TSS, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2007
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from __________ to
__________
Commission
file number: 000-51426
FORTRESS
INTERNATIONAL GROUP, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction
of
incorporation or organization)
9841
Broken Land Parkway
Columbia,
Maryland
(Address
of principal executive offices)
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20-2027651
(I.R.S.
Employer Identification No.)
21046
(Zip
Code)
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Registrant’s
telephone number, including area code
(410)
312-9988
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Securities
registered pursuant to Section 12(b) of the Exchange Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $.0001 par value per share
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NASDAQ
Capital Market
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Warrants
to purchase common stock, $.0001 par value per share
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NASDAQ
Capital Market
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|||
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Units,
each consisting of one share of Common Stock, $.0001 par value
and two
warrants to purchase shares of common stock, $.0001 par
value
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NASDAQ
Capital Market
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|||
Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | [Do not check if a smaller | |||
| Smaller reporting company x | reporting company] | |||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
aggregate market value of the
registrant’s voting and non-voting common stock held by non-affiliates of the
registrant (without admitting that any person whose shares are not included
in
such calculation is an affiliate) computed by reference to the price at which
the common stock was last sold, or the average bid and asked price of the
common
stock, as of the last business day of the registrant’s most recently
completed second fiscal quarter end was
$19,578,343.
As
of
February 29, 2008, 12,089,221 shares of the registrant’s common stock, $0.0001
par value, were outstanding
2
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents (or parts thereof) are incorporated by reference into
the
following parts of this Annual Report on Form 10-K: Certain
information required in Part III of this Annual Report on Form 10-K will
be incorporated from the Registrant’s Proxy Statement for the
2008 Annual Meeting of Stockholders to be filed within 120 days of the end
of the fiscal year ended December 31, 2007.
3
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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7
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Item
1A.
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Risk
Factors
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17
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Item
1B.
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Unresolved
Staff Comments
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27
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Item
2.
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Properties
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27
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Item
3.
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Legal
Proceedings
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27
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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27
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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28
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Item
6.
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Selected
Financial Data
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29
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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31
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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42
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Item
8.
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Financial
Statements and Supplementary Data
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43
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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44
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Item
9A(T).
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Controls
and Procedures
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44
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Item
9B.
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Other
Information
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45
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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45 |
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Item
11.
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Executive
Compensation
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45 |
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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45
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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45
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Item
14.
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Principal
Accounting Fees and Services
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45
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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46
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Signatures
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50
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4
Unless
the context otherwise requires, when we use the words “Fortress,” ”FIGI,” “we,”
“us” or “our company” in this Annual Report on Form 10-K, we are referring
to Fortress International Group, Inc., a Delaware corporation, and its
subsidiaries, unless it is clear from the context or expressly stated that
these
references are only to Fortress International Group, Inc.
5
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some
of
the statements in this Annual Report on Form 10-K constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements can be identified by the use of forward-looking
terminology, including the words “believes,” “estimates,” “anticipates,”
“expects,” “intends,” “may,” “will” or “should,” or, in each case, their
negative or other variations or comparable terminology. Such statements include,
but are not limited to, any statements relating to our ability to consummate
any
acquisition or other business combination and any other statements that are
not
historical facts. You should read such statements carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position, or state other forward-looking information. The
factors listed in Item 1A of Part I of this Annual Report on Form 10-K captioned
“Risk Factors,” as well as any cautionary language in this Annual Report on Form
10-K, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements, including but not limited to, statements
concerning:
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·
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our
mission-critical services business, its advantages and our strategy
for
continuing to pursue our business;
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·
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anticipated
dates on which we will begin providing certain services or reach
specific
milestones in the development and implementation of our business
strategy;
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·
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expectations
as to our future revenue, margin, expenses, cash flows and capital
requirements;
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·
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our
integration of acquired businesses;
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·
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the
amount of cash available to us to execute our business
strategy;
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·
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continued
compliance with government
regulations;
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·
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statements
about industry trends;
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·
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geopolitical
events and regulatory changes;
and
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·
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other statements of expectations, beliefs, future plans and strategies. |
These
forward-looking statements are subject to risks and uncertainties, including
financial, regulatory,
industry growth and trend projections, that could cause actual events or results
to differ materially from those expressed or implied by the statements. The
most
important factors that could prevent us from achieving our stated goals include,
but are not limited to, our failure to:
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·
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implement
our strategic plan, including our ability to make acquisitions and
the
performance and future integration of acquired businesses;
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·
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deliver
services and products that meet customer demands and generate acceptable
margins;
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·
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increase
sales volume by attracting new customers, retaining existing customers
and
growing the overall number of customers to minimize a significant
portion
of our revenues being dependent on a limited number of
customers;
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·
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risks
relating to revenues and backlog under customer contracts, many
of which
can be cancelled on short notice;
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manage
and meet contractual terms of complex
projects;
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attract
and retain qualified management and other personnel; and
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meet
all of the terms and conditions of our debt
obligations.
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Except
as
required by applicable law and regulations, we undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. Further disclosures that we make on
related subjects in our additional filings with the SEC or Securities and
Exchange Commission should be consulted. For further information regarding
the
risks and uncertainties that may affect our future results, please review the
information set forth below under “ITEM 1A. RISK FACTORS.”
6
PART
I
Item
1. BUSINESS
Background
of Fortress International Group, Inc.
We
were incorporated in Delaware on December 20, 2004 as a special
purpose acquisition company under the name “Fortress America Acquisition
Corporation,” for the purpose of acquiring an operating business that performed
services to the homeland security industry.
On
July 20, 2005, we closed our initial public offering of 7,000,000 units,
with each unit consisting of one share of our common stock and two warrants
(each warrant to purchase one share of our common stock at $5.00 per share).
The
units were sold at an offering price of $6.00 per unit, generating gross
proceeds of $42,000,000. On August 24, 2005, we sold an additional 800,000
units pursuant to the underwriters’ over-allotment option raising additional
gross proceeds of $4,800,000. After deducting underwriting discounts and
commissions and the offering expenses, the total net proceeds to us from the
offering were approximately $43,183,521, of which $41,964,000 was deposited
into
a trust fund and the remaining proceeds of $1,219,521 (“available funds”) were
made available to be used to provide for business, legal and accounting due
diligence on prospective business combinations and continuing general and
administrative expenses.
On
January 19, 2007, we acquired all of the outstanding membership interests
of each of VTC, L.L.C. and Vortech, L.L.C. (“TSS/Vortech”) pursuant to
a Second Amended and Restated Membership Interest Purchase Agreement dated
July 31, 2006, as amended by the Amendment to the Second Amended and
Restated Membership Interest Purchase Agreement dated January 16, 2007 (the
“Purchase Agreement”). The closing consideration consisted of
(i) $11,000,000 in cash, (ii) the assumption of $154,599 of debt of
TSS/Vortech, (iii) 3,176,813 shares of our stock, of which 2,534,988 shares
were issued to the selling members, 67,825 shares were issued to Evergreen
Capital L.L.C. as partial payment of certain outstanding consulting fees
and
574,000 shares were designated for issuance to employees of TSS/Vortech under
our 2006 Omnibus Incentive Compensation Plan, and (iv) $10,000,000 in two
convertible, interest-bearing promissory notes of $5,000,000
each.
All
of
the shares of our common stock issued to the selling
members, Messrs. Thomas P. Rosato and Gerard J. Gallagher, are subject
to a lock-up agreement restricting the sale or transfer of those shares through
July 13, 2008 and are being held in escrows maintained by the
escrow agent (up to 2,461,728 shares held in a general indemnity escrow and
73,260 shares held in a balance sheet escrow). The shares of our stock issued
to
certain employees as restricted stock grants are subject to forfeiture if the
receiving employee terminates his or her employment within three years of the
acquisition closing date, in which event the forfeited shares will be delivered
to the selling members.
Each
convertible promissory note bears interest at 6% per year and has a term of
five
years. Interest only is payable during the first two years of each note with
principal payments commencing on the second anniversary of the note and
continuing throughout the balance of the term of the note in equal quarterly
installments of $416,667. At any time after the sixth month following the
closing of the acquisition, the notes are convertible by Messrs. Rosato and
Gallagher into shares of our common stock at a conversion price of $7.50 per
share. At any time after the sixth month following the closing of the
acquisition, the notes are automatically convertible if the average closing
price of our common stock for 20 consecutive trading days equals or exceeds
$7.50 per share.
On
August
29, 2007, we entered into an agreement with our Chief Executive Officer,
Mr. Rosato, to retire $2,500,000 of the convertible promissory note due to
him
by paying $2,000,000 and Mr. Rosato agreed to use the proceeds to purchase
the
Company’s common stock and warrants pursuant to a 10b5-1 plan with a designated
broker. The prepayment discount realized of $500,000 was recorded to additional
paid-in capital. The transaction was completed on September 28,
2007.
The
cash
portion of the payments made in the TSS/Vortech acquisition was financed
entirely through the use of cash raised in our initial public offering and
held
in a trust fund prior to the closing of the acquisition. In connection with
the
acquisition of TSS/Vortech, holders of 756,100 shares of common stock voted
against the acquisition and exercised their right to convert their shares
of common stock into $5.74 of cash per share. An aggregate of $4,342,310 was
paid to the converting stockholders. These conversions were also funded with
the
proceeds of our initial public offering.
Following
the completion of the acquisition, we announced and implemented a common stock
repurchase program. As a result of that program, through December 31, 2007,
we
had utilized $2,036,015 of cash to repurchase 379,075 shares of our common
stock
at an average price of $5.37 per share. We retired 221,000 of the repurchased
shares on June 13, 2007. The repurchase program was suspended during the third
quarter of 2007.
Upon
the
closing of the acquisition, we entered into employment agreements with each
of
the selling members, Messrs. Rosato and Gallagher, under which each is
entitled to an initial annual base compensation of $425,000, an annual bonus
of
up to 50% of his base compensation, and if during the period from the closing
of
the acquisition through July 13, 2008 the market price of our common stock
reaches certain thresholds, up to $5.0 million in shares of our common
stock. Mr. Rosato’s employment agreement contemplates that
he
will serve as our chief executive officer for a period of three years, and
Mr. Gallagher’s employment agreement contemplates that he will serve as our
president and chief operating officer for a period of three years.
7
Upon
the
closing of the acquisition, we also entered into an employment agreement
with
Harvey L. Weiss under which Mr. Weiss agreed to serve as our chairman for a
period of three years at an initial annual base compensation of $200,000
and an
annual bonus of up to 50% of his base compensation. Mr. Weiss is entitled
to certain other benefits under the terms of his employment agreement. At
the
same time, we entered into a three-year consulting agreement with Washington
Capital Advisors, L.L.C., whose principal equity owner and officer is C.
Thomas
McMillen, our director. Under the terms of the consulting agreement,
Washington Capital Advisors has agreed to provide advisory services relating
to
strategic, financial, marketing and business development matters, as well
as
mergers and acquisitions for an initial annual base compensation of $200,000
and
an annual bonus of up to 50% of base compensation, as well as certain other
benefits.
In
connection with the acquisition, our stockholders adopted an amendment and
restatement of our amended and restated certificate of incorporation to
(i) change our name from “Fortress America Acquisition Corporation” to
“Fortress International Group, Inc.” and (ii) remove certain provisions
applicable only prior to our completion of the acquisition. Stockholders also
approved our 2006 Omnibus Incentive Plan and elected David J. Mitchell to our
Board of Directors for a term expiring in 2009.
After
our
initial acquisition of TSS/Vortech, management continued an acquisition strategy
to expand our geographical footprint, add complementary services and diversify
and expand our customer base. We acquired substantially all of the assets
of Comm
Site
of South Florida, Inc. (“Comm Site”) on May 7, 2007, 100% of the outstanding and
issued capital stock of Innovative Power Solutions, Inc. and Quality Power
Solutions, Inc. (“Innovative”) on September 24, 2007, and 100% of the membership
interests of Rubicon Integration, L.L.C. (“Rubicon”) on November 30, 2007.
Subsequent to year end, on January 2, 2008, we purchased 100% of the
outstanding and issued capital stock of SMLB, Ltd.
Our
principal executive offices are located at 9841 Broken Land Parkway,
Columbia, Maryland 21046 and our telephone number is (410) 312-9988.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K,
and all
amendments to those reports,
are
available
to you
free of charge
through
the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov
or
on
our
website at
http://thefigi.com as
soon
as reasonably practicable after such materials have been electronically filed
with, or furnished to, the SEC.
Business
We
plan,
design, build and maintain mission-critical facilities such as data centers,
trading floors, call centers, network operation centers, communication
facilities, laboratories and secure bunkers and we offer expertise for
electrical, mechanical, telecommunications, security, fire protection and
building automation systems that are critical to the mission-critical facilities
lifeblood.
We
provide a single source solution for highly technical mission-critical
facilities and the infrastructure systems that are critical to their
function. Our services include technology consulting, engineering and design
management, construction management, system installations, operations
management, and facilities management and maintenance.
During
the past three years, our revenue growth has been driven primarily by government
spending on homeland security initiatives spurred by the events
of September 11, 2001. These events have also affected businesses,
which are increasing spending on data security and privacy. These homeland
security initiatives include projects that require the hardening, relocation,
renovation and upgrade of mission-critical facilities to protect critical
government information networks and data processing centers against attacks.
With respect to these critical infrastructure systems, we focus on physical
security, network security, redundancies for uninterruptible power supply
systems, electrical switch gear, stand-by power generators, heat rejection
and
cooling systems, fire protection systems, monitoring and control systems, and
security systems, as well as the physical environment that houses critical
operations. We help our customers to plan for, prevent or mitigate against
the
consequences of attacks, power outages and natural disasters. We
provide our services, directly and indirectly, to both government and
private sector customers.
We
have
obtained a facility clearance from the United States Department of Defense.
This
clearance enables us to access and service restricted government projects.
In
addition to the facility clearance, we have successfully cleared approximately
one-third of
our
employees, allowing them individual access to restricted projects and
facilities.
8
Growth
Through
Acquisitions
Beginning
in 2006 and continuing into 2007, we implemented a plan to grow our business,
diversify our customer base, and gain additional operational scale. To mitigate
business volume fluctuations and customer concentration, we added selling,
general and administrative personnel, enabling us to bid and quote up to
approximately several hundred million in revenues across our service
offerings. We acquired four businesses during the fiscal year 2007 that
have provided complementary services, extended our geographical footprint
and added key customers and personnel. In the future, we expect to continue
our
growth initiatives both internally and through potential acquisitions of
specialized mission-critical engineering or IT services firms (primarily in
the
United States). We believe that growth-oriented strategy enables us to compete
effectively in the markets in which we operate.
On
January 19, 2007, we acquired all of the outstanding membership interests
of
each of VTC, L.L.C., doing business as Total Site Solutions, and Vortech,
L.L.C., or TSS/Vortech. TSS/Vortech
provides comprehensive services for the planning, design, and development
of
mission-critical facilities and information infrastructure.
The
closing consideration consisted of (i) $11,519,151 in cash, including
acquisition costs of $1,841,468 and net of $1,322,317 of acquired cash.
(ii) the assumption of $154,599 of debt of TSS/Vortech, (iii) 2,602,813
shares of our common stock, of which 2,534,988 shares were issued to the
selling
members 67,825 shares were issued to Evergreen Capital L.L.C. as partial
payment
of certain outstanding consulting fees, and 574,000 shares were designated
for
issuance to employees of TSS/Vortech under our 2006 Omnibus Incentive
Compensation Plan. (iv) $10,000,000 in two convertible promissory notes of
$5,000,000 each, bearing interest at 6%. Simultaneously
with the acquisition of TSS/Vortech, we changed our name from “Fortress America
Acquisition Corporation” to our current name, “Fortress International Group,
Inc.”
Following
our initial acquisition of TSS/Vortech, we continued with our acquisition
strategy to expand our geographical footprint, add complementary services and
diversify and expand our customer base.
On
September 24, 2007, we entered into a stock purchase agreement with Innovative
Power Systems Inc., Quality Power Systems, Inc., or, collectively, Innovative,
and the stockholders of Innovative. Based in Virginia, Innovative installs,
tests and services specialized uninterruptible power supply systems and backup
power supply systems for data centers and mission-critical facilities throughout
the Washington DC metropolitan area. Pursuant
to the stock purchase agreement, we acquired 100% of the issued and outstanding
capital stock of Innovative for the aggregate consideration consisting of (i)
$1,614,452 in cash, including acquisition cost of $112,420, net of cash acquired
of $244,968 cash subject to certain adjustment as provided in the
Agreement, (ii) a promissory note for the aggregate amount of $300,000 plus
interest accruing at 6% annually from the date of the issuance of the promissory
note (payable in three years, based on a five-year amortization schedule, as
described in note), (iii) 25,155 shares of our common stock, and (iv) additional
earn-out amounts if Innovative achieves certain targeted earnings for each
of
the calendar years 2007-2010, as further described in the stock purchase
agreement.
On
November 30, 2007, we entered into a membership interest purchase agreement
with
Rubicon Integration, L.L.C., or Rubicon, a Delaware limited liability company
based in McLean, Virginia, and each of the members of Rubicon. Rubicon provides
consulting, owners representation and equipment integration services for
mission-critical facilities to corporate customers across the United States.
Pursuant to the purchase agreement, we acquired 100% of the membership interests
of Rubicon for the aggregate consideration consisting of (i) $4,745,524 in
cash,
including acquisition costs of $ 198,043 and net of cash acquired $42,660,
(ii)
204,000 shares of our common stock valued at $1,080,800, (iii) contingent
consideration in the form of two unsecured promissory notes in the maximum
amount of $1,500,000 and $2,000,000, respectively, plus interest accruing at
6%
annually from November 30, 2007, the date of the issuance, payable to the
sellers upon the achievement of certain operational and financial targets for
December 2007 and for the calendar year 2008, respectively, and (iv) additional
earn-out amounts, contingent upon the achievement of certain earnings targets
by
Rubicon for each of the calendar years 2008-2009.
During
the fourth quarter of 2007, Rubicon achieved certain 2007 earnings targets
established in the purchase agreement, entitling the sellers to the first
contingently issuable note of $1,517,753, which was due on January 31, 2008.
In
accordance with terms of the agreement, a working capital adjustment was
computed resulting in an additional amount of $90,141 due to the sellers
on January 31, 2008.
On
January 2, 2008, we entered into a stock purchase agreement with SMLB, Ltd,
or
SMLB, an Illinois corporation which provides professional construction
management services for mission-critical facilities, and each of the
stockholders of SMLB, for the acquisition of SMLB. Pursuant to the purchase
agreement we acquired 100% of the issued and outstanding capital stock of SMLB
for an aggregate consideration consisting of (i) $2,000,000 in cash, subject
to
certain adjustment to be determined within 60 days of the closing of the
acquisition, as provided in the purchase agreement, (ii) an unsecured promissory
note for an aggregate amount of $500,000, plus interest accruing at 6% annually
from the date of the issuance, (iii) an aggregate of 96,896 shares of common
stock of the Company, to be held in escrow pursuant to a certain indemnity
escrow agreement, and (iv) additional earn-out amounts, contingent upon the
achievement of certain operational and financial targets by SMLB for each of
the
calendar years 2008 and 2009 and subject to satisfaction of any outstanding
indemnification obligations by the sellers. The note referred to above is
payable in three years, based on a five-year amortization schedule, with
$100,000 plus accrued interest payable on each of January 2, 2009 and January
2,
2010 and the balance of $300,000 plus accrued interest payable on January 2,
2011.
9
Mission-Critical
IT Industry
IT
facilities and other high technology environments are much more complex than
standard facilities and require a larger capital investment. Errors and delays
in the planning, design, construction or installation of such facilities can
involve significant costs. As a result, companies, building owners and managers
are increasingly seeking project managers and construction firms with
specialized expertise and experience in designing, building and maintaining
critical IT infrastructure and systems.
Market
research indicates growth in overall IT spending and in the mission-critical
business arena in particular. According to a 2006 report by the InterUnity
Group, an industry market research firm based in Concord, Massachusetts, total
information technology spending by the United States Government and the private
sector is expected to grow from $1.02 trillion in 2007 to $1.24 trillion in
2011. The mission-critical IT market in particular is growing rapidly.
InterUnity Group estimates that total mission-critical IT spending by the United
States Government and the private sector will grow from $51.5 billion in
2007 to $91.1 billion in 2011, for an annual compound growth rate of 15.3%.
InterUnity Group also estimates that mission-critical IT spending will grow
from
5.0% of total IT spending in 2007 to 7.4% in 2011.
We
intend
to pursue opportunities in the growing mission-critical IT market in both the
government and private sectors through our single source solution offerings.
We
believe there are significant barriers to entry for new competitors in the
mission-critical IT market, including customer requirements for firms with
substantial IT project experience, deep and broad professional and IT
construction management offerings and, for homeland defense and intelligence
agency work, facility and security clearances. Through our facilities
integration services, we have the ability, directly and through subcontractor
relationships, to provide all services and coordinate the efforts of all
personnel involved in a mission-critical project, to meet crucial occupancy
deadlines, and to complete all required services with minimal
disruption.
We
believe energy initiatives are significant to the overall industry with a
growing focus on corporate citizenship with regard to the environment and
opportunities to increase profitability. We believe the macro trend of rising
energy costs adds further incentive to incorporate green initiatives as
potential returns to customers are greater, while the payback periods on their
investments is shortened. We address this growing trend with a specialized
focus
on green initiatives and a thorough understanding of LEEDS Certification and
its
design requirements and their contribution to the environment and potential
profitability enhancements.
Service
Offerings
We are
focused on becoming involved in facilities integration projects that are in
their planning stages. When involved in the initial planning stages of a
facilities integration project, we develop a comprehensive project Solutions
Path that meets rigorous design and scheduling requirements for the timely
delivery of high technology facilities that are critical to the customer’s
continuous operations. When involved in later project stages, services are
provided on an integrated or individual basis.
Project
Solutions Path
We
have
developed a five-step project named “Solutions Path” for mission-critical
environments. The integrated Solutions Path provides a simple, yet
comprehensive, process for program roll-out, and also serves to align project
requirements with our capabilities. This Solutions Path incorporates each major
phase of a design and construction project, from initial planning and
programming, through maintenance and service of equipment. Descriptions of
the
five phases of the Solutions Path are provided below.
10
Technology
Consulting
Planning
and Programming.
This
phase represents the initiation of project development and typically includes
establishing project goals and a preliminary budget and schedules, setting
technical parameters and requirements, and determining project team members
and
the overall level of effort required of the team. When developing
mission-critical facilities, the planning and programming phase is often
considered the most important because this is where the project receives its
initial emphasis, motivation and direction.
Various
services are performed during the planning and programming phase, with selection
depending upon project mission and scope. Typical planning and programming
services include requirements analyses, site selections and comparisons,
facility and system reliability assessments and audits, energy efficiency
studies space planning, computer hardware planning and configurations, security
risk assessment, disaster avoidance and recovery planning, and project budgeting
and scheduling.
Design
and Engineering.
During
the second phase of the Solutions Path, design and engineering experts on our
team apply vital, real-life experience in the engineering of critical
environmental, power, communications and security systems. This expertise is
the
source of precise engineering solutions that directly impacts the unique
function, reliability, energy usage and overall cost of the customer’s
specialized facility.
Design
and engineering service offerings typically include critical power and
mechanical load calculations, schematic design of electrical, mechanical,
communications, fire protection and security systems, mechanical design and
engineering, high and medium voltage electrical design and engineering,
communications and security systems design and engineering, physical
vulnerability assessments, force protection design and bomb blast analyses,
fire
protection system design and engineering, facility systems equipment selection,
and facility commissioning and testing.
Construction
Management
Construction
Management.
Activities during this phase include detailed preparations required for a
successful construction process. Work performed during the construction
management phase includes project management, value engineering and design
management, bid negotiation, subcontractor pre-qualification and negotiation,
long-lead equipment procurement, issuance of equipment and construction
contracts, and refinement of project budget and schedule.
Installation
Management.
The
fourth phase of the Solutions Path model involves the on-site construction
work.
During this phase, our project managers mobilize the required expertise for
the
project, utilizing in-house superintendents and quality control and safety
professionals, as well as qualified subcontractors and support personnel, some
of which have historically been provided by affiliated entities. Our project
managers supervise work by project team members, including all aspects of the
following: architecture and construction, electric power systems, heat rejection
and cooling, energy management and controls, cooling tower systems, security
systems, voice, data and network cabling, fire and life safety systems, and
process piping and plumbing systems. Our project managers remain responsible
for
all aspects of the project until project completion and customer
delivery.
11
The
installation portion of the project is typically of the longest duration when
compared to other project phases. In addition, this portion has the largest
number of outside influences that can impact project goals and objectives,
such
as weather, non-performance of subcontractors, equipment deliveries, unexpected
project changes from the owner, and influence from local authorities and utility
providers. Therefore, experience, skill and mission focus are critical during
the project installation period.
Facilities
Management
Facilities
Maintenance and Service.
