, 2005 if the exercisewas solicited by CRT Capital Group LLC.

 

**NOTE G—COMMON STOCK RESERVED FOR ISSUANCE**

 

At October 25, 2005,42,000,000 shares of common stock were reserved for issuance upon exercise ofredeemable warrants.

 

**NOTE H—FOUNDING STOCKHOLDERS**

 

One or more of the FoundingStockholders have agreed with the Company that during the 40 trading day periodbeginning 60 days after the end of the “restricted period” underRegulation M, they collectively will spend up to $2,000,000 to purchasewarrants in the public marketplace at prices not to exceed $.65 per warrant.They have further agreed that any warrants purchased by them or theiraffiliates or designees will not be sold or transferred until the completion ofa Business Combination.

 

F-7

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