We
provide a comprehensive maintenance and service contract designed to insure
that
the multiple systems critical to sustaining on-line applications in
technologically intensive facilities remain operational and functional. Typical
services during the facilities maintenance and service phase include overall
management of facility maintenance program, on-site staffing of technical
engineering positions ( e.g.,
electricians, HVAC mechanics, control technicians and voice/data technicians),
and management of non-technical subcontracted services ( e.g.,
landscaping, janitorial, pest control, snow removal, carpentry, painting and
general maintenance services). We seek to provide on-site maintenance services,
not only to gain additional project revenue, but also to obtain hands-on
involvement in any new facility planning, design and construction initiatives
that the customer undertakes.
Strategy
Our
strategies for growth include the following:
|
·
|
Develop a customer relationship at the initiation of a project, therefore maximizing the sales opportunity; |
|
·
|
Because consulting engagements are less expansive than project-wide engagements, purchase authority often resides at lower levels of management, which increases probability of closure; |
|
·
|
Growing
Professional Sales Staff.
To
drive growth in revenues, we have expanded our sales staff to include
account executives for existing and future regional sales offices.
We continue to pursue account executives and additional sales
staff and developed an educational program built around our project
execution model. Each sales professional is responsible for achieving
specific objectives and is managed
closely.
|
|
·
|
Maintaining
and Enhancing Key Alliances.
Maintaining key alliances is also crucial to sales development and
growth
and often provide us with introductions to the customers of our alliance
partners. These alliances reside with IT consulting firms, specialty
mission-critical engineering firms, application service providers
and
internet service providers. Key alliance opportunities also reside
in
other firms within the market sector such as equipment manufacturers,
product suppliers, property management firms, developers, IT system
integrators and firmware providers. In addition, we seek to maintain
alliances and enter into teaming or partnering relationships with
minority
contracting firms and hub zone companies. These firms are natural
alliance
partners and can provide us with valuable entry into government
contracting relationships. In turn, we can provide these contractors
and
hub zone companies with valuable mission-critical design, engineering,
and
contracting experience to which they might not otherwise have access.
We
have entered into several key strategic alliances with large IT
Corporations to provide engineering, design, and construction management
services.
|
12
|
·
|
Geographic
Expansion and Strategic Acquisitions.
We
believe that expanding our presence in additional markets through
establishing regional offices is a key to our future success. Our
acquisitions of Comm Site, Innovative, Rubicon,
and subsequent to year end, SMLB, expand our presence in the Washington
D.C. metro area, Boston, New York/New Jersey, Atlanta, Houston, Miami
and Chicago. Our acquisitions have expanded our
customer base, allowed us to offer a broader scope of services and
supported our current growth in technology consulting projects. In
the
future, we intend to pursue strategic acquisitions that cost-effectively
add new customers, regional coverage, specific federal agency contracting
experience, or complementary expertise to accelerate our access to
existing or new markets.
|
|
·
|
Marketing
Initiatives. We have
expanded our current localized marketing campaign to a regional and
national level. This will involved intensifying the marketing of
our
consulting and engineering services to private sector end users,
major
government contractors, and existing and potential alliance partners
on
regional and national basis through a focused marketing program,
involving:
|
·
Selected
media advertising;
·
Trade
show attendance;
·
Conducting
technical seminars in local target markets; and
·
Producing
a marketing campaign for distribution at a national level.
Contracts
and Customers
Our
customers include United States government and homeland defense agencies and
private sector businesses that in some cases are the end user of the facility
or
in other cases are providing a facility to a government end user. We categorize
contracts where a government agency is the ultimate end user of the facility
as
government-related contracts.
The
price
provisions of the contracts we undertake can be grouped into three broad
categories: (i) fixed-price, (ii) guaranteed maximum price and
(iii) time and materials.
In
a
fixed-price contract, we must fully absorb cost overruns, notwithstanding the
difficulty of estimating all of the costs we will incur in performing these
contracts and in projecting the ultimate level of revenues that we may
achieve. Our failure to anticipate technical problems, estimate costs accurately
or control costs during the performance of a fixed-price contract may reduce
the
profitability of a fixed-price contract or cause a loss.
In
a
guaranteed maximum price contract, we share our cost information with the
customer and earn a negotiated fee. In addition, a contingency fee is included
for changes and errors in pricing. As the project progresses to the point where
both the customer and we are comfortable with final pricing of the project,
a
maximum price is agreed to with savings reverting back to the customer. Due
to
the fact that the risk is shared with the customer on these projects, the profit
margins are less than those earned on other contract types.
In
a
time-and-material contracts, we are reimbursed for labor at fixed hourly rates
and for materials used at an agreed upon mark up on cost. Profit margins depend
on the negotiated bill rate with the customer less our labor and benefit
costs.
For
the
years ended December 31, 2007 and December 31, 2006, revenues from
guaranteed maximum price contracts represented approximately 19.5% and 65.6%
of
our revenues, respectively. Most government contracts, including our contracts
with the federal government, are subject to termination by the government,
to
government audits and to continued appropriations.
13
Historically,
we are not subject to any significant regulation by state, federal or foreign
governments. In the future, as we seek to directly contract services with the
US
government versus perform on a subcontractor basis, we may be subject to audit
and oversight of US government agencies.
Backlog
We
believe an indicator of our future performance is our backlog of uncompleted
projects under contract or awarded. Our backlog represents our estimate of
the
anticipated revenue from executed and awarded contracts that have not
been completed and that we expect will be recognized as revenues over the life
of the contract.
Backlog
is not a measure defined in generally accepted accounting principles, and our
methodology for determining backlog may not be comparable to the methodology
used by other companies in determining their backlog. Our backlog is generally
recognized under two categories: (1) contracts for which work
authorizations have been or are expected to be received on a fixed-price basis,
guaranteed maximum price basis and time and materials basis and
(2) contracts awarded to us where some, but not all, of the
work has not yet been authorized.
Our
total
backlog was approximately $172.9 million as of December 31, 2007.
At
December 31, 2007, we have authorizations to proceed with work for approximately
$32.4 million or 19% of our total backlog of $172.9 million. Additionally,
approximately $118 million or 68% of our backlog relates to a single customer
at
December 31, 2007.
We
estimate that approximately 50% of our backlog will be recognized
during 2008 fiscal year. This estimate is based on the compilation of monthly
backlog reports that the project management regularly prepares which present
backlog per contract, our management’s estimate of future revenue based on
known contracts and historical trends and our projection of the amount of such
backlog expected to be recognized in the following 12 months. Our total backlog
as of December 31, 2006 and December 31, 2005 was $20.6 million and
$39.7 million, respectively.
We
adjust
backlog to reflect project cancellations, deferrals and revisions in scope
and
cost (both upward and downward) known at the reporting date; however, future
contract modifications or cancellations may increase or reduce backlog and
future revenues. We generally do not track and therefore have not disclosed
whether the contracts included in our backlog are fully funded, incrementally
funded, or unfunded. Our
customers may enter into contracts with us for our services; however,
authorization for us to perform those services may be dependent on the
customer’s ability to finance the project either internally or externally
through investors. Most
of
our customer contracts are terminable at will by the customer consistent with
industry practice. As a result, no assurances can be given that the amounts
included in backlog will ultimately be realized.
Sales
and Marketing
The
marketing approach employed by us emphasizes expertise in IT hardware
systems and facilities programming and planning, which enables involvement
at
the critical early stages in projects where a full range of services are needed.
This marketing approach utilizes the Solutions Path and allows the customer
to
contract for comprehensive facilities integration services or to contract
separately for each individual project phase. Our marketing program seeks
to capitalize on our industry standing, including our existing
relationships, relationships added through acquisitions and our
reputation based on our performance on completed projects. We also seek to
enhance our name recognition through the use of trade shows, technical seminars,
direct mailings, and the media.
Maintaining
key alliances is also crucial to sales
development and growth and often provide us with introductions to the customers
of our alliance partners. These alliances reside with IT consulting firms,
specialty mission-critical engineering firms, application service providers
and
internet service providers. Key alliance opportunities also reside in other
firms within the market sector such as equipment manufacturers, product
suppliers, property management firms, developers, IT system integrators and
firmware providers. In addition, we seek to maintain alliances and enter
into
teaming or partnering relationships with minority contracting firms and hub
zone
companies. These firms are natural alliance partners and can provide us with
valuable entry into government contracting relationships. In turn, we can
provide these contractors and hub zone companies with valuable mission-critical
design, engineering, and contracting experience to which they might not
otherwise have access. We have entered into several key strategic alliances
with
large IT Corporations to provide engineering, design, and construction
management services.
The
process for acquiring business may require us to participate in a competitive
request-for-proposal process, with the primary difference among potential
customers being that the process for direct government and government-related
customers is significantly more formal and complex than for private sector
customers as a result of government procurement rules and regulations that
govern the contracting process.
Competition
The
mission-critical IT solutions market is large, fragmented and highly
competitive. We compete for contracts based on our strong customer
relationships, successful past performance record, significant technical
expertise, specialized knowledge and broad service offerings. We often compete
against divisions of both the large design contractors and construction
contractors, as well as against numerous small- to medium-sized specialized
or
regional information technology consulting firms. Some of these competitors
are
large, well-established companies that have broader geographic scope and
greater
financial and other resources than us. These larger, more established
competitors include Washington Group International, Inc. (a division of URS
Corporation), Dycom Industries, Inc., Mastec Inc., Hill International Inc.,
Hewlett Packard Company, Holder Construction Company, Whiting Turner and
Clark
Construction. Although these large construction and engineering companies
have
greater financial and other resources, we do not believe they offer as complete
of a line of mission-critical IT services as us. We expect competition in
the
mission-critical IT technology services sector to increase in the
future.
14
Executive
Officers
Set
forth below is information as of March 28, 2008, about our executive officers,
as determined in accordance with the rules of the SEC.
|
Name
|
Age
|
Position
with the Company
|
||
|
Harvey
L. Weiss
|
65
|
Chairman
of the Board
|
||
|
Thomas
P. Rosato
|
56
|
Chief
Executive Officer and Director
|
||
|
Gerard
J. Gallagher
|
51
|
President,
Chief Operating Officer and Director
|
||
|
Timothy
C. Dec
|
49
|
Chief
Financial Officer
|
Harvey
L. Weiss,
age 65,
became our Chairman of the Board upon the closing of our acquisition of
TSS/Vortech on January 19, 2007. From our inception through the closing of
the
acquisition, Mr. Weiss had served as our Chief Executive Officer, President
and
a member of our Board. He has over 35 years of experience in the information
technology and security market place. From 2002 to August 1, 2004,
Mr. Weiss was the Chief Executive Officer and President of System
Detection, Inc., a software security company. From 2000 to 2002, he served
as
President of Engineering Systems Solutions, Inc., a security and biometrics
integration firm. During 1999, Mr. Weiss was the Chief Executive Officer
and President of Global Integrity Corporation, a SAIC subsidiary specializing
in
information security and served as a Director until the company was sold
in
2002. From 1996 to 1998, until sold to Network Associates, Inc, Mr. Weiss
was President of the Commercial Division, Secretary and Director of Trusted
Information Systems, Inc., a NASDAQ-listed security network company. Prior
to
that time, from 1994 to 1996, Mr. Weiss served as President of Public
Sector Worldwide Division for Unisys Corporation. From 1991 to 1993,
Mr. Weiss was the Vice President of Sales and the President and Chief
Operating Officer of Thinking Machines Corporation, a massively parallel
processing company. Prior to that time, he served in various senior capacities
in Digital Equipment Corporation. Mr. Weiss serves on the Board of Forterra
Systems, Inc., a simulation company, is a member of the Brookings Institution
Council, and is a trustee of Capitol College. Mr. Weiss received a Bachelor
of Science in Mathematics from the University of Pittsburgh.
15
Thomas
P. Rosato,
age 56,
became a Director and our Chief Executive Officer upon our acquisition of
TSS/Vortech on January 19, 2007. Mr. Rosato has over 25 years of experience
in mission-critical service businesses. Since 2002, he has served as the
co-founder and chairman of TSS and the co-founder and chairman of Vortech.
From
1998 to 2001, Mr. Rostato served as the President - Group Maintenance of
America/Encompass Services Corporation, National Accounts Division. From 1995
to
1998, he served as the founder and President of Commercial Air, Power &
Cable, Inc. From 1980 to 1995, he served in various capacities at Com-Site
Enterprises, most recently as Chief Financial Officer and Chief Operating
Officer. Mr. Rosato started his career in 1973 as a certified public
accountant at Coopers & Lybrand. Mr. Rosato received a Bachelor of
Science in Accounting from Temple University.
Gerard
J. Gallagher,
age 51,
became a Director and our President and Chief Operating Officer upon our
acquisition of TSS/Vortech on January 19, 2007. Mr. Gallagher has more than
25 years of experience in mission-critical fields. Since 2002, he has served
as
the co-founder and President of TSS and the co-founder and President of Vortech.
From 1998 to 2001, Mr. Gallagher served as the President of the Total Site
Solutions division of Encompass Services Corp. From 1997 to 1998, he served
as
the President of the Total Site Solutions division of Commercial Air, Power
& Cable, Inc. From 1991 to 1997, he served as the Chief Facilities
Operations and Security Officer of the International Monetary Fund. From 1980
to
1991, Mr. Gallagher served in various capacities at Com Site International,
most recently as Senior Vice President of Engineering and Sales.
Mr. Gallagher received a Bachelor of Science in Fire Science from the
University of Maryland and a Bachelor of Science in Organizational Management
(Summa Cum Laude) from Columbia Union College.
Timothy
C. Dec,
age 49,
was appointed as Chief Financial Officer of the Company, effective August 20,
2007. Prior to his appointment and since June 2006, Mr. Dec was the Chief
Financial Officer of Presidio Networked Solutions Inc., the nation’s largest
independent value-added solutions provider that offers a wide range of
Cisco-centric network infrastructure and collaborative solutions. From 1999
until May 2006, Mr. Dec was Senior Vice President, Chief Accounting Officer
& Treasurer of Broadwing Corporation, a NASDAQ listed telecommunications
company. Broadwing Corp was acquired by Level 3 Inc in 2007. From 1997 to 1999,
Mr. Dec was Director of Accounting and Administration for Thermo Trilogy
Corporations, a subsidiary of AMEX listed Thermo Electron Company. Earlier
in
his career, Mr. Dec held finance and accounting related positions at North
American Vaccine, Inc. an AMEX listed company engaged in the research,
development and manufacturing of vaccines, privately held general contractor
Clark Construction and Intertek Services International, LTD, a division of
Inchcape Group, a multinational public company based in London, England. Mr.
Dec
holds a Bachelor of Science degree in Accounting from Mount Saint Mary’s
University in Emmitsburg, Maryland, and a Masters of Business Administration
from American University in Washington DC. He is a Certified Public
Accountant.
Our
officers employment are subject to the terms and conditions in their respective
employment agreements.
Employees
At
December 31, 2007, we had approximately 179 full-time and 5 part-time
employees. We have obtained facility clearance from the United States Department
of Defense. In addition to the facility clearance, we have successfully cleared
approximately one third of our employees, allowing them individual access to
restricted projects and facilities. Our future success will depend significantly
on our ability to attract, retain and motivate qualified personnel. We are
not a
party to any collective bargaining agreement and we have not experienced
any strikes or work stoppages. We consider our relationship with our
employees to be satisfactory.
16
Item
1A. RISK
FACTORS
RISKS
RELATED TO OUR RECENT ACQUISITIONS
Our
financial condition and growth depends upon the successful integration of our
acquired businesses. We may not be able to efficiently and effectively integrate
acquired operations, and thus may not fully realize the anticipated benefits
from such acquisitions.
Achieving
the anticipated benefits of the acquisitions that we have completed starting
in
January 2007 will depend in part upon whether we can integrate our businesses
in
an efficient and effective manner.
Since
January 2007, we have acquired, in chronological order, VTC, L.L.C. and Vortech
L.L.C., Comm Site of South Florida, Inc., Innovative Power Systems, Inc.
and
Quality Power Systems, Inc., Rubicon Integration, LLC and in January 2008,
we acquired SMLB, Ltd. In the future, we may acquire additional businesses
in
accordance with our business strategy. The integration of our acquired
businesses and any future businesses that we may acquire involves a number
of
risks, including, but not limited to:
|
•
|
demands on management related to the increase in our size
after the
acquisition;
|
|
•
|
the
disruption of ongoing business and the diversion of management’s attention
from the management of daily operations to the integration of operations;
|
|
•
|
failure to fully achieve expected synergies and costs savings; |
|
•
|
unanticipated
impediments in the integration of departments, systems, including
accounting systems, technologies, books and records and procedures,
as
well as in maintaining uniform standards, controls, including internal
control over financial reporting required by the Sarbanes-Oxley Act
of
2002, procedures and policies;
|
|
•
|
loss
of customers or the failure of customers to contract for incremental
services that we expect them to contract;
|
|
•
|
failure to peform services that are contracted by customers during the integration period; |
|
•
|
higher integration costs than anticipated; and |
|
difficulties
in the assimilation and retention of highly qualified, experienced
employees, many of whom are geographically dispersed.
|
Successful
integration of these acquired businesses or operations will depend on our
ability to manage these operations, realize opportunities for revenue growth
presented by strengthened service offerings and expanded geographic market
coverage, obtain better terms from our vendors due to increased buying power,
and eliminate redundant and excess costs to fully realize the expected
synergies. Because of difficulties in combining geographically distant
operations and systems which may not be fully compatible, we may not be able
to
achieve the financial strength and growth we anticipate from the acquisitions.
We
cannot be certain that we will realize our anticipated benefits from our
acquisitions, or that we will be able to efficiently and effectively integrate
the acquired operations as planned. If we fail to integrate the acquired
businesses and operations efficiently and effectively or fail to realize the
benefits we anticipate, we would be likely to experience material adverse
effects on our business, financial condition, results of operations and future
prospects.
Certain
of our key personnel who joined us as a result of the acquisition of TSS/Vortech
are unfamiliar with the requirements of operating a public company, which may
adversely affect our operations, including reducing our revenues and net income,
if any.
Upon
the
completion of the acquisition TSS/Vortech, our former Chairman of the Board,
C.
Thomas McMillen, resigned and became our Vice Chairman, and our former Chief
Executive Officer, President and Secretary, Harvey L. Weiss, resigned from
those
positions and became our Chairman of the Board. Thomas P. Rosato became our
Chief Executive Officer, and Gerard J. Gallagher became our President and Chief
Operating Officer. Neither Mr. Rosato nor Mr. Gallagher has
significant public company experience, and both are unfamiliar with the unique
requirements of operating a public company under United States securities laws.
Our Chief Financial Officer, Timothy C. Dec, joined us in August 2007.
Accordingly, we could be required to expend significant resources to assist
our
management team with regulatory and stockholder relations issues, which could
be
expensive and time-consuming and could lead to various regulatory issues that
may adversely affect our operations, including reducing our revenues and net
income, if any.
17
If
the acquisitions’ benefits do not meet the expectations of financial or industry
analysts, the market price of our common stock may
decline.
The
market price of our common stock may decline as a result of our various
acquisitions if:
|
·
|
we
do not achieve the perceived benefits of each acquisition as rapidly
as,
or to the extent anticipated by, financial or industry analysts;
or
|
|
·
|
the
effect of the acquisitions on our financial results is not consistent
with
the expectations of financial or industry
analysts.
|
Accordingly,
investors may experience a loss as a result of a decreasing stock
price.
The
Chairman, Vice Chairman and one member of our Board of Directors may have
conflicts of interest that could hinder our ability to make
acquisitions.
One
of
our growth strategies is to make selective acquisitions of specialty engineering
and information technology/networking consulting and system integration
companies that focus on mission-critical facilities. The current Vice Chairman
of our Board of Directors, Mr. McMillen, is the president, chief executive
officer and chairman of the board of Homeland Security Capital Corporation
(“HSCC”). HSCC has announced that its intended strategic direction is “to focus
on owning and operating small- and mid-sized growth businesses that provide
homeland security solutions through innovative technologies to both the public
and private sector and to drive growth through management, strategic guidance,
capital and financial support, and government marketing expertise.” It is
possible that HSCC could be interested in acquiring businesses that we would
also be interested in acquiring and that these relationships could hinder our
ability to carry out our acquisition strategy.
Additionally,
our Chairman of the Board, Mr.Weiss, Vice Chairman of the Board, Mr. McMillen,
and Director, Mr. Hutchinson, serve as the Co-Chairman of the Board,
Co-Chairman of the Board, and Director, respectively, on the Board of Directors
at Secure America Acquisition Corporation (Secure America), a blank check
Company formed for the purpose of acquiring, or acquiring control of, through
a
merger, capital stock exchange, asset acquisition, stock purchase or other
similar business combination, one or more operating businesses in the homeland
security industry. It is possible that Secure America could be interested
in
acquiring businesses that we would also be interested in acquiring and that
these relationships could hinder our ability to carry out our acquisition
strategy.
Voting
control by our executive officers, directors and other affiliates may limit
your
ability to influence the outcome of director elections and other matters
requiring stockholder approval.
Persons
who are parties to a voting agreement (Messrs. McMillen, Weiss, Gallagher
and Rosato) own approximately 41%
of our
issued voting stock at December 31, 2007. Moreover, this concentration will
increase if additional shares are issued under the employment agreements
entered
into with Messrs. Rosato and Gallagher or upon conversion of the
convertible promissory notes delivered to Messrs. Rosato and Gallagher in
connection with TSS/Vortech aquisition. These persons have made certain
agreements to vote for each other’s designees to our Board of Directors through
the 2008 director elections. Accordingly, they are able to significantly
influence the election of directors and, therefore, our policies and direction
during the term of the voting agreement. This concentration of ownership
and the
voting agreement could have the effect of delaying or preventing a change
in our
control or discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material adverse effect on the market price
of
our common stock or prevent our stockholders from realizing a premium over
the
market price for their shares of common stock.
Actual
or potential conflicts of interest are likely to develop between us and
Messrs. Rosato and Gallagher.
Thomas
P.
Rosato and Gerard J. Gallagher, the selling members of TSS/Vortech, continue
to
own significant businesses other than TSS/Vortech that are not owned or
controlled by us. We will have an ongoing business relationships with certain
of
these businesses of the selling members. This will likely create actual or
potential conflicts of interest between the selling members, who are executive
officers and members of our Board of Directors and thus in a position to
influence corporate decisions, and us.
18
We
may not have sufficient financial resources to carry out our acquisition
strategy; we may need to use our stock to fund acquisitions to a greater extent
than we originally intended.
In
January 2007, we announced a common stock repurchase program. As a result
of that program, through December 31, 2007 we had utilized $2,036,015 of cash
to
purchase 379,075 shares of our common stock at an average price of $5.37 per
share. We
retired 221,000 of the repurchased shares on June 13, 2007. The repurchase
program was suspended during the third quarter of 2007. These stock
repurchases reduced the amount of cash available to fund acquisitions. As a
result, we may have to incur more debt, or issue more common stock or other
equity securities, than would otherwise have been necessary in connection with
acquisitions, and we may not have sufficient financial resources to carry out
our acquisition strategy to the extent we had initially planned.
If
third parties bring claims against us or if acquired companies breached any
of
its representations, warranties or covenants set forth in the purchase
agreement, we may not be adequately indemnified for any losses arising
therefrom.
Although
the purchase agreement provides that Messrs. Rosato and Gallagher will
indemnify us for losses arising from a breach of the representations, warranties
and covenants by TSS/Vortech or Messrs. Rosato and Gallagher set forth in
the purchase agreement, such indemnification is limited, in general terms,
to an
aggregate amount of $5 million and claims may be asserted against
Messrs. Rosato and Gallagher only if a claim exceeds $8,000 and the
aggregate amount of all claims exceeds $175,000. In addition, with some
exceptions, the survival period for claims under the purchase agreement is
limited to the 18-month period following the closing of the acquisition. We
will
be prevented from seeking indemnification for most claims above the aggregate
threshold or arising after the applicable survival period. For
the
Rubicon, Innovative, and subsequent to year end, SMLB, Ltd acquisitions, we
are
indemnified for any losses arising from a breach of the representations,
warranties, and covenants by the sellers through the right to reduce any future
contingent consideration earned by the sellers; however, we may not be
adequately indemnified for the full value of any loses arising there
from.
19
As
a result of our acquisitions, we have substantial amounts of goodwill and
intangible assets, and changes in future business conditions could cause these
assets to become impaired, requiring substantial write-downs that would
adversely affect our operating results.
Our
acquisitions were accounted for as purchases and involved purchase
prices well in excess of tangible asset values, resulting in the creation of
a
significant amount of goodwill and other intangible assets. Since
December 31, 2006, we completed the acquisitions of
TSS/Vortech, Comm
Site, Innovative, Rubicon,
and subsequent to year end, SMLB and we plan to continue acquiring
businesses if and when opportunities arise, further increasing our goodwill
and
purchased intangibles amount. Under generally accepted accounting principles,
we
do not amortize goodwill and intangible assets acquired in a purchase business
combination that are determined to have indefinite useful lives, but instead
review them annually (or more frequently if impairment indicators arise) for
impairment. To the extent we determine that such an asset has been impaired,
we
will write-down its carrying value on our balance sheet and book an impairment
charge in our statement of operations.
We
amortize intangible assets with estimable useful lives over their respective
estimated useful lives to their estimated residual values, and also review
them
for impairment. If, as a result of acquisitions or otherwise, the amount of
intangible assets being amortized increases, so will our depreciation and
amortization charges in future periods.
RISKS
RELATED TO OUR BUSINESS AND OPERATIONS
We
derive a significant portion of our revenues from a limited number of
customers.
We
derive
and believe that we will continue to derive in the near term, a significant
portion of our revenues from a limited number of customers. To the extent that
any significant customer uses less of our services or terminates its
relationship with us, our revenues could decline significantly, which would
have
an adverse effect on our financial condition and results of operations. For
the
years ended December 31, 2007, 2006 and 2005, we had one large project
with our major real estate investment trust (REIT) customer, Corporate
Office Properties Trust,
which
is providing mission-critical space to a government end user and which comprised
approximately 12.0%, 63.0%, and 78.0%, respectively, of our revenues. Our 10
largest customers accounted for approximately 58.5% and 80.4% of our total
revenues for the years ended December 31, 2007 and 2006,
respectively.
Most
of our contracts may be canceled on short notice, so our revenue and
potential profits are not guaranteed.
Most
of
our contracts are cancelable on short notice by the customer either at its
convenience or upon our default. If one of our customers terminates a
contract at its convenience, then we typically are able to recover only costs
incurred or committed, settlement expenses and profit on work completed prior
to
termination, which could prevent us from recognizing all of our potential
revenue and profit from that contract. If one of our customers terminates the
contract due to our default, we could be liable for excess costs incurred by
the customer in re-procuring services from another source, as well as other
costs. Many of our contracts, including our service agreements, are periodically
open to public bid. We may not be the successful bidder on its existing
contracts that are re-bid. We also provide an increasing portion of our
services on a non-recurring, project-by-project basis. We could experience
a
reduction in our revenue, profitability and liquidity if:
|
·
|
our
customers cancel a significant number of
contracts;
|
|
·
|
we
fails to win a significant number of its existing contracts upon
re-bid;
or
|
|
·
|
we
complete the required work under a significant number of our non-recurring
projects and cannot replace them with similar
projects.
|
20
Our
backlog varies and is subject to unexpected adjustments and cancellations and
is, therefore, not guaranteed to be recognized as
revenue.
We
cannot
assure that the revenues attributed to uncompleted projects under contract
will
be realized or, if realized, will result in profits. Included in our backlog
is
the maximum amount of all uncompleted indefinite delivery/indefinite quantity
(“ID/IQ”) or similar contracts and task order contracts, or a lesser amount
if we do not reasonably expect to be issued task orders for the maximum amount
of such contracts. We perform services only when purchase orders are issued
under the associated contracts.
The
backlog amounts are estimates, subject to change or cancellation, and
accordingly, the actual customer purchase orders to perform work may vary in
scope and amount from the backlog amounts. Accordingly, we can not provide
any
assurance that we will in fact be awarded the maximum amount of such contracts
or be awarded any amount at all. Our backlog as of December 31, 2007 was
approximately $172.9 million.
The
majority of our projects are accounted for on the percentage-of-completion
method, and if actual results vary from the assumptions made in estimating
percentage-of-completion, our revenue and income could be
reduced.
We
generally recognize revenue on our projects on the percentage-of-completion
method. Under the percentage-of-completion method, we record revenue as work
on
the contract progresses. The cumulative amount of revenue recorded on a contract
at a specified point in time is that percentage of total estimated revenue
that
incurred costs to date bear to estimated total contract costs. The
percentage-of-completion method therefore relies on estimates of total expected
contract costs. Contract revenue and total cost estimates are reviewed and
revised periodically as the work progresses. Adjustments are reflected in
contract revenue in the fiscal period when such estimates are revised. Estimates
are based on management’s reasonable assumptions and experience, but are only
estimates. Variation between actual results and estimates on a large project
or
on a number of smaller projects could be material. We immediately recognize
the
full amount of the estimated loss on a contract when our estimates indicate
such
a loss. Any such loss would reduce our revenue and income.
We
submit change orders to our customers for work we perform beyond the scope
of
some of our contracts. If our customers do not approve these change orders,
our
results of operations could be adversely impacted.
We
typically submit change orders under some of our contracts for payment of work
performed beyond the initial contractual requirements. The applicable customers
may not approve or may contest these change orders and we cannot assure you
that
these claims will be approved in whole, in part or at all. If these claims
are
not approved, our net income and results of operations could be adversely
impacted.
We
may not accurately estimate the costs associated with its services provided
under fixed-price contracts, which could impair our financial
performance.
A
portion
of our revenue is derived from fixed price contracts. Under these contracts,
we
set the price of our services and assume the risk that the costs associated
with
our performance may be greater than we anticipated. Our profitability is
therefore dependent upon our ability to estimate accurately the costs associated
with our services. These costs may be affected by a variety of factors, such
as
lower than anticipated productivity, conditions at the work sites differing
materially from what was anticipated at the time we bid on the contract, and
higher than expected costs of materials and labor. Certain agreements or
projects could have lower margins than anticipated or losses if actual costs
for
contracts exceed our estimates, which could reduce our profitability and
liquidity.
Failure
to properly manage projects may result in costs or
claims.
Our
engagements often involve relatively large scale, highly complex projects.
The
quality of our performance on such projects depends in large part upon our
ability to manage the customer relationship, to manage effectively the project
and to deploy appropriate resources, including third-party
contractors and our own personnel, in a timely manner. Any defects or errors
or
failure to meet customers’ expectations could result in claims for substantial
damages against us. We currently maintain comprehensive general liability,
umbrella, professional liability insurance policies. We cannot be certain that
the insurance coverage we carry to cover such claims will be adequate to protect
us from the full impact of such claims. Moreover, in certain instances, we
guarantee customers that we will complete a project by a scheduled date or
that the project will achieve certain performance standards. If the project
experiences a performance problem, we may not be able to recover the additional
costs we will incur, which could exceed revenues realized from a project.
Finally, if we underestimate the resources or time we need to complete a project
with capped or fixed fees, our operating results could be seriously
harmed.
21
We
may choose, or be required, to pay our subcontractors even if our customers
do not pay, or delay paying, us for the related
services.
We
use
subcontractors to perform portions of our services and to manage work flow.
In
some cases, we pay our subcontractors before our customers pay us for the
related services. If we choose, or are required, to pay our subcontractors
for work performed for customers who fail to pay, or delay paying us for the
related work, we could experience a decrease in profitability and
liquidity.
We
operate in a highly competitive industry, which could reduce our growth
opportunities, revenue and operating results.
The
mission-critical IT industry in which we operate is highly competitive. We
often
compete with other IT consulting and integration companies, including several
that are large domestic companies that may have financial, technical and
marketing resources that exceed our own. Our competitors may develop the
expertise, experience and resources to provide services that are equal or
superior in both price and quality to our services, and we may not be able
to
maintain or enhance our competitive position. Although our customers
currently outsource a significant portion of these services to us and our
competitors, we can offer no assurance that our existing or prospective
customers will continue to outsource specialty contracting services to us in
the
future.
The
industries we serve have experienced and may continue to experience rapid
technological, structural and competitive changes that could reduce the need
for
our services and adversely affect our revenues.
The
mission-critical IT industry is characterized by rapid technological change,
intense competition and changing consumer and data center needs. We generate
a
significant portion of our revenues from customers in the mission-critical
IT
industry. New technologies, or upgrades to existing technologies by customers,
could reduce the need for our services and adversely affect our revenues and
profitability. Improvements in existing technology may allow companies to
improve their networks without physically upgrading them. Reduced demand for
our
services or a loss of a significant customer could adversely affect our results
of operations, cash flows and liquidity.
22
If
federal, state or local government or private enterprise spending on homeland
security related capital expenditures decreases, the demand for services like
those provided by us would likely decline. This decrease could reduce our
opportunity for growth, increase our marketing and sales costs, and reduce
the
prices we can charge for services, which could reduce our revenue and operating
results.
We
may be unable to obtain sufficient bonding capacity to support certain service
offerings.
Some
of
our contracts require performance and surety bonds. Bonding capacity for
construction projects has become increasingly difficult to obtain, and bonding
companies are denying or restricting coverage to an increasing number of
contractors. Companies that have been successful in renewing or obtaining
coverage have sometimes been required to post additional collateral to secure
the same amount of bonds which would reduce availability under any credit
facility. We may not be able to maintain a sufficient level of bonding capacity
in the future, which could preclude us from being able to bid for certain
contracts and successfully contract with certain customers. In addition, even
if
we are able to successfully renew or obtain performance or payment bonds in
the
future, we may be required to post letters of credit in connection with the
bonds.
We
may be unable to hire and retain sufficient qualified personnel; the loss of
any
of our key executive officers may adversely affect our
business.
We
believe that our future success will depend in large part on our ability to
attract and retain highly skilled, knowledgeable, sophisticated and qualified
managerial, professional and technical personnel. Our business involves the
development of tailored solutions for customers, a process that relies heavily
upon the expertise and services of employees. Accordingly, our employees are
one
of our most valuable resources. Competition for skilled personnel, especially
those with security clearance, is intense in our industry. Recruiting and
training these personnel require substantial resources. Our failure to attract
and retain qualified personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our
customers’ needs, limit our ability to win new business and constrain our future
growth.
Our
business is managed by a small number of key executive officers, including
Mr. Weiss, our Chairman, Mr. McMillen, our Vice Chairman,
Mr. Rosato, our Chief Executive Officer, Mr. Gallagher, our President
and Chief Operating Officer and Mr. Dec, our Chief Financial Officer. The loss
of any of these key executive officers could have a material adverse effect
on
our business.
Some
United States government projects require our employees to maintain various
levels of security clearances, and we may be required to maintain certain
facility security clearances complying with United States government
requirements.
Obtaining
and maintaining security clearances for employees involve a lengthy process,
and
it is difficult to identify, recruit and retain employees who already hold
security clearances. If our employees are unable to obtain or retain security
clearances or if such employees who hold security clearances terminate their
employment, the customer whose work requires cleared employees could terminate
the contract or decide not to renew it upon expiration. To the extent we are
not
able to engage employees with the required security clearances for a particular
contract, we may not be able bid on or win new contracts, or effectively re-bid
on expiring contracts, which could adversely affect our business.
In
addition, we expect that some of the contracts on which we will bid will
require us to demonstrate our ability to obtain facility security
clearances and perform work with employees who hold specified types of security
clearances. A facility security clearance is an administrative determination
that a particular facility is eligible for access to classified information
or
an award of a classified contract. Although contracts may be awarded prior
to
the issuance of a facility security clearance, in such cases the contractor
is
processed for facility security clearance at the appropriate level and must
meet
the eligibility requirements for access to classified information. A contractor
or prospective contractor must meet certain eligibility requirements before
it
can be processed for facility security clearance. Our ability to obtain and
maintain facility security clearances has a direct impact on our ability to
compete for and perform United States government projects, the performance
of
which requires access to classified information.
23
Our
failure to comply with the regulations of the United States Occupational Safety
and Health Administration and other state and local agencies that oversee safety
compliance could reduce our revenue, profitability and
liquidity.
The
Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes
certain employer responsibilities, including maintenance of a workplace free
of
recognized hazards likely to cause death or serious injury, compliance with
standards promulgated by the Occupational Safety and Health Administration
and
various record keeping, disclosure and procedural requirements. Various
standards, including standards for notices of hazards, safety in excavation
and
demolition work, may apply to our operations. We have incurred, and will
continue to incur, capital and operating expenditures and other costs in the
ordinary course of our business in complying with OSHA and other state and
local laws and regulations.
Our
quarterly revenue, operating results and profitability will
vary.
Our
revenue, operating results and profitability may fluctuate significantly and
unpredictably in the future. In particular, the changes in contract mix that
is
inherent to our business may significantly affect our results.
Factors
that may contribute to the variability of our revenue, operating results or
profitability include:
|
·
|
Fluctuations
in revenue earned on contracts;
|
|
·
|
Commencement,
completion and termination of contracts, especially contracts relating
to
our major customers;
|
|
·
|
Declines
in backlog that are not replaced;
|
|
·
|
Additions
and departures of key personnel;
|
|
·
|
Strategic
decisions by us and our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments and changes in business
strategy;
|
|
·
|
Contract
mix and the extent of subcontractor use;
and
|
|
·
|
Any
seasonality of our business.
|
Therefore,
period-to-period comparisons of our operating results may not be a good
indication of our future performance. Our quarterly operating results may not
meet the expectations of securities analysts or investors, which in turn may
have an adverse affect on the market price of our common stock.
If
we are unable to engage appropriate subcontractors or if our subcontractors
fail
to perform their contractual obligations, our performance as a prime contractor
and ability to obtain future business could be materially and adversely
impacted.
Our
contract performance may involve the engagement of subcontracts to other
companies upon which we rely to perform all or a portion of the work we are
obligated to deliver to our customers. Our inability to find and engage
appropriate subcontractors or a failure by one or more of our subcontractors
to
satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform
the agreed-upon services may materially and adversely affect our ability to
perform our obligations as a prime contractor.
24
In
extreme cases, a subcontractor’s performance deficiency could result in the
customer terminating the contract for default with us. A default termination
could expose us to liability for excess costs of reprocurement by the customer
and have a material adverse effect on our ability to compete for future
contracts and task orders.
If
we are unable to manage our growth, our business may be adversely
affected.
Sustaining
our historical growth may place significant demands on our management, as well
as on our administrative, operational and financial resources. If we sustain
significant growth, we must improve our operational, financial and management
information systems and expand, motivate and manage our workforce. If we are
unable to do so, or if new systems that we implement to assist in managing
any
future growth do not produce the expected benefits, our business, prospects,
financial condition or operating results could be adversely
affected.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
AND
OUR EXPERIENCE AS A PUBLIC COMPANY
Because
we do not currently intend to pay dividends on our common stock, stockholders
will benefit from an investment in our common stock only if it appreciates
in
value.
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in the operations and
expansion of our business. As a result, we do not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of our
board
of directors and will depend on factors our board of directors deems relevant,
including, among others, our results of operations, financial condition and
cash
requirements,
business
prospects, and the terms of our credit facilities and other financing
arrangements. Accordingly, realization of a gain on stockholders’ investments
will depend on the appreciation of the price of our common stock. There is
no
guarantee that our common stock will appreciate in value or even maintain the
price at which stockholders purchased their shares.
The
significant number of our outstanding warrants and options to purchase our
shares of common stock may place a ceiling on, or otherwise adversely
affect, the value of our common stock.
We
have
17,810,300 outstanding warrants and options to purchase shares of our
common stock at a weighted average exercise price of $5.20 per share, with
weighted average remaining life of 1.65 years and only 12,089,221
outstanding
shares of common stock as of February 29, 2008. Our warrants represent a
very
significant market overhang that may limit the value of our common stock,
at least in the near term and unless and until we can substantially grow
our
business.
If
our initial stockholders and Messrs. Rosato and Gallagher exercise their
registration rights, it may have an adverse effect on the market price of our
common stock.
Our
stockholders that acquired shares of common stock prior to our initial public
offering are entitled to demand that we register the resale of their shares
of
common stock in certain circumstances. If our initial stockholders exercise
their registration rights with respect to all of their shares of common stock,
then there will be an additional 1,750,000 shares of common stock eligible
for
trading in the public market. We have also granted registration rights to the
selling members of TSS/Vortech, who received 2,534,988 shares of our common
stock upon closing of the acquisition and who may receive, in the aggregate,
up
to $10,000,000 in additional shares of our common stock under the terms of
their
employment agreements. The contingently issuable shares expire on July 13,
2008.
The presence of this additional number of shares of common stock eligible for
trading in the public market may have an adverse effect on the market price
of
our common stock.
If
we are unable to maintain a current prospectus relating to the common stock
underlying our warrants, our warrants may be
worthless.
Our
warrants will be exercisable and we will not be obligated to issue shares of
common stock unless, at the time a holder seeks to exercise such warrant, a
prospectus relating to the common stock issuable upon exercise of the warrant
is
current and the common stock has been registered or qualified or deemed to
be
exempt under the securities laws of the state of residence of the holder of
the
warrants. Under the terms of the warrant agreement between Continental Stock
Transfer & Trust Company, as warrant agent, and us, we have agreed to use
our reasonable best efforts to maintain a current prospectus relating to the
common stock issuable upon exercise of our warrants until the expiration of
our
warrants. However, we cannot assure warrant holders that we will be able to
do
so. The warrant agreement does not provide that we are required to net-cash
settle the warrants if we are unable to maintain a current prospectus. If the
prospectus relating to the common stock issuable upon exercise of the warrants
is not current, or if the common stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the warrants reside,
our warrants may not be exercisable before they expire. Thus, our warrants
may
be deprived of any value, the market for our warrants may be limited or
non-existent and the warrants may expire worthless.
25
The
warrant agreement governing our warrants permits us to redeem the warrants
after
they become exercisable, and it is possible that we could redeem the warrants
at
a time when a prospectus is not current, resulting in the warrant holder
receiving less than fair value of the warrant or the underlying common
stock.
Under the
warrant agreement governing our outstanding warrants, we have the right to
redeem outstanding warrants, at any time after they become exercisable and
prior
to their expiration, at the price of $0.01 per warrant, provided that the last
sales price of our common stock is at least $8.50 per share on each of 20
trading days within any 30 trading day period ending on the third business
day
prior to the date on which notice of redemption is given. The warrant agreement
does not require, as a condition to giving notice of redemption, that we have
in
effect a current prospectus relating to the common stock issuable upon exercise
of our warrants. Thus, it is possible that we could issue a notice of redemption
of the warrants at a time when holders of our warrants are unable to exercise
their warrants and thereafter immediately resell the underlying common stock
under a current prospectus. Under such circumstances, rather than face
redemption at a nominal price per warrant, warrant holders could be forced
to
sell the warrants or the underlying common stock for less than fair
value.
Increased
scrutiny of financial disclosure could adversely affect investor confidence
and
any restatement of earnings could increase litigation risks and limit our
ability to access the capital markets.
Congress,
the Securities and Exchange Commission, or the SEC, other regulatory authorities
and the media are intensely scrutinizing a number of financial reporting issues
and practices. If we were required to restate our financial statements as a
result of a determination that we had incorrectly applied generally accepted
accounting principles, that restatement could adversely affect our ability
to
access the capital markets or the trading price of our securities. The recent
scrutiny regarding financial reporting has also resulted in an increase in
litigation. There can be no assurance that any such litigation against us would
not materially adversely affect our business or the trading price of our
securities.
Prior
to the acquisition of TSS/Vortech, we did not have operations, and TSS/Vortech
had never operated as a public company. Fulfilling our obligations incident
to
being a public company will be expensive and time
consuming.
Prior
to
the acquisition of TSS/Vortech, both we, as a company without operations, and
TSS/Vortech, as a private company, had maintained relatively small finance
and
accounting staffs. We have engaged a firm to perform internal audit
services and assist with the effort to remediate the weaknesses described below
and be compliant with Section 404. We have maintained limited disclosure
controls and procedures and internal control over financial reporting as
required under the federal securities laws with respect to our limited
activities prior to the acquisition, but we have not been required to maintain
and establish such disclosure controls and procedures and internal controls
as
are required with respect to a business such as TSS/Vortech with substantial
operations following the acquisition. Under the Sarbanes-Oxley Act of 2002
and
the related rules and regulations of the SEC, as well as the rules of NASDAQ,
we
must implement additional internal and disclosure control procedures and
corporate governance practices and adhere to a variety of reporting requirements
and complex accounting rules. Compliance with these obligations will require
significant management time, place significant additional demands on our finance
and accounting staff and on our financial, accounting and information systems,
and increase our insurance, legal and financial compliance costs.
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our
internal controls over financial reporting for fiscal 2007 and beyond and will
require an independent registered public accounting firm to report on our
assessment as to the effectiveness of these controls for fiscal 2008 and beyond.
Any delays or difficulty in satisfying these requirements could adversely affect
our future results of operations and our stock price.
26
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the
effectiveness of our internal controls over financial reporting in accordance
with an established internal control framework and to report on our conclusion
as to the effectiveness of our internal controls for our fiscal year ending
December 31, 2007 and subsequent years. In connection with this evaluation,
we retained internal audit services to further enhance our internal control
environment. It will also require an independent registered public accounting
firm to test, evaluate and report on the completeness of our assessment for
our
fiscal year ending December 31, 2008 and subsequent years. It may cost us
more than we expect to comply with these control- and procedure-related
requirements.
Through
December 31, 2006, we had no operations, no full-time personnel and very
few
personnel of any kind. Our activities from inception in late 2005 and into
2006
focused on completing our initial public offering, identifying acquisition
candidates and then completing the acquisition of TSS/Vortech on January
19,
2007. As of December 31, 2007, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer, of the effectiveness of the design and operation of our
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were ineffective at that time for the purpose of ensuring that the information
required to be disclosed in our reports filed with the SEC under the Exchange
Act is (1) recorded, processed, summarized, and reported within the time
periods
specified in the SEC’s rules and forms and (2) is accumulated and communicated
to our management, including the Chief Executive Officer, as appropriate
to
allow timely decisions regarding required disclosure.
In
January 2007, we acquired TSS/Vortech and re-evaluated our internal control
process during 2007 based on the framework in "Internal Control-Interpreted
Framework" issued by Committee of Sponsoring Organizations of the Treadway
Commission (COSO). As a result of this re-evaluation, we have determined
that
our internal control over financial reporting is ineffective as of December
31,
2007. We had neither the resources, nor the personnel, to provide for an
adequate internal control environment. The following material weaknesses
in our
internal control over financial reporting were noted at December 31, 2007:
(i)
we did not have the ability to segregate duties; (ii) we lacked the formal
documentation of policies and procedures that were in place; (iii) we lacked
adequate financial personnel; (iv) we lacked general computer controls and
adequate procedures involving change management, and; (v) controls are
inadequate to reasonably assume compliance with generally accepted accounting
principles related to revenue.
We
have
begun to address the internal control weaknesses summarized above beginning
in
the first quarter of 2008, with the goal of eliminating such deficiencies
by the
end of 2008. We are working with a certified public accounting firm to serve
as
our internal auditors to further enhance our internal control environment
and a
Chief Financial Officer has been with the Company since August 20, 2007.
The
acquisitions of TSS/Vortech will require the development of more robust
disclosure controls and procedures, which we are currently developing.
Management will continue to monitor, evaluate and test the operating
effectiveness of these controls during 2008.
This
Annual Report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
| Item 1B. |
UNRESOLVED
STAFF COMMENTS
|
None.
| Item 2. |
PROPERTIES
|
Our
principal executive offices are located at 9841 Broken Land Parkway, Columbia,
Maryland 21046. We have both cancelable and non-cancelable operating leases
and
do not own any real property. Our
subsidiaries operate from leased administrative offices and shop
facilities. We believe that our facilities are adequate for our current
operations and additional facilities would be available if
necessary.
| Item 3. |
LEGAL
PROCEEDINGS
|
We
are
not a party to any material litigation in any court, and management is not
aware
of any contemplated proceeding by any governmental authority against
us.
From
time
to time, we are involved in various legal matters and proceedings concerning
matters arising in the ordinary course of business. We currently believe that
any ultimate liability arising out of these matters and proceedings will not
have a material adverse effect on our financial position, results of operations
or cash flows.
| Item 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to a vote of security holders through the solicitation
of
proxies or otherwise during the fourth quarter of the year ended December 31,
2007.
27
PART
II
| Item 5. |
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Our common
stock, warrants, and units began trading on The Nasdaq Capital Market (NASDAQ)
on August 1, 2007 under
the
symbols “FIGI,” “FIGIW,” and “FIGIU,” respectively. Prior and up to trading on
the NASDAQ, our common stock, warrants, and units were traded on
the FINRA Over-the-Counter Bulletin Board (OTCBB) under the
symbols “FAAC,” “FAACW,” and “FAACU,” respectively. Each
warrant entitles the holder to purchase one share of common stock at an exercise
price of $5.00. The closing price per share of our common stock, warrants and
units as reported by NASDAQ on March 25, 2008 was $4.37,
$0.43
and $5.30, respectively. The
following table sets forth, for the periods indicated, the high and low sales
prices for the common stock, warrants and units, as reported by NASDAQ from
August 1, 2007 and OTCBB bid quotations prior to August 1, 2007,
which reflect interdealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions:
|
Common
Stock
|
|
Warrants
|
Units
|
||||||||||||||||
|
Year
ended December 31, 2007
|
High
|
|
Low
|
|
High
|
|
Low
|
High
|
|
Low
|
|||||||||
|
First
Quarter
|
$
|
5.70
|
$
|
5.23
|
$
|
0.94
|
$
|
0.20 |
$
|
7.50
|
$
|
6.00
|
|||||||
|
Second
Quarter
|
$
|
5.60
|
$
|
4.91
|
$
|
0.95 |
$
|
0.57 |
$
|
7.36
|
$
|
6.04
|
|||||||
|
Third
Quarter
|
$
|
6.53
|
$
|
5.13
|
$
|
1.80 |
$
|
0.63 |
$
|
10.00
|
$
|
6.50
|
|||||||
|
Fourth
Quarter
|
$
|
6.06
|
$
|
4.77
|
$
|
1.30 |
$
|
0.47 |
$
|
8.50
|
$
|
6.00
|
|||||||
|
Year
ended December 31, 2006
|
|||||||||||||||||||
|
First
Quarter
|
$
|
5.60
|
$
|
5.22
|
$
|
0.78
|
$
|
0.36
|
$
|
7.15
|
$
|
5.95
|
|||||||
|
Second
Quarter
|
$
|
5.54
|
$
|
5.35
|
$
|
0.83
|
$
|
0.49
|
$
|
7.20
|
$
|
6.23
|
|||||||
|
Third
Quarter
|
$
|
5.50
|
$
|
5.35
|
$
|
0.55
|
$
|
0.41
|
$
|
6.65
|
$
|
6.12
|
|||||||
|
Fourth
Quarter
|
$
|
5.62
|
$
|
5.40
|
$
|
0.51
|
$
|
0.40
|
$
|
6.55
|
$
|
6.25
|
|||||||
Stockholders
As
of
February 29, 2008, there were 24 stockholders
of record of our 12,089,221
outstanding shares of common stock (does not reflect persons or entities
that
hold
their shares
of
common stock
in
nominee or “street”
name
through various brokerage firms), 1 holders of record of our units
and 1 holders of record of our warrants.
Dividends
We
have
not paid dividends to our stockholders since our inception and do not plan
to pay cash dividends in the foreseeable future. We currently intend to
retain earnings, if any, to finance our growth.
28
| Item 6. |
SELECTED
FINANCIAL DATA
|
The
following table was derived from the audited consolidated financial statements
of Fortress International Group, Inc. and its subsidiaries for each of the
three
years ended December 31, 2005, 2006 and 2007 and for the period from December
20, 2004 (inception) through December 31, 2004. The selected financial data
for
each of the periods ended December 31, 2006 have been derived from our
consolidated financial statement, which financial statements have been audited
by Goldstein Golub Kessler LLP, an independent registered public accounting
firm
and the selected financial data for the period from January 1, 2007 through
January 19, 2007 and from January 20, 2007 through December 31, 2007 have been
audited by Grant Thornton LLP, an independent registered public accounting
firm.
The information for the period ended December 31, 2007 includes operations
of
TSS/Vortech from January 20, 2007 through December 31, 2007. The foregoing
consolidated financial statements and the report thereon are included elsewhere
in this Annual Report on Form 10-K. The information below should be read in
conjunction with the consolidated financial statements (and notes thereon)
and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included in Item 7.
29
|
Fortress
International Group, Inc.
|
|||||||||||||
|
For
the period
|
|||||||||||||
|
December
20, 2004
|
|||||||||||||
|
(Successor)
|
(inception)
to
|
||||||||||||
|
2007
|
|
2006
|
|
2005
|
Decmeber
31, 2004
|
||||||||
|
Results
of Operations:
|
|||||||||||||
|
Revenue
|
$
|
50,455,823
|
$
|
-
|
$
|
$
|
-
|
||||||
|
Cost
of revenue
|
42,071,361
|
-
|
-
|
-
|
|||||||||
|
Gross
profit
|
8,384,462
|
-
|
-
|
-
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
14,563,111
|
689,120
|
319,694
|
-
|
|||||||||
|
Depreciation
and amortization
|
394,913
|
-
|
-
|
-
|
|||||||||
|
Amortization
of intangibles
|
2,109,222
|
-
|
-
|
-
|
|||||||||
|
Total
operating costs
|
17,067,246
|
689,120
|
319,694
|
-
|
|||||||||
|
Operating
income (loss)
|
(8,682,784
|
)
|
(689,120
|
) |
(319,694
|
) |
-
|
||||||
|
Interest income
(expense), net
|
806,518
|
1,666,806
|
525,430
|
(1,056
|
)
|
||||||||
|
Income
(loss) before income taxes
|
(7,876,266
|
)
|
977,686
|
205,736
|
(1,056
|
)
|
|||||||
|
Income
tax expense (benefit)
|
(499,155
|
)
|
332,414
|
74,194
|
-
|
||||||||
|
Net
Income (loss) from continuing operations(1)
|
$
|
(7,377,111
|
)
|
$
|
645,272
|
$
|
131,542
|
$
|
(1,056
|
)
|
|||
|
Per
Common Share:
|
|||||||||||||
|
Basic
and diluted net income (loss) from continuing
operations(1)
|
$
|
(0.63
|
)
|
$
|
0.07
|
$
|
0.03
|
$
|
0.11
|
||||
|
Dividends(2)
|
-
|
-
|
-
|
-
|
|||||||||
|
Financial
Position:
|
|||||||||||||
|
Total
assets
|
$
|
77,399,061
|
$
|
46,045,619
|
$
|
43,778,513
|
$
|
25,000
|
|||||
|
Current
portion of long-term debt(3)
|
1,650,306
|
-
|
-
|
-
|
|||||||||
|
Long-term
debt, less current portion(3)
|
7,848,661 |
-
|
-
|
-
|
|||||||||
|
Common
stock, subject to possible conversion,
|
|||||||||||||
|
1,559,220
at conversion value (4)
|
-
|
8,388,604
|
8,388,604
|
-
|
|||||||||
|
Stockholders’
and members’ equity (5)
|
47,853,675
|
35,595,775
|
34,950,503
|
23,944
|
|||||||||
| (1) |
During
2007 we completed a series of acquisitions as
follows:
|
| A. | On January 19, 2007, we purchased TSS/Vortech. |
| B. |
On
May 7, 2007, we purchased substantially all of the assets of Comm
Site of South Florida, Inc.
|
| C. |
On
September 24, 2007, we purchased 100% of outstanding stock
of Innovative.
|
| D. |
On
November 30, 2007, we purchased all of the membership interests of
Rubicon.
|
The
TSS/Vortech, Comm Site, Innovative and Rubicon results of operations and
financial position are included in our consolidated financial statements
from the respective dates of their acquisition. During 2007, we recorded revenue
attributable to TSS/Vortech of 48,595,473, Comm Site of
$250,000, Innovative of $1,182,808, and Rubicon of $427,542.
| (2) |
We
have not paid dividends to our stockholders since our inception and
do not plan to pay cash dividends in the foreseeable future. We
currently intend to retain earnings, if any, to finance our
growth.
|
| (3) |
In
conjunction with acquisition of TSS/Vortech, Innovative, and
Rubicon we, in a non-cash exchange, issued notes payable, bearing
interest at 6%, to the respective sellers. During the third quarter
2007, we paid $2.0 million of cash to retire $2.5 million of notes
payable issued to Mr. Rosato in conjunction with the sale of TSS/Vortech.
The net $0.5 million difference was recorded as an addition to additional
paid-in capital.
|
| (4) |
We had
initially anticipated that 1,559,220 shares of our common stock would
be
subject to conversion; however, only 756,100 shares were
converted.
|
| (5) |
We used
approximately $2,036,015 of our cash to purchase 379,075 shares
of our
common stock at an average price of $5.37 per share. We
retired 221,000 of the repurchased shares on June 13, 2007. The
repurchase program was suspended during the third quarter of 2007.
|
30
The
following table was derived from the audited consolidated financial statements
of TSS/Vortech and its subsidiaries for the period from January 1, 2007 through
January 19, 2007 (acquisition date) and for each of the four years ended
December 31, 2006, 2005, 2004 and 2003. The foregoing consolidated financial
statements and the report thereon are included elsewhere in this Annual Report
on Form 10-K. The information below should be read in conjunction with the
consolidated financial statements (and notes thereon) and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
included in Item 7.
|
Predecessor
(TSS/Vortech)
|
||||||||||||||||
|
Period
from
|
||||||||||||||||
|
Janaury
1, 2007
|
||||||||||||||||
|
ending
January
19, 2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Results
of Operations:
|
||||||||||||||||
|
Revenue
|
$
|
1,412,137
|
$
|
60,154,971
|
$
|
58,632,293
|
$
|
21,302,997
|
$
|
12,330,785
|
||||||
|
Cost
of revenue
|
1,108,276
|
48,172,911
|
50,056,924
|
15,769,341
|
$
|
8,392,786
|
||||||||||
|
Gross
profit
|
303,861
|
11,982,060
|
8,575,369
|
5,533,656
|
3,937,999
|
|||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
555,103
|
8,165,386
|
5,419,618
|
4,363,144
|
2,083,889
|
|||||||||||
|
Depreciation
and amortization
|
33,660
|
277,664
|
228,279
|
151,331
|
48,019
|
|||||||||||
|
Amortization
of intangibles
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Total
operating costs
|
588,763
|
8,443,050
|
5,647,897
|
4,514,475
|
2,131,908
|
|||||||||||
|
Operating
income (loss)
|
(284,902
|
)
|
3,539,010
|
2,927,472
|
1,019,181
|
1,806,091
|
||||||||||
|
Other
income (expense), net
|
3,749
|
(24,084
|
)
|
(35,184
|
)
|
(29,139
|
)
|
(3,957
|
)
|
|||||||
|
Income
from continuing operations
|
(281,153
|
)
|
3,514,926
|
2,892,288
|
990,042
|
1,802,134
|
||||||||||
|
Loss
(gain) from discontinued operations
|
-
|
-
|
(252,845
|
)
|
252,845
|
-
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
(281,153
|
)
|
$
|
3,514,926
|
$
|
3,145,133
|
$
|
737,197
|
$
|
1,802,134
|
|||||
|
Per
Common Share: (1)
|
||||||||||||||||
|
Basic
and diluted income (loss) from continuing operations
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Dividends
|
|
-
|
|
-
|
-
|
-
|
-
|
|||||||||
|
Financial
Position:
|
||||||||||||||||
|
Total
assets
|
$
|
10,346,091
|
$
|
13,962,112
|
$
|
14,099,310
|
$
|
6,001,953
|
$
|
5,448,474
|
||||||
|
Current
portion of long-term debt
|
72,808
|
76,934
|
72,808
|
116,654
|
48,726
|
|||||||||||
|
Long-term
debt, less current portion
|
79,524
|
81,679
|
160,652
|
369,579
|
167,015
|
|||||||||||
|
Stockholders’
and members’ equity
|
1,889,323
|
3,413,862
|
2,591,634
|
356,117
|
1,276,437
|
|||||||||||
(1) The
Predecessor was a Limited Liability Company accordingly no earnings per share
data is computed.
| Item 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You
should read the following discussion and analysis in conjunction with our
financial statements and the related notes included elsewhere in this
Form 10-K. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties, and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements
as
a result of certain factors, including, but not limited to, those set forth
under “Risk Factors” and elsewhere in this Annual Report on
Form 10-K.
31
Business
Formation and Overview
We
were incorporated in Delaware on December 20, 2004 as a special
purpose acquisition company formed under the name “Fortress America Acquisition
Corporation” for the purpose of acquiring an operating business that performed
services to the homeland security industry.
On
July 20, 2005, we closed our initial public offering of 7,000,000 units,
with each unit consisting of one share of our common stock and two warrants
(each warrant to purchase one share of our common stock at $5.00 per share).
The
units were sold at an offering price of $6.00 per unit, generating gross
proceeds of $42,000,000. On August 24, 2005, we sold an additional 800,000
units pursuant to the underwriters’ over-allotment option raising additional
gross proceeds of $4,800,000. After deducting underwriting discounts and
commissions and the offering expenses, the total net proceeds to us from the
offering were approximately $43,183,521, of which $41,964,000 was deposited
into
a trust fund and the remaining proceeds of $1,219,521 were made available for
business, legal and accounting due diligence on prospective business
combinations and continuing general and administrative expenses.
On
January 19, 2007, we acquired all of the outstanding membership interests
of each of VTC, L.L.C., doing business as “Total Site Solutions” (“TSS”), and
Vortech, L.L.C. (“Vortech” and, together with TSS, “TSS/Vortech”) and
simultaneously changed our name to “Fortress International Group, Inc.”
TSS/Vortech provides comprehensive services for the planning, design, and
development of mission critical facilities and information infrastructure.
The
details of the TSS/Vortech acquisition are provided in Item 1, Part I,
“Business-Background of Fortress International Group, Inc” in this Annual
Report on Form 10-K.
After
our
initial acquisition of TSS/Vortech, management continued an acquisition strategy
to expand our geographical footprint, add complimentary services, and diversify
and expand our customer base. We acquired substantially all of the assets of
Comm Site of South Florida, Inc. on May 7, 2007, 100% of the outstanding stock
of Innovative Power Solutions, Inc. and Quality Power Solutions, Inc. on
September 24, 2007, and 100% of the membership interests of Rubicon Integration,
L.L.C. on November 30, 2007. Subsequent to year end on January 2, 2008, we
purchased 100% of the outstanding stock of SMLB, Ltd.
As
a
result of these acquisitions, fiscal year 2007 was our first year to engage
in
operations, generating revenue and incurring debt and expenses.
We
provide comprehensive services for the planning, design, and development
of
mission-critical facilities and information infrastructure. We also provide
a
single source solution for highly technical mission-critical facilities such
as
data centers, operation centers, network facilities, server rooms, security
operations centers, communications facilities and the infrastructure systems
that are critical to their function. Our services include technology consulting,
engineering and design management, construction management, system
installations, operations management, and facilities management and
maintenance.
During
the past three years, our revenue growth has been driven mainly by government
spending on homeland security initiatives spurred by the events of
September 11, 2001. These events have also affected businesses, which are
increasing spending on data security and privacy. These homeland security
initiatives include projects that require the relocation, renovation and
upgrade
of mission-critical facilities to protect critical government information
networks and data processing centers against attacks. In addition to these
factors there are other drivers that cause our market to remain robust.
Legislation such as Sarbanes Oxley compliance for publicly traded companies,
HIPPA laws regarding protection and availability of data for healthcare
organizations and the government’s critical infrastructure protection program
for industries that are vital to our economy have resulted in such companies
having the need to invest to protect their networks, the reliability of those
networks, and maintain their ability to perform transactions that are financial
or informational in nature. With respect to these critical infrastructure
systems, we focus on physical security, network security, redundancies for
uninterruptible power supply systems, electrical switch gear, stand-by power
generators, heat rejection and cooling systems, fire protection systems,
monitoring and control systems, and security systems, as well as the physical
environment that houses critical operations. We help our customers plan for,
prevent or mitigate against the consequences of attacks, power outages and
natural disasters. We provide our services, directly and indirectly, to both
government customers and private sector customers.
32
We
have
obtained a facility clearance from the United States Department of Defense.
This
clearance enables the companies to access and service restricted government
projects. In addition to the facility clearance, TSS has successfully cleared
over one-third of its employees, allowing them individual access to restricted
projects and facilities. Several additional employees are currently in the
process for clearance.
During
the fiscal year 2007, we have expanded our sales reach by opening offices
in New
York, Chicago and Miami. We plan to continue to expand geographically through
internal growth initiatives, as well as through potential acquisitions of
specialized mission-critical engineering, IT services firms (primarily in
the
United States) and mission-critical facility management
companies.
Our
customers include United States government and homeland defense agencies
and
private sector businesses that in some cases are the end user of the facility
or
in other cases are providing a facility to a government end user. We categorize
contracts where a government agency is the ultimate end user of the facility
as
government-related contracts.
Our
revenues are derived from fees for our professional services as well as revenues
earned under construction management contracts and facility management contracts
with varying terms.
We
believe there are high barriers to entry in our sector for new competitors
due
to our specialized technology service offerings we deliver for our customers,
our top secret clearances, and our turnkey suite of deliverables offered.
We
compete for business based upon our reputation, past experience, and our
technical engineering knowledge of mission-critical facilities and their
infrastructure. We are developing and creating long term relationships with
our
customers because of our excellent reputation in the industry and will continue
to create facility management relationships with our customers that we expect
will provide us with steadier revenue streams to improve the value of our
business.
Operations
Overview
We
contract with our customer under three primary contract types: cost-plus-fee
(guaranteed maximum price), time-and-materials, and fixed-price contracts.
Cost-plus-fee (guaranteed maximum price) contracts are typically lower risk
arrangements and thus yield lower profit margins than time-and-materials and
fixed-price arrangements which generate higher profit margins generally,
relative to their higher risk. Where customer requirements are clear, we prefer
to enter into time-and-materials and fixed-price arrangements rather than
cost-plus-fee contracts.
Most
of
our revenue is generated based on services provided either by our employees
or
subcontractors. To a lesser degree, the revenue we earn includes reimbursable
travel and other costs to support the project. Thus, once we are awarded new
business, the key to delivering the revenue is through hiring new employees
to
meet customer requirements, retaining our employees, and ensuring that we deploy
them on direct-billable jobs. Therefore, we closely monitor hiring success,
attrition trends, and direct labor utilization. Since we earn higher profits
from the labor services that our employees provide compared with subcontracted
efforts and other reimbursable costs, we seek to optimize our labor content
on
the contracts we are awarded.
Cost
of
revenue includes labor, or the salaries and wages of our employees, plus fringe
benefits; the costs of subcontracted labor and outside consultants, equipment
and materials, and other direct costs such as travel incurred to support
contract efforts. Since we earn higher profits on our own labor services, we
expect the ratio of cost of services to revenue to decline when our labor
services mix increases relative to subcontracted labor or third-party material.
Conversely, as subcontracted labor or third-party material purchases for
customers increase relative to our own labor services, we expect the ratio
of
cost of services to revenue to increase. As we continue to bid and win larger
contracts, our own labor services component could decrease. Typically, the
larger contracts are broader in scope and
require
more diverse capabilities, thus resulting in more subcontracted labor. In
addition, we can face hiring challenges in staffing larger contracts. While
these factors could lead to a higher ratio of cost of services to revenue,
the
economics of these larger jobs are nonetheless generally favorable because
they
increase income, broaden our revenue base and have a favorable return on
invested capital.
Depreciation
and amortization expenses are affected by the level of our annual capital
expenditures and the amount of identified intangible assets related to
acquisitions. We do not presently foresee significant changes in our capital
expenditure requirements. As we continue to make selected strategic
acquisitions, the amortization of identified intangible assets may increase
as a
percentage of our revenue.
33
Our
operating income, or revenue minus cost of revenue, selling, general and
administrative expenses, and depreciation and amortization, and thus our
operating margin, or the ratio of operating income to revenue, is driven by
the
mix and execution on our contracts, how we manage our costs, and the
amortization charges resulting from acquisitions.
Our
cash position is driven primarily by the level of net income, working capital
in
accounts receivable, capital expenditures and acquisition activities.
Contract
Backlog
We
believe a strong indicator of our future performance is our backlog of
uncompleted projects in process or recently awarded. Our backlog represents
our
estimate of anticipated revenue from executed and awarded contracts that
have
not been completed and that we expect will be recognized as revenues over
the
life of the contracts. We have broken our backlog into the following three
categories: (i) technology consulting consisting of services related to
consulting and/or engineering design contracts; (ii) construction management
and
(iii) facility management.
Backlog
is not a measure defined in generally accepted accounting principles, and
our
methodology for determining backlog may not be comparable to the methodology
of
other companies in determining their backlog. Our backlog is generally
recognized under two categories: (1) contracts for which work authorizations
have been or are expected to be received on a fixed-price basis, guaranteed
maximum price basis and time and materials basis and (2) contracts awarded
to us
where some, but not all, of the work have not yet been authorized. At December
31, 2007, we have authorizations to proceed with work for approximately
$32.4
million or 19% of our total backlog of $172.9 million. Additionally,
approximately $118 million or 68% of our backlog relates to a single customer
at
December 31, 2007.
As
of
December 31, 2007, our backlog was approximately $172.2 million, compared
to
approximately $20.6 million at December 31, 2006. We believe that approximately
50% of the backlog at December 31, 2007 will be recognized during over the
next
twelve months. The following table reflects the value of our backlog in the
above three categories as of December 31, 2007 and December 31, 2006,
respectively.
|
|
(Successor)
December
31,
2007
|
(Predecessor)December
31,
2006
|
|||||
|
Technology
consulting
|
$
|
3.9
|
$
|
1.3
|
|||
|
Construction
management
|
154.1
|
11.8
|
|||||
|
Facilities
management
|
14.9
|
7.5
|
|||||
|
|
|||||||
|
Total
Backlog
|
$
|
172.9
|
$
|
20.6
|
|||
Related
Party
Transactions
We have in
the past, and continue to have, transactions with related parties and
such transactions are reviewed by the audit committee of our board of
directors in accordance with our audit committee charter. We believe that
all of our related
party
transactions
are reflected at arm’s length terms. For a discussion of certain
relationships and related
party
transactions,
see Note 14 —Related
Party
Transactions
of the Notes to Consolidated Financial Statements. The table below summarizes
our related party transactions:
|
(Successor)
|
|
(Predecessor)
|
|
||||
|
|
|
For
the Year
|
|
For
the Year
|
|
||
|
|
|
Ended
|
|
Ended
|
|
||
|
|
|
December
31,
|
|
December
31,
|
|
||
|
|
|
2007
|
2006
|
||||
|
Revenue
|
$
|
0.4
|
$
|
2.4
|
|||
|
Cost
of revenue
|
4.3
|
7.5
|
|||||
|
Selling,
general and administrative
|
0.6
|
1.3
|
|||||
Overview
of 2006
We
neither engaged in any operations, generated any revenues nor incurred any
debt
or expenses during the period ended December 31, 2006, other than for rent
and administrative support, taxes, accounting and legal fees associated with
our
public reporting obligations, and expenses related to pursuing acquisitions
of
target businesses. Our activity from inception until January 19, 2007 was
focused on preparing for and consummating our initial public offering and then
identifying and investigating target businesses for a business
combination.
34
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires that management make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ significantly from those
estimates.
We
believe the following critical accounting policies affect the more significant
estimates and judgments used in the preparation of our financial statements.
Revenue
Recognition
The
Company recognizes revenue when pervasive evidence of an arrangement exists,
the
contract price is fixed or determinable, services have been rendered or
goods
delivered, and collectibility is reasonably assured. The Company's revenue
is
derived from the following types of contractual arrangements: fixed-price
contracts, time and material contracts and cost-plus-fee contracts (including
guaranteed maximum price contracts). The Company’s primary source of revenue is
from fixed price contracts and
we
apply Statement of Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, recognizing revenue
on
the percentage-of-completion method using costs incurred in relation to
total
estimated project costs.
Revenue
from fixed price contracts is recognized on the percentage of completion
method,
measured by the percentage of total costs incurred to date to estimated
total
costs for each contract. This method is used because management considers
cost
incurred and costs to complete to be the best available measure of progress
in
the contracts. Contract costs include all direct materials, subcontract
and
labor costs and those indirect costs related to contract performance, such
as
indirect labor, payroll taxes, employee benefits and supplies.
Revenue
on time-and-material contracts is recognized based on the actual labor
hours
performed at the contracted billable rates, and costs incurred on behalf
of the
customer. Revenue on cost-plus-fee contracts is recognized to the extent
of
costs incurred,
plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee
contracts are recorded as earned in proportion to the allowable costs incurred
in performance of the contract.
Contract
revenue recognition inherently involves estimation. Examples of estimates
include the contemplated level of effort to accomplish the tasks under
the
contract, the costs of the effort, and an ongoing assessment of the Company's
progress toward completing the contract. From time to time, as part of
its
standard management process, facts develop that require the Company to
revise
its estimated total costs on revenue. To the extent that a revised estimate
affects contract profit or revenue previously recognized, the Company records
the cumulative effect of the revision in the period in which the revisions
becomes known. The full amount of an anticipated loss on any type of contract
is
recognized in the period in which it becomes probable and can reasonably
be
estimated.
Under
certain circumstances, the Company may elect to work at risk prior to receiving
an executed contract document. The Company has a formal procedure for
authorizing any such at risk work to be incurred. Revenue, however, is
deferred
until a contract modification or vehicle is provided by the customer.
35
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine the
allowance based on an analysis of our historical experience with bad debt
writeoffs and an aging of the accounts receivable balance. Account balances
are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
Non-cash
Compensation
We
apply
the expense recognition provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123”), therefore, the recognition of
the value of the instruments results in compensation or professional expenses
in
an our financial statements. The expense differs from other compensation
and
professional expenses in that these charges, though generally permitted to
be
settled in cash, are typically settled through the issuance of common stock,
which would have a dilutive effect upon earnings per share, if and when such
warrants are exercised or restricted stock vests. The determination of the
estimated fair value used to record the compensation or professional expenses
associated with the equity or liability instruments issued requires management
to make a number of assumptions and estimates that can change or fluctuate
over
time.
Goodwill
and Other Purchased Intangible Assets
Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Other purchased intangible assets include the fair value of items
such
as customer contracts, backlog and customer relationships. SFAS No. 142,
Goodwill
and Other Intangible Assets
(SFAS
No. 142), establishes financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets acquired
in
a purchase business combination and determined to have an indefinite useful
life
are not amortized, but rather tested for impairment on an annual basis or
triggering event. Purchased intangible assets with a definite useful life are
amortized on a straight-line basis over their estimated useful lives.
The
estimated fair market value of identified intangible assets is amortized over
the estimated useful life of the related intangible asset. We have a process
pursuant to which we typically retain third-party valuation experts to assist
us
in determining the fair market values and useful lives of identified intangible
assets. We evaluate these assets for impairment when events occur that suggest
a
possible impairment. Such events could include, but are not limited to, the
loss
of a significant client or contract, decreases in federal government
appropriations or funding for specific programs or contracts, or other similar
events. None of these events have occurred for the periods presented. We
determine impairment by comparing the net book value of the asset to its future
undiscounted net cash flows. If an impairment occurs, we will record an
impairment expense equal to the difference between the net book value of the
asset and its estimated discounted cash flows using a discount rate based on
our
cost of capital and the related risks of recoverability.
Long-Lived
Assets (Excluding Goodwill)
In
accordance with the provisions of SFAS No. 144 in accounting for long-lived
assets such as property, equipment and intangible assets subject to
amortization, we review the assets for impairment. If circumstances
indicate the carrying value of the asset may not be fully recoverable, a loss
is
recognized at the time impairment exists and a permanent reduction in the
carrying value of the asset is recorded. We believe that the carrying
values of its long-lived assets as of December 31, 2007 are fully
realizable.
36
Income
Taxes
Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Deferred tax assets
and liabilities are measured using tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized.
We
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which principally arise
from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We also must analyze income tax reserves, as
well
as determine the likelihood of recoverability of deferred tax assets, and adjust
any valuation allowances accordingly. Considerations with respect to the
recoverability of deferred tax assets include the period of expiration of the
tax asset, planned use of the tax asset, and historical and projected taxable
income, as well as tax liabilities for the tax jurisdiction to which the tax
asset relates. Valuation allowances are evaluated periodically and will be
subject to change in each future reporting period as a result of changes in
one
or more of these factors.
Effective
January 1, 2007, we were required to adopt FASB Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN 48”). FIN 48 prescribes a more-likely-than-not threshold of
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition of income tax assets and liabilities, classification of
current and deferred tax assets and liabilities, accounting for interest
and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures. Since inception and through January 1,
2007, the adoption date of this standard, we were in essence a “blank
check” company with no substantive operations. Management has concluded that the
adoption of FIN 48 had no material effect on our financial position or
results of operations. As of December 31, 2007, we do not have
any material gross unrecognized tax benefit liabilities. However, management
is
still in the process of evaluating the various tax positions associated with
the
acquisition of Innovative and is of the opinion that any deferred tax
liabilities that would ultimately result from uncertain tax positions related
to
these entities may be covered by indemnification provisions provided in the
acquisition agreements or may result in an adjustment to
goodwill.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenue and expenses during the reporting period.
The
most critical estimates and assumptions are made in determining the allowance
for doubtful accounts, revenue recognition, recovery of long-lived assets,
useful lives of long-lived assets, accruals for estimated tax and stock
compensation expense. Actual results could differ from those estimates and
assumptions.
In
September 2006, the FASB issued Statements of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for fiscal years beginning after November 15, 2007
and interim periods within that fiscal year. The adoption of SFAS No. 157
is not expected to have a material effect on our consolidated results of
operations or financial condition upon adoption on January 1, 2008.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141,
“Business Combinations.” SFAS No.141R retains the underlying concepts of SFAS
No. 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but
SFAS
No. 141R will significantly change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment for certain specific acquisition related
items
including: (1) expensing acquisition related costs as incurred;
(2) expensing changes in deferred tax asset valuation allowances and income
tax
uncertainties after the acquisition date; (3) valuing noncontrolling
interests at fair value at the acquisition date; and (4) expensing
restructuring costs associated with an acquired business. SFAS No. 141R
also includes a substantial number of new disclosure requirements. SFAS
No. 141R is to be applied prospectively to business combinations for which
the acquisition date is on or after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No.160 requires
noncontrolling interests, previously referred to as minority interests, to
be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity and applies to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. SFAS No. 160 will be applied prospectively to all
noncontrolling interests, including any that arose before the effective date
except that comparative period information must be restated to classify
noncontrolling interests in equity, attributed net income and other
comprehensive income to noncontrolling interests, and provide other disclosures
required by SFAS No. 160. This statement is effective for the Company
beginning January 1, 2009. We currently do not expect the adoption of SFAS
No. 160 to have a material effect on our consolidated results of operations
or financial condition.
Results
of Operations
Year
ended December 31, 2007 (Successor) compared to the year ended December 31,
2006
(Successor)
Revenue
and operating costs and expenses. The
Company had no operating revenues or cost of revenues in the year ended
December 31, 2006, compared to $50.5 million of revenues and
$42.1 million in cost of revenues in the year ended December 31, 2007.
Selling,
general and administrative expenses. Selling,
general and administrative expenses of $0.7 million for the year ended
December 31, 2006 were related to the pursuit of potential acquisition
candidates. For the year ended December 31, 2007, the $14.6 million of
selling, general and administrative expenses were related to our operations
of
the acquired companies.
37
Depreciation.
There
was
no depreciation expense in the year ended December 31, 2006. For the year
ended December 31, 2007, the $0.4 million of depreciation expense was
related to our operations of the acquired companies.
Amortization
of intangible assets. There
was
no amortization of intangible assets in the year ended December 31, 2006.
For the year ended December 31, 2007, the $2.1 million of amortization
expense reflects the amortization of intangible assets resulting from the
acquisitions of TSS/Vortech, Innovative and Rubicon.
Interest
income (expense), net Interest
income, net was $0.8 million in the year ended December 31, 2007, and
interest income was $1.7 million for the year ended December 31, 2006.
The interest income for the period ended December 31, 2006 was primarily
related to earnings on funds that were held in trust until we consummated
the acquisition of TSS/Vortech, which occurred on January 19, 2007. The
interest income for the period ended December 31, 2007 was primarily
lower due to lower average invested balances and higher expense associated
with
promissory notes issued in conjunction with our acquistions.
Provision
for income taxes. The
income tax benefit was $0.5 million for the year ended December 31,
2007 from an income tax expense of $0.3 million for the year ended
December 31, 2006.
Year
ended December 31, 2007 (Successor) compared to year ended December 31, 2006
(Predecessor)
Revenue.
Revenue
decreased $9.7 million to $50.5 million for the year ended December 31, 2007
from $60.2 million for the year ended December 31, 2006. The decrease in revenue
is primarily attributable to our transition from dependence on a single
customer, whose contracts were substantially completed in 2007, to a more
diversified customer base.
Cost
of Revenue. Cost
of
revenue decreased $6.1 million to $42.1 million for the year ended December
31,
2007 from $48.2 million for the year ended December 31, 2006. The decrease
in
cost of revenue is primarily attributable to decline in contract volume and
the
transition in contracted revenue largely from a single customer to a more
diversified customer base.
Gross
Margin Percentage. Gross
margin percentage decreased approximately 300 basis points to 17% for the year
ended December 31, 2007 from 20% for the year ended December 31, 2006. The
decline in gross profit is primarily attributable to the contract mix of work
being performed.
Selling,
general and administrative expenses. Selling,
general and administrative expenses increased $6.4 million to $14.6 million
for the year ended December 31, 2007 from $8.2 million for the year ended
December 31, 2006. The increase in expense is associated primarily with
additional costs of being a public company and increased headcount in the
proposal, sales and marketing departments, as we sought to simultaneously
grow and diversify our customer base in 2007.
Depreciation.
Depreciation
expenses increased $0.1 million to $0.4 million for the year ended
December 31, 2007 from $0.3 million for the year ended December 31, 2006.
The increase was driven by a higher average depreciable base.
Amortization
of intangible assets. Amortization
expense increased to $2.1 million for the year ended December 31, 2007 from
$0 for the year ended December 31, 2006. For the year ended December 31,
2007, the $2.1 million of amortization expense reflects the amortization of
intangible assets resulting from the acquisitions of TSS/Vortech, Innovative
and
Rubicon. The predecessor had no amortizable intangibles in 2006.
Interest
income (expense), net. Interest
income, net was $0.8 million in the year ended December 31, 2007 as
compared to $0 for the year ended December 31, 2006. The interest
income for the period ended December 31, 2007 was primarily attributable to
interest of $1.3 million on invested cash balances, offset in part by interest
expense of $0.5 million associated with promissory notes issued in acquisitions.
Provision
for income taxes. The
income tax benefit was $0.5 million for the year ended December 31,
2007 as compared to $0.0 million for the year ended December 31, 2006. The
predecessor company was a limited liability company, and therefore the entity
was not taxed rather its members were responsible for any tax obligation.
38
Year
ended December 31, 2006 (Successor) compared to the year ended December 31,
2005
(Successor)
Selling,
general and administrative expenses. Selling,
general and administrative expenses increased $0.4 million to $0.7 million
for the year ended December 31, 2006 from $0.3 million for the year ended
December 31, 2005. The costs are associated were related to the pursuit of
acquisition candidate and increased due primarily to a partial year of
operations from July 25, 2005 (IPO) through December 31, 2005.
Interest
income, (expense), net.
For the
year ended December 31, 2006, we had total income of $1.7 million,
consisting of net interest income on investments held in trust and on cash
balances maintained. This represented an increase of $1.2 million, or 217%,
from the year ended December 31, 2005 due to the completion of our initial
public offering on July 20, 2005.
Provision
for income taxes.
The
provision for income taxes increased $0.2 million to $0.3 million for the year
ended December 31, 2006 from $0.1 million for the year ended December 31, 2005.
The increase in the provision is associated with the $0.5 million increase
in income from operations due to higher net interest income on investments
held
in trust
Liquidity
and Capital Resources
Overview
|
Successor
(Fortress International Group, Inc.)
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Cash used
in operations
|
$ |
(4,554,793
|
)
|
$ |
(780,496
|
)
|
$ |
(252,074
|
)
|
|
|
Cash
provided by (used in) investing
|
26,286,893
|
(224,704
|
)
|
(41,964,000
|
)
|
|||||
|
Cash
provided by (used in) financing
|
(8,567,237
|
)
|
20,000
|
43,183,621
|
||||||
|
Net
increase (decrease) in cash
|
$ |
13,164,863
|
$ |
(985,200
|
)
|
$ |
967,547
|
|||
From
inception through January 19, 2007, we operated solely as an investment vehicle
to acquire an operating company consistent with our purpose. We completed our
initial public offering July 20, 2005, resulting in funds of
approximately $43.2 million, net of issuance costs. We invested the net
proceeds from our initial public offering (IPO) in short term U.S. treasury
bills and used the earned interest to fund our operating costs associated with
our pursuit of acquisition candidates. Investing activity from inception through
January 19, 2007 was limited to investing our IPO proceeds in a trust account.
Aside from the IPO, no significant financing activity occurred through January
19, 2007.
On
January 19, 2007, we acquired TSS/Vortech and transitioned to an operating
company.
|
Successor
|
Predecessor
|
|||||||||
|
December
31,
|
December
31,
|
|||||||||
|
2007
|
|
2006
|
Change
|
|||||||
|
Cash
provided by (used in) operations
|
$ |
(4,554,793
|
)
|
$ |
3,912,514
|
$ |
(8,467,307
|
)
|
||
|
Cash
provided by (used in) investing
|
26,286,893
|
(488,459
|
)
|
26,775,352
|
||||||
|
Cash
used in financing
|
(8,567,237
|
)
|
(2,799,292
|
)
|
(5,767,945
|
)
|
||||
|
Net
increase (decrease) in cash
|
$ |
13,164,863
|
$ |
624,763
|
$ |
12,540,100
|
||||
For
the
year ended December 31, 2007, we had cash and cash equivalents of $13,172,210.
For the year ended December 31, 2006 we had cash and cash equivalent of $7,437
and cash held in trust of $44,673,994. As of January 19, 2007 and December
31,
2006, the predecessor had cash and cash equivalent of $1,322,317 and $2,361,838,
respectively.
Operating
Activity
Net
cash
provided by operations decreased $8.5 million to $ 4.6 million used by
operations for this successor
year ended December 31, 2007 from $ 3.9 million provided by operations for
the
predecessor
for the year ended December 31, 2006. The decline in operating cash flow
is primarily attributable to the following:
| · |
Increase
in net loss. We had a $7.5
million increase in our net loss excluding non-cash items such as
provisions for bad debt, depreciation, amortization, equity-based
expense,
provision for income taxes and other non-cash charges. As discussed
above
during 2007 fiscal year, we incurred increased costs associated with
being
a public company and sought to align our headcount consistent with
our
objective of diversifying our customer concentration and growing
revenue
over the long-term. Our current backlog growth is indicative of this
strategic effort and we expect that such backlog will turn into
operating cash flows in the future.
|
39
| · |
Increase
in working capital. Net
changes in operating assets and liabilities increased approximately
$0.9
milllion accounting for the remaining decline in operating cash flows.
The
decrease is attributable primarily to timing on contracts, as management
seeks to balance customer and vendor cash flows via contractual terms
standard to our industry.
|
Investing
Activity
Net
cash
provided by investing was attributable to our transition to an operating Company
and the release of investments held in trust for general operating purposes.
Net
cash used in 2006 reflects only purchase of property plant and equipment at
levels generally consistent with 2007, and accordingly the increase is primarily
attributable to the following:
| · |
Sale
of investments held in Trust.
Upon the approval of the TSS/Vortech acquisition, we sold
approximately $44.7 million in trust investments to fund the cash
portion
the acquisition and related operations, and repay dissenting shareholders
electing to receive their IPO proceeds back.
|
| · |
Acquisitions.
We
purchased four companies during the year resulting in a net cash
investment of approximately $18.0 million. We initially invested
approximately $11.5 million, net of acquisition costs and acquired
cash,
toward the purchase of TSS/Vortech, and subsequently invested $6.5
million, net of acquisition costs and acquired cash, toward the purchase
of Comm Site, Innovative and
Rubicon.
|
Financing
Activity
Net
cash
used in financing increased approximately $5.7 million. Predecessor financing
activities were comprised of members’ distributions. Successor cash used in
financing activities consisted primarily of the following:
| · |
Repurchase.
We
used $6.4 million to repurchase our common stock associated with
the election of conversion rights by our dissenting shareholders
in connection with our acquisition of TSS/Vortech and share buy back
program through the first half of the year.
|
| · |
Non-Cash
Debt Issuance. In connection
with our purchase of TSS/Vortech, we issued to selling members
Mr. Rosato
and Mr. Gallagher a total of $10.0 million in convertible, unsecured
promissory notes, bearing interest at 6% per annum and repayable
over a
five-year term.
In
connection with our purchase of Innovative, we issued to selling
members
$0.3 million unsecured promissory notes, bearing interest at
6% per annum
and repayable over a three-year term. Additionally, the sellers
were
entitled to a contingently issuable note in the event Innovative
achieves
certain earnings targets.
During
the fourth quarter Innovative achieved 2007 financial targets
for 2007
established in the purchase agreement, resulting in an additional
note of $0.1 million.
In
connection with our purchase of Rubicon, we issued contingent
consideration in the form of two unsecured promissory notes
issuable up to
a maximum of $1.5 million and $2.0 million contingently issuable.
The
notes are issuable in the event of achievement of certain operational
and
financial targets for December 2007 and calendar year 2008.
The notes bear
interest at 6% from the purchase date and are payable upon
achievement of
the targets.
During
the fourth quarter, Rubicon achieved certain 2007 earnings
targets
established in the purchase agreement, resulting in an unsecured
promissory note of $1.5 million due on January 31, 2008.
For
a discussion of our acquisitions, see Note 2 —Acquisitions of the
Notes to Consolidated Financial
Statements.
|
| · |
Debt
Repayments.
We
paid $2.2 million in repayment of debt, consisting primarily of the
$2.0
million to retire the promissory note due to our Chief Executive
Officer. Our Chief Executive Officer, Thomas
P. Rosato, used the proceeds to purchase our common stock and
warrants in the open market pursuant to a 10b5-1
Plan.
|
The
share
repurchase program was suspended in the third quarter 2007. We expect to retain
future earnings, if any, for use in possible expansion of our business and
do
not anticipate paying any cash dividends in the foreseeable future.
We
believe that our current cash and cash equivalents and expected future cash
generated from operations will satisfy our expected working capital, capital
expenditure and investment requirements through the next twelve
months. We
may
elect to secure additional capital in the future, at acceptable terms, to
improve our liquidity or fund acquisitions. The amounts involved in any
such transaction, individually or in the aggregate, may be material.
To
the
extent that we raise additional capital through the sale of equity securities,
the issuance of such securities could result in dilution to our existing
shareholders. If we raise additional funds through the issuance of debt
securities, the terms of such debt could impose additional restrictions on
our
operations. Additional capital, if required, may not be available on acceptable
terms, if at all. If we are unable to obtain additional financing, we may be
required to reduce the scope of acquisition plan, which could impact our
business, financial condition and earnings.
Off-Balance
Sheet
Arrangements
At
December 31, 2007, we had no off-balance sheet
arrangements.
40
Contractual
Obligations and Commercial Commitments
The
following table summarizes our future contractual obligations and commercial
commitments of the Company at December 31, 2007, as further described in
the notes to our consolidated financial statements:
|
Less
than
|
|||||||||||||
|
Total
|
|
1
Year
|
1-3
Years
|
|
3-5
Years
|
||||||||
|
Long-term
debt
|
$ |
9,498,967
|
$ |
1,650,306
|
$ |
7,223,664
|
$ |
624,997
|
|||||
|
Operating
leases
|
2,851,585
|
870,035
|
1,925,410
|
56,140
|
|||||||||
|
Contractual
purchase commitments
|
14,897,631
|
||||||||||||
|
Total
|
$
|
27,248,183
|
$
|
2,520,341
|
$
|
9,149,074
|
$
|
681,137
|
|||||
Contractual
purchase commitments represent outstanding purchase orders at December 31,
2007.
41
| Item 7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in
forward-looking statements.
Our
exposure to market risk for changes in interest rates relates to our cash
equivalents. Our cash and cash equivalents are highly liquid and consist of
maturies less than 90 days. Our cash and investments policy emphasizes liquidity
and preservation of principal over other portfolio considerations. If market
interest rates were to increase by one percent from December 31, 2007, the
fair value of our portfolio would decline less than approximately $0.1 million.
42
| Item 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Fortress
International Group, Inc.
|
Index
to Financial Statements and Financial Statement
Schedule
|
Number
|
|||
|
|
|
|||
|
Financial
Statements:
|
|
|||
|
|
|
|
||
|
Report
of Independent Registered Public
Accounting Firm
|
F-2
|
|||
|
Consolidated
Balance Sheets as of December
31, 2007
(Successor), December 31, 2006 (Successor),
January 19, 2007 (Predecessor) and December 31, 2006
(Predecessor)
|
F-6
|
|||
|
Consolidated
Statements of Operations for the three years ended December 31, 2007
(Successor), December 31, 2006 (Successor) and December 31, 2005
(Successor), and for the period from January 1, 2007 through January
19,
2007 (Predecessor) and for the years ended December 31, 2006 (Predecessor)
and December 31, 2005 (Predecessor)
|
F-7
|
|||
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2007 (Successor), 2006 (Successor) and 2005 (Successor) and
Consolidated Statements of Members’ Equity for the period from January 1,
2007 through January 19, 2007 (Predecessor), and for the years ended
December 31, 2007 (Predecessor) and 2006 (
Predecessor).
|
F-8
|
|||
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2007
(Successor), December
31, 2006 (Successor) and December 31, 2005 (Successor), and for
the period
from January 1, 2007 through January 19, 2007 (Predecessor) and for
the years ended December 31, 2006 (Predecessor) and December 31,
2005
(Predecessor)
|
F-9
|
|||
|
Notes
to Consolidated Financial Statements
|
F-10
|
|||
|
|
|
|||
|
Financial
Statement Schedules:
|
||||
|
Schedule
- II Valuation Accounts
|
43
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Shareholders
Fortress
International Group, Inc.
We
have
audited the accompanying consolidated balance sheet of Fortress International
Group, Inc. and Subsidiaries (the “Company”) (a Delaware corporation) as of
December 31, 2007, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year ended December 31, 2007. Our
audit of the basic financial statements included the financial statement
schedule for the year ended December 31, 2007 listed in the index appearing
under Item 15. These financial statements and financial statement schedule
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Fortress International
Group, Inc. and Subsidiaries as of December 31, 2007, and the consolidated
results of their operations and their cash flows for the year ended December
31,
2007 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as
a whole, presents fairly in all material respects, the information set forth
therein for the year ended December 31, 2007.
/s/
GRANT THORNTON LLP
Baltimore,
Maryland
March
28,
2008
F-2
Report
of Independent Certified Public Accountants
Board
of
Directors and Shareholders
Fortress
International Group, Inc.
We
have
audited the accompanying combined balance sheet of Vortech, L.L.C. and VTC,
L.L.C. (the “Company”) (a Delaware corporation) as of January 19, 2007, and the
related statements of operations, stockholders’ equity, and cash flows for the
period from January 1, 2007 through January 19, 2007. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with auditing standards generally accepted
in
the United States of America as established by the American Institute of
Certified Public Accountants. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the combined financial position of Vortech, L.L.C. and VTC,
L.L.C. as of January 19, 2007, and the combined results of their operations
and
their cash flows for the period from January 1, 2007 through January 19, 2007
in
conformity with accounting principles generally accepted in the United States
of
America.
/s/
GRANT THORNTON LLP
Baltimore,
Maryland
March
28,
2008
F-3
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
Fortress
International Group, Inc.
We
have
audited the accompanying balance sheet of Fortress International Group,
Inc.
(formerly Fortress America Acquisition Corporation) (a corporation in the
development stage) as of December 31, 2006, and the related statements
of
operations, stockholders’ equity and cash flows for the years ended December 31,
2006 and 2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Fortress International Group,
Inc.
as of December 31, 2006, and the results of its operations and its cash
flows
for the years ended December 31, 2006 and 2005 in conformity with United
States
generally accepted accounting principles.
GOLDSTEIN
GOLUB KESSLER LLP
New
York,
New York
February
27, 2007
F-4
Report
Of Independent Registered Public Accounting Firm
To
the
Members
Vortech,
LLC and VTC, LLC
Beltsville,
Maryland
We
have
audited the accompanying combined balance sheet of Vortech, LLC and VTC,
LLC
(the Company) as described in Note 1 to the financial statements, as
of
December 31, 2006 and the related combined statements of operations,
changes in members’ equity and cash flows for the years ended December 31, 2006
and 2005. These financial statements are the responsibility of the Company
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the combined financial statements referred to above present
fairly, in
all material respects, the financial position of the Vortech,
LLC and VTC, LLC
as of
December 31, 2006 and the results of their operations and their cash
flows for
the years ended December 31, 2006 and 2005 in conformity with U.S., generally
accepted accounting principles.
Baltimore,
Maryland
March
27,
2007
F-5
FORTRESS
INTERNATIONAL GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
Successor
(Fortress
International
Group, Inc.)
|
Predecessor
(TSS/Vortech)
|
||||||||||||
|
December
31,
|
December
31,
|
January
19,
|
December
31,
|
||||||||||
|
2007
|
2006
|
|
2007
|
2006
|
|||||||||
|
Current
Assets
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
13,172,210
|
$
|
7,347
|
$
|
1,322,317
|
$
|
2,361,838
|
|||||
|
Investments
held in trust
|
- | 44,673,994 | - | - | |||||||||
|
Contract
and other receivables, net
|
18,349,140
|
-
|
6,261,988
|
9,960,851
|
|||||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
1,322,254
|
-
|
1,559,045
|
480,540
|
|||||||||
|
Prepaid
expenses and other current assets
|
301,487
|
3,750
|
233,894
|
125,276
|
|||||||||
|
Income
taxes receivable
|
893,322
|
-
|
-
|
-
|
|||||||||
|
Due
from affiliated entities
|
-
|
-
|
-
|
201,670
|
|||||||||
|
Total
Current Assets
|
34,038,413
|
44,685,091
|
9,377,244
|
13,130,175
|
|||||||||
|
Property
and equipment, net
|
1,044,545
|
-
|
904,689
|
810,747
|
|||||||||
|
Goodwill
|
20,714,967
|
-
|
-
|
-
|
|||||||||
|
Intangible
assets, net
|
21,089,136
|
-
|
-
|
-
|
|||||||||
|
Other
assets
|
512,000
|
1,360,528
|
64,158
|
21,190
|
|||||||||
|
Total
Assets
|
$
|
77,399,061
|
$
|
46,045,619
|
$
|
10,346,091
|
$
|
13,962,112
|
|||||
|
Liabilities,
Stockholders’ and Members’ Equity
|
|||||||||||||
|
Current
Liabilities
|
|||||||||||||
|
Notes
payable, current portion
|
$
|
1,650,306
|
$
|
-
|
$
|
72,808
|
$
|
76,934
|
|||||
|
Accounts
payable and accrued expenses
|
16,121,492
|
913,222
|
6,641,718
|
8,503,024
|
|||||||||
|
Billings
in excess of costs and estitmated earnings on uncompleted
contracts
|
3,880,279
|
-
|
1,662,718
|
1,243,042
|
|||||||||
|
Advances
from stockholder
|
-
|
20,000
|
-
|
-
|
|||||||||
|
Income
taxes payable
|
-
|
586,283
|
-
|
-
|
|||||||||
|
Interest
income on common stock subject to possible
redemption
|
- | 541,735 | - | - | |||||||||
|
Deferred
compensation payable
|
-
|
-
|
-
|
643,571
|
|||||||||
|
Total
Current Liabilities
|
21,652,077
|
2,061,240
|
8,377,244
|
10,466,571
|
|||||||||
| Convertible notes payable, less current portion | 7,500,000 | - | - | - | |||||||||
|
Notes
payable, less current portion
|
348,611
|
-
|
79,524
|
81,679
|
|||||||||
|
Other
liabilities
|
44,648
|
-
|
-
|
-
|
|||||||||
|
|
|||||||||||||
|
Total
Liabilities
|
29,545,386
|
2,061,240
|
8,456,768
|
10,548,250
|
|||||||||
|
Common
stock, subject to possible redemption 1,559,220 shares
|
-
|
8,388,604
|
-
|
-
|
|||||||||
|
Commitments
and Contingencies
|
-
|
-
|
-
|
-
|
|||||||||
|
Stockholders’
and Members’ Equity
|
|||||||||||||
|
Preferred
stock- $.0001 par value; 1,000,000 shares authorized; no
shares issued or
outstanding
|
-
|
-
|
-
|
-
|
|||||||||
|
Common
stock-- $.0001 par value, 100,000,000 shares authorized;
12,150,400 and
9,550,000 issued; 11,992,325 and 9,550,000 outstanding, at
December 31,
2007 and 2006 respectively (which includes 0 and 1,559,220
shares subject
to possible redemption, respectively)
|
1,214
|
955
|
-
|
-
|
|||||||||
|
Additional
paid-in capital
|
55,268,012
|
34,819,062
|
-
|
-
|
|||||||||
|
Treasury
stock, 158,075 and 0 shares at December 31, 2007 and December
31, 2006,
respectively, at cost
|
(814,198
|
)
|
-
|
-
|
-
|
||||||||
|
Retained
earnings (accumulated deficit)
|
(6,601,353
|
)
|
775,758
|
-
|
-
|
||||||||
|
Members’
equity
|
-
|
-
|
1,889,323
|
3,732,115
|
|||||||||
|
Note
receivable from affiliate
|
-
|
-
|
-
|
(318,253
|
)
|
||||||||
|
|
|||||||||||||
|
Total
stockholders’ and members’ equity
|
47,853,675
|
35,595,775
|
1,889,323
|
3,413,862
|
|||||||||
|
Total
liabilities, common stock subject to redemption, and stockholders’ and
members’ equity
|
$
|
77,399,061
|
$
|
46,045,619
|
$
|
10,346,091
|
$
|
13,962,112
|
|||||
See
accompanying notes to consolidated financial statements.
F-6
FORTRESS
INTERNATIONAL GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Predecessor
|
|||||||||||||||||||
|
Sucessor
for the Year
Ended
|
|
For
the period January 1,
|
|
For
the Year Ended
|
|
||||||||||||||
|
|
|
December
31,
|
|
(inception)
to
|
|
December
31,
|
|
December
31,
|
|
||||||||||
|
|
|
2007
|
|
2006
|
|
2005
|
|
Janaury
19, 2007
|
|
2006
|
|
2005
|
|||||||
|
Results
of Operations:
|
|||||||||||||||||||
|
Revenue
|
$
|
50,455,823
|
$
|
-
|
$
|
-
|
$
|
1,412,137
|
$
|
60,154,971
|
$
|
58,632,293
|
|||||||
|
Cost
of revenue
|
42,071,361
|
-
|
-
|
1,108,276
|
48,172,911
|
50,056,924
|
|||||||||||||
|
Gross
profit
|
8,384,462
|
-
|
-
|
303,861
|
11,982,060
|
8,575,369
|
|||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Selling,
general and administrative
|
14,563,111
|
689,120
|
319,694
|
555,103
|
8,165,386
|
5,419,618
|
|||||||||||||
|
Depreciation
and amortization
|
394,913
|
-
|
-
|
33,660
|
277,664
|
228,279
|
|||||||||||||
|
Amortization
of intangibles
|
2,109,222
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Total
operating costs
|
17,067,246
|
689,120
|
319,694
|
588,763
|
8,443,050
|
5,647,897
|
|||||||||||||
|
Operating
income (loss)
|
(8,682,784
|
)
|
(689,120
|
)
|
(319,694
|
)
|
(284,902
|
)
|
3,539,010
|
2,927,472
|
|||||||||
|
Interest
income (expense), net
|
806,518
|
1,666,806
|
525,430
|
3,749
|
(24,084
|
)
|
(35,184
|
)
|
|||||||||||
|
Income
(loss) from continuing operations before
income
taxes
|
(7,876,266
|
)
|
977,686
|
205,736
|
(281,153
|
)
|
3,514,926
|
2,892,288
|
|||||||||||
|
Income
tax expense (benefit)
|
(499,155
|
)
|
332,414
|
74,194
|
-
|
-
|
-
|
||||||||||||
|
Income
(loss) from continuing operations
|
(7,377,111
|
)
|
645,272
|
131,542
|
(281,153
|
)
|
3,514,926
|
2,892,288
|
|||||||||||
|
Gain
on discontinued operations
|
-
|
-
|
-
|
-
|
-
|
252,845
|
|||||||||||||
|
Net
income (loss)
|
$
|
(7,377,111
|
)
|
$
|
645,272
|
$
|
131,542
|
$
|
(281,153
|
)
|
$
|
3,514,926
|
$
|
3,145,133
|
|||||
|
Per
Common Share (Basic and Diluted): (1)
|
|||||||||||||||||||
|
Basic
and diluted net income (loss) per share
|
$
|
(0.63
|
)
|
$
|
0.07
|
$
|
0.03
|
|
-
|
|
|
-
|
|
-
|
|||||
|
Weighted
average common shares outstanding-basic and diluted
|
11,698,895
|
9,550,000
|
5,107,534
|
-
|
-
|
-
|
|||||||||||||
(1)
Basic
and diluted earnings per share are the same, as the inclusion of dilutive
securities would have an anti-dilutive impact due to reported net losses. The
Predecessor was a limited liability Company accordingly no earnings per share
data is computed.
F-7
FORTRESS
INTERNATIONAL GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
AND MEMBERS’
EQUITY
|
Successor
(Fortress International Group, Inc.)
|
||||||||||||||||||||||
|
Common
Stock
|
Treasury
Stock
|
|||||||||||||||||||||
|
Shares
|
|
|
Amount
|
|
Additional
Paid-in Capital
|
Shares
|
Amount
|
(Accumulated
Deficit) Retained Earnings
|
|
Total
Stockholders’ Equity
|
||||||||||||
|
Balance
at January 1, 2005
|
1,250,000
|
$
|
125
|
$
|
24,875
|
-
|
$
|
-
|
$
|
(1,056
|
)
|
$
|
23,944
|
|||||||||
|
Redemption
of common stock
|
(1,250,000
|
)
|
(125
|
)
|
(24,875
|
)
|
(25,000
|
)
|
||||||||||||||
|
Common
shares issued March 9, 2005 at $0.01429 per
share
|
1,750,000
|
175
|
24,825
|
25,000
|
||||||||||||||||||
|
Common
shares issued July 20, 2005, net of underwriters’ discount and offering
expenses (includes 1,399,300 shares subject to possible
conversion)
|
7,000,000
|
700
|
38,687,329
|
-
|
-
|
-
|
38,688,029
|
|||||||||||||||
|
Common
shares issued August 24, 2005, net of underwriters’ discount and offering
expenses (includes159,920 shares subject to possible
conversion)
|
800,000
|
80
|
4,495,412
|
-
|
-
|
-
|
4,495,492
|
|||||||||||||||
|
Proceeds
subject to possible conversion of 1,559,220
shares
|
-
|
-
|
(8,388,604
|
)
|
(8,388,604
|
)
|
||||||||||||||||
|
Proceeeds
from issuance of option
|
-
|
-
|
100
|
100
|
||||||||||||||||||
|
Net
income for the period
|
-
|
-
|
-
|
131,542
|
131,542
|
|||||||||||||||||
|
Balance
at December 31, 2005
|
9,550,000
|
955
|
34,819,062
|
-
|
-
|
130,486
|
34,950,503
|
|||||||||||||||
|
Net
income for the period
|
645,272
|
645,272
|
||||||||||||||||||||
|
Balance
at December 31, 2006
|
9,550,000
|
955
|
34,819,062
|
-
|
-
|
775,758
|
35,595,775
|
|||||||||||||||
|
Issuance
of common stock related to acquisitions
|
2,831,968
|
283
|
15,463,276
|
-
|
-
|
-
|
15,463,559
|
|||||||||||||||
|
Purchase
of treasury stock 379,075, retired 221,000 shares
|
(221,000
|
)
|
(22
|
)
|
(1,221,795
|
)
|
158,075
|
(814,198
|
)
|
-
|
(2,036,015
|
)
|
||||||||||
|
Reclassify
common stock subject to possible redemption 1,559,220
shares
|
- | - | 8,388,604 | - | - | - | 8,388,604 | |||||||||||||||
|
Repurchase
of shares from dissenting shareholders, net of tax effect of
deferred
interest
|
(756,100
|
)
|
(76
|
)
|
(4,160,289
|
) |
(4,160,365
|
)
|
||||||||||||||
|
Discount
received on repayment of promissory note to officer
|
500,000
|
500,000
|
||||||||||||||||||||
|
Warrant
exercise
|
14,700
|
1
|
73,499
|
73,500
|
||||||||||||||||||
|
Non-cash
compensation
|
730,832
|
73
|
1,405,655
|
-
|
-
|
-
|
1,405,728
|
|||||||||||||||
|
Net
loss for the period
|
(7,377,111
|
)
|
(7,377,111
|
)
|
||||||||||||||||||
|
Balance
at December 31, 2007
|
12,150,400
|
$
|
1,214
|
$
|
55,268,012
|
158,075
|
$
|
(814,198
|
)
|
$
|
(6,601,353
|
)
|
$
|
47,853,675
|
||||||||
|
Predecessor
|
||||
|
Members’
|
||||
|
Equity
|
||||
|
Beginning
balance January 1, 2005
|
$
|
356,117
|
||
|
Distributions
|
(559,616
|
)
|
||
|
Net
income
|
3,145,133
|
|||
|
Balance
December 31, 2005
|
2,941,634
|
|||
|
Distributions
|
(2,724,445
|
)
|
||
|
Net
income
|
3,514,926
|
|||
|
Balance
December 31, 2006
|
|
3,732,115
|
||
| Distributions | (1,561,639 |
)
|
||
|
Net
loss
|
(281,153 |
)
|
||
|
Balance
January 19, 2007
|
$
|
1,889,323 | ||
See
accompanying notes to consolidated financial statements.
F-8
FORTRESS
INTERNATIONAL GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Successor
(Fortress International
Group,
Inc.)
|
Predecessor
(TSS/Vortech)
|
||||||||||||||||||
|
For
the Year Ended
|
For
the Year Ended
|
||||||||||||||||||
|
2007
|
|
2006
|
|
2005
|
|
For
the period January 1, to Janaury 19, 2007
|
December
31, 2006
|
|
December
31, 2005
|
||||||||||
|
Cash
Flows from Operating Activities:
|
|||||||||||||||||||
|
Net
(loss) income
|
$
|
(7,377,111
|
)
|
$
|
645,272
|
$
|
131,542
|
$
|
(281,153
|
)
|
$
|
3,514,926
|
$
|
3,145,133
|
|||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used
in) operating
activities:
|
|||||||||||||||||||
|
Depreciation
and amortization
|
394,913
|
-
|
-
|
33,660
|
277,664
|
228,279
|
|||||||||||||
|
Amortization
of intangibles
|
2,562,741
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Allowance
for doubtful accounts
|
79,611
|
-
|
-
|
-
|
50,000
|
(26,876
|
)
|
||||||||||||
|
Stock
and warrant-based compensation
|
1,405,728
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Benefit
from income taxes
|
(499,155
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Other
non cash income, net
|
(222,597
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Gain
from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
(252,845
|
)
|
||||||||||||
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|||||||||||||||||||
|
Contracts
and other receivables
|
(11,057,579
|
)
|
-
|
-
|
3,698,863
|
1,125,982
|
(8,440,587
|
)
|
|||||||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
652,937
|
-
|
-
|
(1,078,505
|
)
|
47,954
|
434,595
|
||||||||||||
|
Prepaid
expenses
|
(50,988
|
)
|
46,415
|
(50,165
|
)
|
(108,618
|
)
|
(119,079
|
)
|
(2,236
|
)
|
||||||||
|
Due
from affiliates
|
-
|
-
|
-
|
519,923
|
(118,150
|
)
|
(285,303
|
)
|
|||||||||||
|
Other
assets
|
425,972
|
(358,675
|
) |
(132,000
|
)
|
(42,968
|
)
|
17,796
|
(146,809
|
)
|
|||||||||
|
Accounts
payable and accrued expenses
|
7,689,253
|
162,765
|
104,252
|
(1,861,306
|
)
|
256,574
|
5,066,299
|
||||||||||||
|
Billings
in excess of costs and estitmated earnings on uncompleted
contracts
|
2,149,719
|
-
|
-
|
419,676
|
(1,656,686
|
)
|
1,361,266
|
||||||||||||
|
Interest
income attributable to common stock subject to possible
redemption
|
-
|
(2,070,193
|
)
|
(639,801
|
) |
-
|
-
|
-
|
|||||||||||
|
Other
liabilities
|
(708,236
|
)
|
793,920
|
334,098
|
|
(643,571
|
)
|
515,533
|
103,472
|
||||||||||
|
Net
cash provided by (used in) operating activities
|
(4,554,792
|
)
|
(780,496
|
)
|
(252,074
|
)
|
656,001
|
3,912,514
|
1,184,388
|
||||||||||
|
Cash
Flows from Investing Activities:
|
|||||||||||||||||||
|
Purchase
of property and equipment
|
(357,974
|
)
|
-
|
-
|
(127,602
|
)
|
(488,459
|
)
|
(59,521
|
)
|
|||||||||
|
Purchase
of investments held in trust
|
-
|
-
|
(41,964,000
|
)
|
-
|
-
|
-
|
||||||||||||
|
Sale
of investments held in trust
|
44,673,994
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Payments
of deferred acquistion costs
|
-
|
(224,704
|
)
|
-
|
-
|
-
|
-
|
||||||||||||
|
Purchase
of TSS/Vortech, net of cash received
|
(11,519,151
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Purchase
of Comm Site of South Florida, Inc. net of cash received
|
(150,000
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Purchase
of Innovative, net of cash received
|
(1,614,452
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Purchase
of Rubicon Integration, L.L.C., net of cash received
|
(4,745,524
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net
cash provided by (used in) investing activities
|
26,286,893
|
(224,704
|
)
|
(41,964,000
|
)
|
(127,602
|
)
|
(488,459
|
)
|
(59,521
|
)
|
||||||||
|
Cash
Flows from Financing Activities:
|
|||||||||||||||||||
|
Proceeds
of public offering, including over-allotment option exercise,
and net of
issuance costs
|
-
|
-
|
43,196,121
|
-
|
|||||||||||||||
|
Payments
on notes payable
|
(242,413
|
)
|
-
|
-
|
(6,281
|
)
|
(74,847
|
)
|
(331,514
|
)
|
|||||||||
|
Proceeds
from issuance of notes payable, stockholders
|
-
|
20,000
|
57,500
|
-
|
-
|
-
|
|||||||||||||
|
Payment
of notes payable, stockholders
|
(20,000
|
)
|
-
|
(70,000
|
)
|
-
|
-
|
-
|
|||||||||||
|
Payment
on promissory note payable to officer
|
(2,000,000
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Warrant
exercise
|
73,500
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Payment
to shareholders electing to redeem their shares in connection
with the
TSS/Vortech acquisition
|
(4,342,310
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Proceeds
from sale of shares of common stock
|
-
|
-
|
25,000
|
-
|
-
|
-
|
|||||||||||||
|
Redemption
of common stock
|
-
|
-
|
(25,000
|
)
|
-
|
-
|
-
|
||||||||||||
|
Repurchase
of treasury stock
|
(2,036,015
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Members’
distributions
|
-
|
-
|
-
|
(1,561,639
|
)
|
(2,724,445
|
)
|
(559,616
|
)
|
||||||||||
|
Net
cash provided by (used in) financing activities
|
(8,567,238
|
)
|
20,000
|
43,183,621
|
(1,567,920
|
)
|
(2,799,292
|
)
|
(891,130
|
)
|
|||||||||
|
Net
Increase (Decrease) in Cash
|
13,164,863
|
(985,200
|
)
|
967,547
|
(1,039,521
|
)
|
624,763
|
233,737
|
|||||||||||
|
Cash,
beginning of period
|
7,347
|
992,547
|
25,000
|
2,361,838
|
1,737,075
|
1,503,338
|
|||||||||||||
|
Cash,
end of period
|
$
|
13,172,210
|
$
|
7,347
|
$
|
992,547
|
$
|
1,322,317
|
$
|
2,361,838
|
$
|
1,737,075
|
|||||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||||||||
|
Cash
paid for interest
|
$
|
523,268
|
$
|
-
|
$
|
-
|
$
|
368
|
$
|
24,084
|
$
|
35,184
|
|||||||
|
Cash
paid for taxes
|
593,196
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Supplemental
disclosure of non cash Investing Activities:
|
|||||||||||||||||||
|
Issuance
of common stock in connection with the acquisition of
TSS/Vortech
|
14,211,359
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Accrual
of acquisitions
|
- | 645,149 | - | - | - | - | |||||||||||||
|
Promissory
notes payable issued in connection with the acquisition of
TSS/Vortech
|
10,000,000
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of common stock in connection with the acquisition of
Innovative
|
150,075
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Promissory
notes issued in connection with the acquisition of
Innovative
|
564,611
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Promissory
notes isssued in connection with the acquisition of
Rubicon
|
1,517,753
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Supplemental
disclosure of non cash Financing Activities:
|
|||||||||||||||||||
|
Discount
received on repayment of promissory note to officer
|
500,000
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
See
accompanying notes to consolidated financial statements.
F-9
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(1)
Basis of Presentation and Significant Accounting Policies
The
consolidated financial statements are for the years ended December 31,
2007, 2006, and 2005 for Fortress International Group, Inc. (the
“Successor Company”, “Fortress” or the “Company”) and are for the period January
1, 2007 to January 19, 2007 (the acquisition date) and the years ended December
31, 2006 and December 31, 2005 for VTC, L.L.C. t/a Total Site Solutions and
Vortech, L.L.C. ( collectively the “Predecessor Company” or
“TSS/Vortech”).
The
Company was formed in Delaware on December 20, 2004 as a special purpose
acquisition company formed under the name “Fortress America Acquisition
Corporation” for the purpose of acquiring an operating business that performed
services to the homeland security industry.
On
July
20, 2005, we closed our initial public offering (IPO) of 7,800,000 units,
including an overallotment option of 800,000 units, with each unit consisting
of
one share of our common stock and two warrants (each to purchase one share
of
common stock at $5.00). Of the total IPO proceeds of $43,183,521, net of
issuance, costs, $41,964,000 placed into a trust fund (Trust) and the
remaining $1,219,521 were available to fund operations in the pursuit of
acquiring a company.
On
January 19, 2007, the Company acquired all of the outstanding interest in
TSS/Vortech in exchange for a combination of cash, the Company’s common stock,
and issuance of two convertible notes (See Note 2). The acquisition transformed
the Company from a firm investing capital to an operating business. Concurrent
with the acquisition, the Company changed its name to Fortress International
Group, Inc.
The
Company provides a single source solution for highly technical mission-critical
facilities such as data centers, operations centers, network facilities,
server
rooms, security operations centers, communications facilities and the
infrastructure systems that are critical to their function. The Company’s
services consist of technology consulting, design and engineering, construction
management, systems installations, facilities management.
After
acquiring TSS/Vortech, the Company continued its expansion through the
acquisition of Comm Site of South Florida, Inc. (“Comm Site”) on
May 7, 2007, Innovative Power Solutions, Inc. and Quality Power Solutions,
Inc.
(“Innovative”) on September 24, 2007, and Rubicon Integration, L.L.C.
(“Rubicon”) on November 30, 2007. As applicable, the Company also acquired these
companies’ operating subsidiaries. The results of operations, cash flows and
financial position attributable to these acquisitions are included in the
consolidated financial statements from the respective dates of their acquisition
(See Note 2). All
intercompany transactions have been eliminated in
consolidation.
Revenue
Recognition
The
Company recognizes revenue when pervasive evidence of an arrangement exists,
the
contract price is fixed or determinable, services have been rendered or
goods
delivered, and collectibility is reasonably assured. The Company’s revenue is
derived from the following types of contractual arrangements: fixed-price
contracts, time and material contracts and cost-plus-fee contracts (including
guaranteed maximum price contracts). The Company’s primary source of revenue is
from fixed price contracts and
the
Company applies Statement of Position (SOP) 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,
recognizing revenue on the percentage-of-completion method using costs
incurred
in relation to total estimated project costs.
Revenue
from fixed price contracts is recognized on the percentage of completion
method,
measured by the percentage of total costs incurred to date to estimated total
costs for each contract. This method is used because management considers
cost
incurred and costs to complete to be the best available measure of progress
in
the contracts. Contract costs include all direct materials, subcontract and
labor costs and those indirect costs related to contract performance, such
as
indirect labor, payroll taxes, employee benefits and supplies.
Revenue
on time-and-material contracts is recognized based on the actual labor hours
performed at the contracted billable rates, and costs incurred on behalf
of the
customer. Revenue on cost-plus-fee contracts is recognized to the extent
of
costs incurred,
plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee
contracts are recorded as earned in proportion to the allowable costs incurred
in performance of the contract.
Contract
revenue recognition inherently involves estimation. Examples of estimates
include the contemplated level of effort to accomplish the tasks under the
contract, the costs of the effort, and an ongoing assessment of the Company’s
progress toward completing the contract. From time to time, as part of its
standard management process, facts develop that require the Company to revise
its estimated total costs on revenue. To the extent that a revised estimate
affects contract profit or revenue previously recognized, the Company records
the cumulative effect of the revision in the period in which the revisions
becomes known. The full amount of an anticipated loss on any type of contract
is
recognized in the period in which it becomes probable and can reasonably
be
estimated.
Under
certain circumstances, the Company may elect to work at risk prior to receiving
an executed contract document. The Company has a formal procedure for
authorizing any such at risk work to be incurred. Revenue, however, is deferred
until a contract modification or vehicle is provided by the customer.
Cost of
revenue
Direct
costs consist of all directly-related contract costs, including compensation
costs for subcontract personnel, subcontract material cost and any other
direct costs. Also appropriate indirect overhead costs are applied to employee
direct labor, subcontractor direct labor and material costs and included as
direct costs.
F-10
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based
Compensation
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards (SPAS)
No. 123R, Share Based Payment (SFAS No. 123R). On the date of adoption,
with the exception of shares of common stock granted to certain individuals,
the
Company had not granted any options, warrants or similar instruments requiring
measurement under SFAS No. 123R. The Company has granted to third parties
warrants for the purchase of its common stock for professional investment
related services. Expense related to these warrants was computed using the
fair value of the stock option as determined by an option pricing model, the
Black-Scholes valuation model. We amortize stock-based costs for such awards
on
a straight-line method over the contractual term of the warrant agreement.
The
company also grants shares of common stock to
employees. Share based compensation expense is recognized based on the
fair market value of the shares on the date the shares are issued to employees
over the vesting period taking into consideration the employment termination
behavior experienced by the Company.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses include salaries, wages and related benefits
(including non-cash charges for stock based compensation), travel,
insurance, rent, contract maintenance, advertising and other administrative
expenses.
Advertising
Costs
The
Company expenses the cost of advertising as incurred. Advertising expense
is included as a component of selling, general and administrative expenses
in
the accompanying consolidated statements of operations.
Advertising
expense
for
the Company was $1.2 million, $0 and $0 for the years ended
December 31, 2007, December 31, 2006 and December 31, 2005, respectively. For
the period January 1, 2007 through January 19, 2007 and for the years ended
December 31, 2006 and December 31, 2005, the predecessor
incurred advertising expense of $0.1 million, $1.0 million, and $0.4
million, respectively.
Depreciation
and Amortization
Property and
equipment are recorded at cost. Depreciation and amortization for the Company’s
property and equipment are computed on straight-line method based on the
following useful lives:
|
Depreciable
|
||||
|
Lives
|
||||
|
Vehicles
|
5 | |||
|
Trade
equipment
|
5 | |||
|
Furniture
and fixtures
|
7 | |||
|
Office
equipment
|
3-7 | |||
Leasehold
improvements are depreciated over the shorter of their estimated useful lives
or
lease terms that are reasonably assured. Repairs and maintenance costs are
expensed as incurred.
Net
income (Loss) Per Share
Basic net
income (loss) per share have been computed using the weighted average
number of shares outstanding during each period. Diluted net
income (loss) per share is computed by including the dilutive effect of
common stock that would be issued assuming conversion or exercise of outstanding
convertible notes, warrants, and restricted stock. Unvested
restricted stock, options to purchase units, warrants to purchase common
shares
and notes convertible totaling 19,764,466 common shares were excluded in
the computation of diluted loss per share in 2007 because the Company incurred
a
net loss and the effect of inclusion would have been anti-dilutive. Options
to
purchase units and warrants to purchase common shares totaling 17,700,000
were
excluded in the computation of diluted loss per share in 2007 because the
Company incurred a net loss and the effect of inclusion would have been
anti-dilutive.
F-11
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and may bear
interest in
the
event of late payment under certain contracts. The allowance for doubtful
accounts is the Company’s best estimate of the amount of probable credit losses
in the Company’s existing accounts receivable. The Company determines the
allowance based on an analysis of its historical experience with bad debt
writeoffs and aging of the accounts receivable balance. The Company reviews
its
allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectability.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance sheet credit exposure related
to its customers.
The
successor company had recorded accounts receivable allowances of $65,000
and $0
at December 31, 2007 and December 31, 2006, respectively. The
predecessor had recorded accounts receivable allowances of $75,000 and
$75,000
at January 19, 2007 and December 31, 2006,
respectively.
Under
certain construction management contracts, the Company is obligated to obtain
performance bonds with various financial institutions, which typically require
a
security interest in the corresponding receivable. At December 31, 2007 bonds
secured by customer accounts receivable totaled $0.6 million. The predecessor
had similar such bonds at January 19, 2007 and December 31, 2006 of $0.4
million an $0.9 million, respectively.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Long-Lived
Assets
The
Company segregates identifiable intangible assets acquired in an acquisition
from goodwill. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”), goodwill is evaluated for impairment
at least annually.
Other
intangible assets primarily include customer contracts, customer relationships,
and trademarks acquired in business combinations. The intangible assets
with estimated useful lives are amortized on a straight-line basis over the
expected period of benefit, which ranges from 1 to 8 years. Certain
intangibles acquired in business combinations have an indefinite life.
In accordance with SFAS No. 142, the Company evaluates its indefinite lived
intangible assets for impairment annually or as circumstances change that could
affect the recoverability of the carrying amount of the assets.
The
Company at least annually, or as events or circumstances change that could
affect the recoverability of the carrying value of its long-lived assets,
conducts a comprehensive review of the carrying value of its assets to determine
if the carrying amount of the assets are recoverable in accordance with SFAS
No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets.”
This review requires the identification of the lowest level of identifiable
cash
flows for purposes of grouping assets subject to review. The estimate of
undiscounted cash flows includes long-term forecasts of revenue growth, gross
margins and capital expenditures. All of these items require significant
judgment and assumptions. An impairment loss may exist when the estimated
undiscounted cash flows attributable to the assets are less than their carrying
amount. If an asset is deemed to be impaired, the amount of the impairment
loss
recognized represents the excess of the asset’s carrying value as compared to
its estimated fair value, based on management’s assumptions and projections.
F-12
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
Deferred
income taxes are provided for the temporary differences between the financial
reporting and tax basis of the Company’s assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The U.S. net operating losses not utilized can be carried forward
for
20 years to offset future taxable income. A valuation allowance has been
recorded against the majority of the Company’s deferred tax assets, as the
Company has concluded that under relevant accounting standards, it is more
likely than not that deferred tax assets will be not be realizable. The Company
recognizes interest and penalty expense associated with uncertain tax positions
as a component of income tax expense in the consolidated statements of
operations.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. The
most critical estimates and assumptions are made in determining the allowance
for doubtful accounts, revenue recognition, recoverability of long-lived and
indefinite-lived assets, useful lives of long-lived assets, accruals for
estimated liabilities that are probable and estimatable, and the fair value
of stock and option grants. Actual results could differ from those estimates
and
assumptions.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued Statements of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for fiscal years beginning after November 15, 2007
and interim periods within that fiscal year. The adoption of SFAS No. 157
is not expected to have a material effect on the Company’s consolidated results
of operations or financial condition upon adoption on January 1, 2008.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities–Including
an
amendment of FASB Statement No. 115. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option
has been elected will be recognized in earnings at each subsequent reporting
date. We do not believe the adoption of SFAS No. 159 will have a
material impact on our finanical statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141,
“Business Combinations.” SFAS No.141R retains the underlying concepts of SFAS
No. 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but
SFAS
No. 141R will significantly change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment for certain specific acquisition related
items
including: (1) expensing acquisition related costs as incurred;
(2) expensing changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date; (3) valuing noncontrolling
interests at fair value at the acquisition date; and (4) expensing
restructuring costs associated with an acquired business. SFAS No. 141R
also includes a substantial number of new disclosure requirements. SFAS
No. 141R is to be applied prospectively to business combinations for which
the acquisition date is on or after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No.160 requires
noncontrolling interests, previously referred to as minority interests, to
be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity and applies to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. SFAS No. 160 will be applied prospectively to all
noncontrolling interests, including any that arose before the effective date
except that comparative period information must be restated to classify
noncontrolling interests in equity, attributed net income and other
comprehensive income to noncontrolling interests, and provide other disclosures
required by SFAS No. 160. This statement is effective for the Company
beginning January 1, 2009. The Company does not expect the adoption of SFAS
No. 160 to have a material effect on its consolidated results of operations
or financial condition.
In
2007,
the Company transitioned from a special purpose acquisition company to an
operating entity with its purchase of TSS/Vortech. The Company embarked on
a
strategy to build on to the TSS/Vortech operations through acquisitions that
expand geographical reach, add complementary services, and access new key
customers for additional selling opportunities. All of the acquisitions have
been accounted for using purchase accounting. The results of operations
attributable to each acquisition are included in the consolidated financial
statements from the date of acquisition. The value of Fortress common stock
issued in connection with the acquisitions was determined based on the average
closing price for Fortress common stock two days before and two days after
the
date the acquisition was announced multiplied by the number of shares
issued.
TSS/Vortech
On
January 19, 2007, Fortress acquired all of the outstanding membership interests
of TSS/Vortech. In total, the Company paid consideration consisting of
approximately (i) $11,519,151 in cash, including acquisition costs of $1,841,468
and net of $1,322,317 of acquired cash (ii) $14,211,359 of Fortress common
stock, consisting of 2,602,813 shares of Fortress common stock, of which
2,534,988 shares were issued to the selling members and 67,825 shares were
issued associated with acquisition costs, and (iii) $10,000,000 in two
convertible promissory notes of $5,000,000 each, bearing interest at 6% (See
Note 7). Concurrent with the acquisition the Company issued 574,000 shares
of restricted stock under the Fortress International Group, Inc. 2006 Omnibus
Incentive Compensation Plan.
All
of
the shares issued to the selling members (2,534,988 shares) were placed into
escrow accounts as follows: 2,461,728 into the General Indemnity escrow to
secure the rights of Fortress under the acquisition and 73,260 shares into
the
Balance Sheet escrow subject to TSS/Vortech delivering $1,000,000 in working
capital. These shares will be released subject to certain conditions under
the
respective agreements. Based on a determination of net working capital at the
acquisition date, the Company has recorded a payable for approximately $200,000,
included in accounts payable and accrued expenses in the December 31, 2007
consolidated balance sheet, expected to be paid to the sellers as a purchase
price adjustment.
Shareholders
owning 756,100 shares of Fortress common stock voted against the acquisition
and
requested to receive the pro rata share of cash in the Trust Fund. The
Company paid approximately $4,342,000 in exchange for these shares.
F-13
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
cash
portion of the payments made in the acquisition was financed entirely through
the use of cash raised in the Company’s initial
public
offering and held in a trust fund prior to the closing of the TSS/Vortech
acquisition. In connection with the acquisition of TSS/Vortech, holders of
756,100 shares of common stock voted against the acquisition and exercised
their
right to convert their shares of common stock into $5.74 of cash per share.
An
aggregate of $4,342,310 was paid to converting stockholders. These conversions
were also funded with the proceeds of the Company’s IPO.
All
of the shares of the Company’s common stock issued
to Messrs. Rosato and Gallagher are subject to a lock-up agreement restricting
the sale or transfer of those shares through July 13, 2008 and are being held
in
escrows maintained by the escrow agent (up to 2,461,728 shares held in a general
indemnity escrow and 73,260 shares held in a balance sheet escrow). The shares
of the Company’s stock issued to certain employees as restricted stock grants
are subject to forfeiture if the receiving employee terminates his or her
employment within three years of the acquisition closing date, in which event
the forfeited shares will be delivered to the selling members.
The
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and preliminarily identified intangible assets acquired for a number of reasons,
including the following:
|
·
|
TSS/Vortech
has a broad range of experience, contacts and service offerings
in the
mission-critical facility industry. TSS/Vortech has a very experienced
and
committed management team with strong core competencies. TSS has
a
significant number of personnel with security clearances which
is
important in the homeland security industry.
|
|
·
|
TSS/Vortech’s
business model and potential for growth, increasing demand in its
industry
and its complete service offering when compared to other similar
companies. In addition TSS/Vortech may provide the platform to
assist us
in managing acquisitions in the future.
|
| · |
TSS/Vortech
has been building a national business development organization
to expand
beyond its current regional
presence.
|
Comm
Site of South Florida, Inc.
On
May 7,
2007, the Company purchased all of the assets of Comm Site of South Florida,
Inc. for $150,000 paid in cash. In connection with this purchase, $135,000
has
been allocated to goodwill with the balance to other current assets and property
and equipment, based on their historic cost which management believes
approximates fair value.
Innovative
Power Systems, Inc. and Quality Power Systems, Inc.
On
September 24, 2007, Fortress acquired 100% of the issued and outstanding stock
of Innovative Power Systems, Inc. and Quality Power Systems, Inc. (collectively
“Innovative”) for aggregate consideration consisting of (i) $1,614,452 in cash,
including acquisition costs of $112,420, and net of acquired cash of $244,968,
(ii) a promissory note (the “Note”) for the aggregate amount of $300,000 payable
to Sellers accruing at 6% annually from the date of issuance of the Note (the
Note is payable in three years, based on a five-year amortization schedule,
as
described in the Note), (iii) 25,155 shares of common stock valued at $150,000
and (iv) additional contingent consideration if Innovative achieves certain
targeted earnings for each of the calendar years 2007-2010, as further described
in the agreement.
During
the fourth quarter, Innovative achieved 2007 earnings targets established
in the
purchase agreement, entitling the sellers to additional purchase consideration
of $265,000, consisting of $200,000 in cash due on January 31, 2008 and a
$65,000 promissory note, net of a $135,000 post closing working capital
adjustment, accruing interest at 6% annually (the Note is payable in three
years, based on a five-year amortization schedule, as described in the Note
7).
The purchase agreement required working capital of $300,000 at September
24,
2007, while any excess or shortfall would result in consideration adjustment.
Actual working capital was approximately $165,000, resulting in a $135,000
promissory note reduction consistent with terms in the purchase agreement.
The
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and preliminarily identified intangible assets acquired for a number of reasons,
including Innovative complementary experience, contacts and facilities
maintenance offerings in the mission-critical facility industry and is
complementary to the Company’s primary operations.
Rubicon
Integration, L.L.C.
On
November 30, 2007, Fortress acquired 100% of the membership interests of Rubicon
Integration L.L.C. (Rubicon), for the aggregate closing consideration consisting
of (i) $4,745,524 in cash, including acquisition costs of $198,043, net of
cash
acquired of $42,660 (ii) 204,000 shares of the Company’s common stock valued at
$1,080,800, (iii) contingent consideration in the form of two unsecured
promissory notes in the maximum amount of $1,500,000 and $2,000,000,
respectively, plus interest accruing at 6% annually from November 30, 2007,
the
date of the issuance, payable to the Sellers upon the achievement of certain
operational and financial targets for December 2007 and for the calendar year
2008, respectively, and (iv) additional earn-out amounts, contingent upon the
achievement of certain earnings targets by Rubicon for each of the calendar
years 2008-2009.
During
the fourth quarter, Rubicon achieved certain 2007 earnings targets established
in the purchase agreement, entitling the sellers to an unsecured promissory
note
of $1,517,753 due on January 31, 2008. Additionally, the purchase agreement
required net working capital of $200,000 at the acquisition date, while any
excess or shortfall would result in consideration adjustment. Actual working
capital was approximately $290,141, resulting in additional cash payment
of
$90,141 due to the seller on January 31, 2008.
The
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and preliminarily identified intangible assets acquired for a number of reasons,
including Rubicon’s complementary experience, key customer relationships, and
service offerings in the mission-critical facility industry.
F-14
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Purchase
Price Allocation
Under
business combination accounting, the purchase price for each of the acquired
companies was allocated to the net tangible and identifiable intangible
assets
based on their estimated fair values as of the acquisition dates. The
allocation
of the purchase price was based upon valuations performed for each acquired
company. The valuations for TSS/Vortech and Innovative have been
finalized. We expect to have Rubicon complete in the first quarter of
2008.
The
valuations indicated that the estimated fair value of the assets acquired
was
less than the total of the purchase price paid and the liabilities assumed
in
the transactions. As a result, the excess purchase price was assigned to
goodwill for each acquisition.
These
estimates are subject to change upon the finalization of the valuation
of
certain assets and liabilities and may be adjusted in accordance with the
provisions of SFAS No. 141, Business
Combinations.
The transactions resulted in goodwill of $20.7 million of which $19.8 is
expected to be deductible for income tax purposes.
Tangible
and Other Intangible Long-Lived Assets
In
performing the purchase price allocation for each acquired company, the Company
considered, among other factors, the intention for future use of acquired
assets, analysis of historical financial performance and estimates of future
performance of each acquired company’s products. The fair value of assets was
based, in part, on a valuation using either a cost, income, or in some cases,
market valuation approach and estimates and assumptions provided by management.
The tangible assets primarily include personal property such as computers,
software and service vehicles. Intangible assets consist primarily of customer
relationships,
order
backlog, and trade name.
The
preliminary estimated value and the range of amortizable lives of each of the
components of intangible assets as of December 31, 2007 are as
follows:
|
Amortizable
|
||||||||||||||||
|
TSS/Vortech
|
Innovative
|
Rubicon
|
Total
|
Lives
in Years
|
||||||||||||
|
Intangible
asset:
|
||||||||||||||||
|
Trade
name
|
$
|
4,930,000
|
$
|
60,000
|
$
|
460,000
|
$
|
5,450,000
|
Indefinite
|
|||||||
|
In-place
contracts
|
406,277
|
350,000
|
50,000
|
806,277
|
1-1.25
|
|||||||||||
|
Customer
relationships
|
14,100,000
|
560,000
|
2,000,000
|
16,660,000
|
5-8
|
|||||||||||
|
Non
competition agreement
|
-
|
50,600
|
685,000
|
735,600
|
2
|
|||||||||||
|
Total
Intangible
|
19,436,277
|
1,020,600
|
3,195,000
|
23,651,877
|
||||||||||||
|
Accumulated
amortization
|
(2,397,231
|
)
|
(85,968
|
)
|
(79,542
|
)
|
(2,562,741
|
)
|
||||||||
|
Net
intangible assets
|
$
|
17,039,046
|
$
|
934,632
|
$
|
3,115,458
|
$
|
21,089,136
|
||||||||
Unaudited pro
forma
results of operations are as follows. The amounts are shown as if the TSS,
Inovative and Rubicon acquisitions had occurred on January 1, 2006:
|
2007
|
2006
|
||||||
|
Proforma
revenue
|
$
|
50,455,823
|
$
|
60,154,971
|
|||
|
Proforma
operating (loss) income
|
(9,466,620
|
)
|
(496,610
|
)
|
|||
|
Proforma
pretax (loss) income
|
(8,660,102
|
)
|
1,146,412
|
||||
|
Proforma
net (loss) income
|
(8,160,947
|
)
|
813,698
|
||||
|
Pro
forma basic and diluted net (loss) per share
|
$
|
(0.68
|
)
|
$
|
0.07
|
||
|
Weighted
average common shares
|
12,003,664
|
12,381,968
|
|||||
This information is not necessarily indicative of the
operational results that would have occurred if the acquisition had been
consummated on the dates indicated nor is it necessarily indicative of
future
operating results of the combined enterprise.
F-15
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
adjusted fair values of the assets acquired and the
liabilities assumed for the companies Fortress acquired in 2007 are as
follows:
|
TSS/Vortech
|
|
Comm
site
|
|
Innovative
|
|
Rubicon
|
Total
|
|||||||||
|
Cash
|
$
|
11,000,000
|
$
|
150,000
|
$
|
1,747,000
|
$
|
4,590,141
|
$
|
17,487,141
|
||||||
|
Common
stock
|
14,211,359
|
-
|
150,075
|
1,080,800
|
15,442,234
|
|||||||||||
|
Promissory
notes to sellers
|
10,000,000
|
-
|
564,611
|
1,517,753
|
12,082,364
|
|||||||||||
|
Acquistion
costs
|
1,841,468
|
-
|
112,420
|
198,043
|
2,151,931
|
|||||||||||
|
Total
purchase price
|
37,052,827
|
150,000
|
2,574,106
|
7,386,737
|
47,163,670
|
|||||||||||
|
Assets
|
||||||||||||||||
|
Cash
and equivalents
|
1,322,317
|
-
|
244,968
|
42,660
|
1,609,945
|
|||||||||||
|
Contracts
and other receivables
|
6,261,988
|
5,200
|
466,852
|
637,132
|
7,371,172
|
|||||||||||
|
Costs
and estimated earnings
|
1,559,045
|
-
|
317,868
|
98,278
|
1,975,191
|
|||||||||||
|
Prepaid
expenses
|
233,894
|
-
|
12,855
|
-
|
246,749
|
|||||||||||
|
Total
current assets
|
9,377,244
|
5,200
|
1,042,543
|
778,070
|
11,203,057
|
|||||||||||
|
Property
and equipment
|
904,689
|
10,177
|
163,947
|
3,048
|
1,081,861
|
|||||||||||
|
Goodwill-Investment
in Subsidiary
|
15,739,472
|
134,623
|
942,323
|
3,898,549
|
20,714,967
|
|||||||||||
|
Identifiable
intangibles, net
|
19,436,200
|
-
|
1,020,600
|
3,195,000
|
23,651,800
|
|||||||||||
|
Other
Assets
|
64,158
|
-
|
-
|
-
|
64,158
|
|||||||||||
|
Total
assets
|
45,521,763
|
150,000
|
3,169,413
|
7,874,667
|
56,715,843
|
|||||||||||
|
Liabilities
|
||||||||||||||||
|
Notes
payable, current
|
72,808
|
-
|
6,684
|
-
|
79,492
|
|||||||||||
|
Accounts
payable and accrued expenses
|
6,653,886
|
-
|
398,903
|
487,930
|
7,540,719
|
|||||||||||
|
Income
taxes payable
|
-
|
-
|
114,075
|
-
|
114,075
|
|||||||||||
|
Billings
in excess of costs
|
1,662,718
|
-
|
67,842
|
-
|
1,730,560
|
|||||||||||
|
Total
current liabilities
|
8,389,412
|
-
|
587,504
|
487,930
|
9,464,846
|
|||||||||||
|
Long-Term
Liabilities
|
||||||||||||||||
|
Notes
payable, less current portion
|
79,524
|
-
|
-
|
-
|
79,524
|
|||||||||||
|
Other
long term liabilities
|
-
|
-
|
7,803
|
-
|
7,803
|
|||||||||||
|
Total
liabilities
|
8,468,936
|
-
|
595,307
|
487,930
|
9,552,173
|
|||||||||||
|
Allocated
purchase price
|
$
|
37,052,827
|
$
|
150,000
|
$
|
2,574,106
|
$
|
7,386,737
|
$
|
47,163,670
|
||||||
(3)
Investment Held in Trust
The
Company held certain investments, consisting primarily of short term
investments, in a trust account through January 19, 2007. All such investments
were disposed as of January 19, 2007.
(4)
Property and Equipment
Property
and equipment consisted of the following:
F-16
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
Successor
|
Predecessor
|
||||||||||||
|
December
31,
|
Decmber
31,
|
January
19,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Vehicles
|
$
|
164,576
|
$
|
-
|
$
|
393,185
|
$
|
393,185
|
|||||
|
Trade
equipment
|
135,482
|
67,829
|
|||||||||||
|
Leasehold
improvements
|
500,040
|
-
|
584,544
|
584,544
|
|||||||||
|
Furniture
and fixtures
|
32,753
|
-
|
14,732
|
14,732
|
|||||||||
|
Office
equipment
|
606,607
|
-
|
416,087
|
373,450
|
|||||||||
|
1,439,458
|
-
|
1,476,377
|
1,365,911
|
||||||||||
|
Less
accumulated
depreciation
|
(394,913
|
)
|
(571,688
|
)
|
(555,164
|
)
|
|||||||
|
$
|
1,044,545
|
$
|
-
|
$
|
904,689
|
$
|
810,747
|
||||||
Depreciation
of fixed assets was $0.4 million for the year ended December 31, 2007 for the
successor. For the predecessor for the period January 1, 2007 through January
19, 2007 and for the years ended December 31, 2006 and December 31, 2005,
depreciation expense totaled $0.0, $0.3 million, and $0.2 million,
respectively.
(5)
Goodwill and Other Intangibles
The
Company recognized goodwill associated with its four acquisitions during 2007.
As of December 31, 2007, goodwill totaled $20.7 million of which approximately
$19.8 million is deductible for income tax purposes. The predecessor had no
goodwill.
Other
intangibles at December 31, 2007 were related to the following
acquisitions:
|
Amortizable
|
||||||||||||||||
|
TSS/Vortech
|
Innovative
|
|
Rubicon
|
Total
|
Lives
in Years
|
|||||||||||
|
Intangible
asset:
|
||||||||||||||||
|
Trade
name
|
$
|
4,930,000
|
$
|
60,000
|
$
|
460,000
|
$
|
5,450,000
|
Indefinite
|
|||||||
|
In-place
contracts
|
406,277
|
350,000
|
50,000
|
806,277
|
1-1.25
|
|||||||||||
|
Customer
relationships
|
14,100,000
|
560,000
|
2,000,000
|
16,660,000
|
5-8
|
|||||||||||
|
Non
competition agreement
|
-
|
50,600
|
685,000
|
735,600
|
2
|
|||||||||||
|
Total
Intangible
|
19,436,277
|
1,020,600
|
3,195,000
|
23,651,877
|
||||||||||||
|
Accumulated
amortization
|
(2,397,231
|
)
|
(85,968
|
)
|
(79,542
|
)
|
(2,562,741
|
)
|
||||||||
|
Net
intangible assets
|
$
|
17,039,046
|
$
|
934,632
|
$
|
3,115,458
|
$
|
21,089,136
|
||||||||
Intangible
asset amortization expense totaling $2,562,741 has been included in the
accompanying consolidated statement of operations related to the above
intangibles, of which $453,442 is included in cost of revenue for the year
ended
December 31, 2007. The Company estimates amortization expense will be $2.9
million in 2008, $2.5 million in 2009, $2.2 million in 2010, $2.2 million
in
2011 and $2.1 million in 2012 and $3.8 million thereafter.
During
the fourth quarter of 2007, the Company performed an impairment analysis of
the
intangible assets acquired pursuant to SFAS 142 and SFAS 144. The Company did
not recognize an impairment loss, as the carrying amount of infinite-lived
intangible assets was determined to be recoverable.
F-17
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(6)
Basic and Diluted Net Loss Per Common Share
Basic
and
diluted net loss per common share is computed as follows:
|
Successor
|
||||||||||
|
Year
Ended
|
||||||||||
|
|
December
31,
|
December
31,
|
|
December
31,
|
||||||
|
|
2007
|
2006
|
|
2005
|
||||||
|
Net
income (loss)
|
$
|
(7,377,111
|
)
|
$
|
645,272
|
$
|
131,542
|
|||
|
Basic
and diluted weighted average common shares
|
11,698,895
|
9,550,000
|
5,107,534
|
|||||||
|
Earnings
per share
|
$
|
(0.63
|
)
|
$
|
0.07
|
$
|
0.03
|
|||
Unvested
restricted stock, options to purchase units, convertible unsecured promissory
notes, and warrants outstanding as of December 31, 2007 to purchase
954,166, 2,100,000, 1,000,000, and 15,710,300 shares of common stock,
respectively, options were not included in the computation of diluted net
loss
per common share for the year ended December 31, 2007, as their inclusion
would be anti-dilutive.
Options
to purchase units and warrants outstanding as of December 31, 2006 to
purchase 2,100,000 and 15,600,000 shares of common stock, respectively,
options
were not included in the computation of diluted net loss per common share
for
the year ended December 31, 2007, as their inclusion would be
anti-dilutive.
No
weighted average common shares or income (loss) per share amounts are shown
for
the predecessor since the predecessor was limited liability company whose
capital structure consisted of membership interests. As such, no weighted
average number of outstanding shares and earnings per share are
presented.
Long-term
debt was as follows:
|
Successor
|
Predecessor
|
||||||||||||
|
December
31,
|
December
31,
|
January
19,
|
December
31,
|
||||||||||
|
2007
|
2006
|
|
2007
|
2006
|
|||||||||
|
Convertible
Unsecured promissory notes, due 2012 (6.0%)
|
$
|
7,500,000
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Unsecured
promissory note, due 2011 (6.0%)
|
394,611
|
-
|
-
|
-
|
|||||||||
|
Unsecured
promissory note, due 2008 (6.0%)
|
1,517,753
|
-
|
-
|
-
|
|||||||||
|
Vehicle
notes
|
86,603
|
-
|
152,332
|
158,613
|
|||||||||
|
Total
debt
|
9,498,967
|
-
|
152,332
|
158,613
|
|||||||||
|
Less
current portion
|
1,650,306
|
-
|
72,808
|
76,934
|
|||||||||
|
$
|
7,848,661
|
$
|
-
|
$
|
79,524
|
$
|
81,679
|
||||||
In
connection with the TSS/Vortech acquisition, the Company entered into two
convertible unsecured promissory notes payable (in equal amounts with each
the Company’s
Chief Executive Officer and President ) totaling $10,000,000. The notes bear
interest at six percent per year and have a term of five years. Interest only
is
payable during the first two years of each note with principal payments
commencing on the second anniversary (January 19, 2009) and continuing
throughout the balance of the term of the notes in equal quarterly installments
totaling $833,333. Subsequent to the retirement described below, the
recalculated quarterly principal installments total $625,000 over the original
term. At any time after the sixth month following the closing of the
acquisition, the notes are convertible into shares of our common stock at a
conversion price of $7.50 per share. At any time after the sixth month following
the closing of the acquisition, the notes are automatically convertible if
the
average closing price of Fortress common stock for 20 consecutive trading days
equals or exceeds $7.50 per share.
On
August
29, 2007 the Company entered into an agreement with the Chief Executive Officer
( the “CEO”) to retire $2,500,000 of the note due to him by paying $2,000,000
and the CEO agreed to use the proceeds to purchase the Company’s common stock
and warrants. The prepayment discount realized of $500,000 has been recorded
as
additional paid-in capital. This transaction was completed on September 28,
2007.
In
connection with the Innovative acquisition, the Company entered into an
unsecured promissory note with the sellers in the amount of $300,000. The
note bears interest at six percent per year and has a three year tem. Quarterly,
interest is payable and quarterly principal installments of $15,000 commence
December 31, 2007 with a final balloon payment of $120,000 due on December
31,
2010. Based on achieving certain earnings targets through December 31, 2007
and
net of a purchase price adjustment associated with working capital, Innovative
sellers received an additional promissory note of approximately $65,000 at
December 31, 2007. see Note 2. The additional unsecured promissory note is
in similar form to the unsecured promissory note issued at closing, bearing
interest at six percent per year and has a three year term. Quarterly interest
is payable and quarterly principal installments of $8,200 commence March 31,
2008 with a final balloon payment of $65,600 due on March 31, 2011.
F-18
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the Rubicon acquisition, the Company was obligated to issue
unsecured promissory notes totaling $1.5 million and $2.0 million contingent
on
Rubicon achieving certain earnings targets for the month ended December 31,
2007
and certain revenue bookings targets for 2008, respectively. As described in
footnote 2 above, Rubicon exceeded earnings targets for the month ended
December, 31 2007, resulting in the issuance of a promissory note totaling
$1.5
million due January 31, 2008 per the terms of the purchase agreement. Rubicon’s
achievement of the revenue bookings targets for 2008 was not determinable beyond
a reasonable doubt, therefore the $2.0 million contingent note was not issued
at
December 31, 2007.
The
Company is obligated under multiple notes payable arrangements through October
2010 totaling $106,885 that bear interest at rates up to six percent, and are
secured by vehicles.
Scheduled
principal repayments at December 31, 2007 are as follows:
|
2008
|
$
|
1,650,306
|
||
|
2009
|
1,970,912
|
|||
|
2010
|
2,672,750
|
|||
|
2011
|
2,580,002
|
|||
|
2012
|
624,997
|
|||
|
Total
|
$
|
9,498,967
|
(8) Advance
from Stockholder
In
December 2006, an Initial Stockholder, officer and director made payments
totaling $20,000 on behalf of the Company. These payments are non interest
bearing and due on demand. Such amounts have been included in Advances from
Stockholders in the December 31, 2006 balance sheet. These advances were
repaid by the Company in January 2007.
(9) Employee
Benefit Plans
Restricted
Stock
On
January 17, 2007, the stockholders of the Company approved the Fortress
International Group, Inc. 2006 Omnibus Incentive Compensation Plan (the “Plan”).
Under the Plan, the Company reserved 2.1 million shares of the Company’s common
stock for issuance to employees and directors through incentive stock options,
or non-qualified stock options or through restricted stock. To date grants
under
the plan have been limited to shares of restricted stock, which were
granted
to the recipients at no cost
and
generally restrictions lapse over a three year period. Concurrent with the
acquisition of TSS/Vortech, the Company issued 574,000 shares of restricted
stock under the Plan.
The
fair
value of restricted stock awarded for the years ended December 31, 2007
totaled $5.3 million and was calculated using the value of Fortress’ common
stock on the grant date and is being amortized over the restriction lapse
periods of the awards taking into account the effect of an estimated forfeiture
rate of 12% associated with termination behavior. The Company recognized
non-cash compensation associated with restricted stock of $1.2 million for
the
year ended December 31, 2007. As of December 31, 2007, the total
compensation cost related to unvested restricted stock or restricted stock
not
yet recognized was $3.4 million with a weighted average remaining vest life
of
2.3 years.
F-19
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
changes in restricted stock and restricted stock units are shown in the
following table:
|
Weighted
|
|||||||
|
Average
|
|||||||
|
Grant
Date
|
|||||||
|
Number
|
|
Fair
Value
|
|||||
|
Unvested
December 31, 2006
|
-
|
$
|
- | ||||
|
Granted
restricted stock
|
970,833
|
|
5.47
|
||||
|
Vested
restricted stock
|
(16,667
|
)
|
5.43
|
||||
|
Unvested
December 31, 2007
|
954,166
|
$
|
5.47
|
||||
401(k)
Plan
The
Company and its subsidiaries offer their qualified employees the opportunity
to
participate in a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code (“401(k) Plan”).
Each employee is eligible to contribute, on a tax deferred basis, a portion
of
annual earnings generally not to exceed $15,500 in 2007. The Company matches
50%
of employee contributions up to 6% of eligible earnings or applicable regulatory
limits. The Company made 401(k) Plan matching contributions in cash of
approximately $222,000 for the year ended December 31, 2007. The predecessor
contributed approximately $15,000, $163,000 and $71,000 for the period from
January 1, 2007 through January 19, 2007, for the year ended December 31, 2006
and December 31, 2005, respectively. The Company’s matching contributions were
recorded in selling, general and administrative expenses.
In
January 2007, the Company repurchased 756,100 shares of those shareholders
that voted against the acquisition of TSS/Vortech and requested that their
shares be redeemed at the then per share trust value of $5.74 per share
(including deferred interest of $0.38 per share).
Prior
to
the consummation of the acquisition of TSS/Vortech, the Company announced and
implemented a common stock repurchase program under which it may purchase up
to
3,000,000 shares of common stock. Currently the Board of Directors has
authorized the repurchase of up to 500,000 shares under this program. For
the year ended December 31, 2007, the Company paid approximately $2.0 million
in
cash to redeem 379,075 shares of common stock at an average price of $5.37
per
share. On June 13, 2007 the Company retired 221,000 shares from these
redemptions and currently has 158,075 shares of Treasury Stock.
(11)
Options to Purchase Units and Warrants
Total
warrants outstanding at December 31, 2007 and
2006 were 17,810,300 and 17,700,000, respectively.
In
conjunction with initial public offerings, the Company issued 15,600,000
warrants to purchase one share of common stock with an
exercise price of $5.00 and an expiration date of July 11, 2009. During the
fourth quarter of 2007, a warrant exercise resulted in the issuance of 14,700
shares of common stock and related cash proceeds of $73,500. As
part
of the underwriter’s fee associated with our IPO, Sunrise Securities Corporation
received an option to purchase 700,000 units at an offering price of $7.50
per
unit. Units are convertible to one share of common stock and two warrants.
Each
warrant is convertible to one share of common stock at an exercise
price of $6.25. The units are set to expire July 11, 2010.
In
February 2007, the Company entered into an agreement with an advisor in which
it
was obligated to issue a warrant for the purchase of 125,000 shares of our
common stock. The warrants have an exercise price of $5.00 and an
expiration date of July 11, 2009. The fair value of these warrants has been
determined using the Black Sholes model and is recognized over the term of
the
agreement. For the year ended December 31, 2007, the Company recognized $234,000
of stock-based compensation expense which has been recorded as selling, general
and administrative expense.
(12) Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined
from
time to time by the Board of Directors.
F-20
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(13) Income
Taxes
Income
taxes are recognized for the amount of taxes payable or refundable for
the
current year and deferred tax liabilities and assets are established
for the
future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns. The effects of income taxes are
measured
based on enacted tax laws and rates.
The
provision (benefit) for income taxes consists of the following:
|
For the Period
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Current:
|
|
|
|||||
|
Federal
|
$
|
(897,283
|
)
|
$
|
691,089
|
||
|
State
|
—
|
—
|
|||||
|
Deferred:
|
|||||||
|
Federal
|
(1,730,703
|
)
|
(358,675
|
)
|
|||
|
State
|
(347,573
|
)
|
|
||||
|
Total
provision (benefit) for income taxes before valuation
allowance
|
$
|
(2,975,559
|
)
|
$
|
332,414
|
||
|
Change
in valuation allowance
|
2,476,404
|
—
|
|||||
|
Total
provision (benefit) for income taxes
|
$
|
(499,155
|
)
|
$
|
332,414
|
||
F-21
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2007
|
December 31,
2006
|
||||||
|
Gross
current deferred taxes:
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Bad
debts
|
$
|
22,123
|
$
|
—
|
|||
|
Accrued
expenses
|
17,719
|
—
|
|||||
|
Net
operating loss carryover
|
412,632
|
—
|
|||||
|
Deferred
compensation
|
142,191
|
—
|
|||||
|
Gross
current deferred tax assets before valuation allowance
|
594,665
|
—
|
|||||
|
Valuation
allowance
|
(445,180
|
)
|
—
|
||||
|
Gross
current deferred tax assets
|
$
|
149,485
|
$
|
—
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Tax
accounting differences for long-term contracts
|
(75,899
|
)
|
—
|
||||
|
Prepaid
expenses
|
(59,535
|
)
|
—
|
||||
|
Deferred
current tax liabilities
|
$
|
(135,434
|
)
|
$ | |||
|
Net
current deferred taxes
|
$
|
14,051
|
|
$
|
—
|
||
|
Non-current
deferred taxes:
|
|||||||
|
Deferred
tax assets:
|
|
||||||
|
Interest
income deferred for financial reporting purposes
|
$
|
—
|
$
|
183,702
|
|||
|
Net
operating loss carryover
|
1,219,628
|
—
|
|||||
|
Expenses
deferred for income tax purposes
|
325,521
|
306,973
|
|||||
|
Deferred
compensation
|
521,945
|
—
|
|||||
|
Depreciation
|
63,453
|
—
|
|||||
|
Gross
non-current deferred tax assets before valuation allowance
|
2,130,547
|
490,675
|
|||||
|
Valuation
allowance
|
(1,595,059
|
)
|
—
|
||||
|
Gross
non-current deferred tax assets
|
$
|
535,488
|
$
|
490,675
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Amortization
of goodwill and other
|
(549,539
|
)
|
—
|
||||
|
Deferred
non-current tax liabilities
|
(549,539
|
)
|
—
|
||||
|
Net
non-current deferred taxes
|
$
|
(14,051
|
) |
$
|
490,675
|
||
In
2007,
the company has reported a net operating loss and expects, $2,627,418
of this
loss will be carried back to prior years resulting in a refund of federal
income
taxes of $893,322. The remainder, or $4,113,066, will be carried forward
to
future years, and will expire in 2028. The Company has recorded a deferred
tax
asset of $1,632,260
reflecting the federal and state benefit of the remaining loss
carryforwards.
The
Company does not believe its net operating loss will be limited under
Internal
Revenue Code Section 382 and believes it will also be available for state
income
tax purposes subject to state carryforward limitations.
The
Company has established a partial valuation allowance with respect to
a portion
of these federal and state loss carryforwards and other net deferred
tax assets
due to uncertainties surrounding their realization. The Company believes
that it
is more likely than not that the benefit of the net deferred tax assets
will not
be fully realized based on the Company’s current year loss and estimated future
taxable income.
F-22
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
carryforward loss has not resulted in a fully reported tax benefit because
of an
offsetting valuation allowance for deferred tax assets that results from
the
inability to determine the realizability of those assets.
The
Company’s provision for income taxes for the year ended December 31, 2006
consists primarily of federal income taxes on interest income.
In
determining the Company’s provision (benefit) for income taxes, net deferred tax
assets, liabilities and valuation allowances, management is required
to make
judgments and estimates related to projections of profitability, the
timing and
extent of the utilization of net operating loss carryforwards and applicable
tax
rates. Judgments and estimates related to the Company’s projections and
assumptions are inherently uncertain; therefore, actual results could
differ
materially from the projections.
The
Company acquired all issued and outstanding stock of Innovative Power Systems,
Inc. and Quality Power Systems, Inc. effective September 24, 2007. The
Company
has recorded $470,173 of deferred tax liabilities related to this acquisition.
This deferred tax liability is off-set in purchase accounting by a corresponding
reduction in the Company’s previously recorded valuation allowance against net
deferred tax assets.
On
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, “Accounting for Uncertainties in Income taxes” (“FIN 48”). The Company has
analyzed its current tax reporting compliance positions for all open
years, and
has determined that it does not have any material unrecognized tax benefits.
Accordingly, the Company has omitted the tabular reconciliation schedule
of
unrecognized tax benefits. The Company does not expect a material change
in
unrecognized tax benefits over the next 12 months. All of the Company’s prior
tax federal, Maryland and Virginia filings since inception remain open
under
statutes of limitation. Innovative Power System Inc.’s statutes of
limitation are open from the 2002 tax year forward for both federal
and Virginia purposes. Quality Power Systems
Inc.’s statutes of limitation are open from the 2003 tax year forward for
both federal and Virginia purposes.
The
total
provision for income taxes differs from that amount which would be computed
by
applying the U.S. federal income tax rate to income before provision
for income
taxes due to the following:
|
|
For the Period
Ended December 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Federal
statutory rate
|
34.0
|
%
|
34.0
|
%
|
|||
|
State
tax, net of income tax benefit
|
-
|
-
|
|||||
|
Effect
of permanent differences
|
(0.3
|
)
|
|||||
|
Effect
of valuation allowance
|
(27.4
|
)
|
|||||
|
Total
|
6.3
|
%
|
34.0
|
%
|
|||
F-23
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Company participates in transactions with the following entities affiliated
through common ownership and management. The Audit Committee of
the Company’s board of directors reviews and approves these transactions
with each of these affiliated entities.
S3
Integration L.L.C.
S3
Integration L.L.C. (S3 Integration) is owned 15% each by the Company’s Chief
Executive Officer and President. S3 Integration provides commercial security
systems design and installation services as a subcontractor to the Company.
Chesapeake
Systems, L.L.C.
(Chesapeake Systems) is 9% owned and significantly indebted to the Company’s
Chief Executive Officer. Chesapeake Systems is a manufacturers’ representative
and distributor of mechanical and electrical equipment and purchased certain
assets of Chesapeake Tower Systems, Inc. in February 2007.
Chesapeake
Mission Critical, L.L.C.
(Chesapeake MC) is 9% owned each by the Company’s Chief Executive Officer and
its President. Additionally, it is significantly indebted to the Company’s Chief
Executive Officer. Chesapeake MC is a manufacturers’ representative and
distributor of electrical equipment and purchased certain assets of Chesapeake
Tower Systems, Inc. in February 2007.
Chesapeake
Tower Systems, Inc.
Chesapeake Tower Systems, Inc. (Chesapeake) is 100% owned by the Company’s Chief
Executive Officer. On February 28, 2007 Chesapeake sold substantially all of
its
assets to Chesapeake Systems and Chesapeake MC and, except for an office space
sublease agreement, does not engage in any business with the Company. Chesapeake
was a manufacturer’s representative and distributor of mechanical and electrical
equipment, which Chesapeake sold to the Company. In addition, the Company acted
as a subcontractor to Chesapeake for certain equipment installation on
project-by-project basis.
F-24
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
CTS
Services, L.L.C.
(CTS) is
55% owned by the Company’s Chief Executive Officer and 5% owned by the Company’s
Treasurer. CTS is a mechanical contractor that acts as a subcontractor to the
Company for certain projects. In addition, CTS utilizes the Company as a
subcontractor on projects as needed.
L.H.
Cranston Acquisition Group, Inc.
L.H.
Cranston Acquisition Group, Inc. (Cranston) is 25% owned by the Company’s Chief
Executive Officer. Cranston is a mechanical, electrical and plumbing contractor
that acts, directly or through its Subsidiary L.H. Cranston and Sons, Inc.,
as
subcontractor to the Company on a project-by-project basis.
Telco
P&C, L.L.C.
Telco
P&C, L.L.C. is 55% owned by the Company’s Chief Executive Officer. Telco
P&C is a specialty electrical installation company that acts as a
subcontractor to the Company. The Company has also acted as a subcontractor
to
Telco as needed.
Automotive
Technologies, Inc.
Automotive Technologies, Inc. is 60% owned by the Company’s Chief Executive
Officer and provides vehicle maintenance and repair services to the
Company.
TPR
Group, L.L.C.
TPR
Group, L.L.C. is 100% owned by the Company’s Chief Executive Officer and has
provided human resources, employee benefit, and administrative services to
TSS/Vortech.
TPR
Group Re Three, L.L.C.
As of
November 1, 2006, TPR Group Re Three, L.L.C. (TPR Group Re Three) is owned
50%
each by the Company’s Chief Executive Officer and its President. TPR Group Re
Three leases office space to the Company under the terms of a real property
lease to TSS/Vortech. The Company had an independent valuation, which determined
the lease to be at fair value.
CSI
Engineering, Inc. (CSI), which was
9% owned by the Company’s President, acts as an engineering services
subcontractor to the Company and the Company acts as an electrical subcontractor
to CSI. As of December 31, 2006 the President no longer had an interest in
CSI.
GR
Partners GR Partners, which is owned
50% by the Company’s Chief Executive Officer and President, leases office and
field equipment to the Company under the terms of an equipment lease. In
addition, the predecessor Company has paid fees for management services (which
is included in general and administrative expenses).
The
following table sets forth transactions the Company has entered into with the
above related parties for the year ended December 31, 2007 and 2006 (Successor),
and Predecessor transactions for the period January 1, 2007 through January
19,
2007 and for the years ended December 31, 2006 and 2005. It should be noted
that
revenue represents amounts earned on contracts with related parties under which
we provide services; and cost of revenue represents costs incurred in connection
with related parties which provide services to us on contracts for our
customers. As such a direct relationship to the revenue and cost of revenue
information below by company should not be expected.
F-25
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
(Succesor)
|
(Predecessor)
|
|||||||||||||||
|
Year
Ended
|
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||
|
December
31,
|
December
31,
|
January
19,
|
December
31,
|
|
December
31,
|
|||||||||||
|
2007
|
|
2006
|
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue
|
||||||||||||||||
|
CTS
Services, L.L.C.
|
$
|
183,532
|
$
|
-
|
1,800
|
$
|
88,017
|
189,743
|
||||||||
|
CSI
Engineering, Inc.
|
-
|
-
|
-
|
2,289,102
|
3,627,743
|
|||||||||||
|
Chesapeake
Systems, L.L.C.
|
105,965
|
-
|
-
|
-
|
-
|
|||||||||||
|
Chesapeake
Mission Critical, L.L.C.
|
106,627
|
-
|
-
|
-
|
-
|
|||||||||||
|
Chesapeake
Tower Systems, Inc.
|
-
|
-
|
-
|
16,183
|
7,729
|
|||||||||||
|
S3
Integration, L.L.C.
|
-
|
-
|
-
|
1,668
|
18,204
|
|||||||||||
|
TPR
Group, L.L.C.
|
-
|
-
|
-
|
1,772
|
8,808
|
|||||||||||
|
Total
|
$
|
396,124
|
$
|
-
|
1,800
|
$
|
2,396,742
|
3,852,227
|
||||||||
|
Cost
of Revenue
|
||||||||||||||||
|
CTS
Services, L.L.C.
|
$
|
3,439,631
|
$
|
-
|
82,032
|
$
|
4,473,118
|
3,425,784
|
||||||||
|
CSI
Engineering, Inc.
|
-
|
-
|
-
|
501,974
|
380,586
|
|||||||||||
|
Chesapeake
Systems, L.L.C.
|
161,178
|
-
|
-
|
-
|
-
|
|||||||||||
|
Chesapeake
Mission Critical, L.L.C.
|
144,924
|
-
|
-
|
-
|
||||||||||||
|
Chesapeake
Tower Systems, Inc.
|
1,052
|
-
|
8,225
|
925,833
|
7,387,225
|
|||||||||||
|
GR
Parnters
|
-
|
-
|
-
|
-
|
508,234
|
|||||||||||
|
S3
Integration, L.L.C.
|
267,848
|
-
|
-
|
848,160
|
6,628
|
|||||||||||
|
LH
Cranston & Sons, Inc.
|
234,252
|
-
|
-
|
769,672
|
2,001,354
|
|||||||||||
|
Telco
P&C, L.L.C.
|
29,174
|
-
|
-
|
17,268
|
17,268
|
|||||||||||
|
Total
|
$
|
4,278,059
|
$
|
-
|
90,257
|
$
|
7,536,025
|
13,727,079
|
||||||||
|
Selling,
general and administrative
|
||||||||||||||||
|
Management
fees paid to TPR Group, L.L.C.
|
$
|
-
|
$
|
-
|
-
|
$
|
836,400
|
-
|
||||||||
|
Management
fees paid to GR Partners
|
-
|
-
|
-
|
50,935
|
275,000
|
|||||||||||
|
Office
rent paid on Chesapeake sublease agmt
|
207,671
|
-
|
16,016
|
256,465
|
190,727
|
|||||||||||
|
Office
rent paid to TPR Group Re Three, L.L.C.
|
384,271
|
-
|
26,472
|
65,392
|
-
|
|||||||||||
|
Equipment
rent paid to GR Partners
|
-
|
-
|
-
|
66,987
|
33,066
|
|||||||||||
|
Vehicle
repairs to Automotive Technologies, Inc.
|
4,442
|
-
|
656
|
25,148
|
26,165
|
|||||||||||
|
Management
fees to CTS Services
|
- | - | - | - |
534,700
|
|||||||||||
|
Total
|
$
|
596,384
|
$
|
-
|
43,144
|
1,301,327
|
524,958
|
|||||||||
|
Successor
|
(Predecessor)
|
|||||||||||||||
|
December
31,
|
December
31,
|
January
19,
|
December
31,
|
December
31,
|
||||||||||||
|
2007
|
|
2006
|
2007
|
2006
|
|
2005
|
||||||||||
|
Accounts
receivable/(payable):
|
||||||||||||||||
|
CTS
Services, L.L.C.
|
$
|
44,821
|
231,135
|
$
|
229,335
|
4,669
|
||||||||||
|
CTS
Services, L.L.C.
|
(2,969,671
|
)
|
(207,195
|
)
|
(405,091
|
)
|
(275,553
|
)
|
||||||||
|
CSI
Engineering, Inc.
|
-
|
-
|
199,317
|
854,455
|
||||||||||||
|
CSI
Engineering, Inc.
|
-
|
-
|
(78,351
|
)
|
(8,795
|
)
|
||||||||||
|
Chesapeake
Systems, L.L.C.
|
611
|
-
|
-
|
-
|
||||||||||||
|
Chesapeake
Systems, L.L.C.
|
(873
|
)
|
-
|
-
|
-
|
|||||||||||
|
Chesapeake
Mission Critical, L.L.C.
|
104,397
|
-
|
-
|
-
|
||||||||||||
|
Chesapeake
Mission Critical, L.L.C.
|
(18,950
|
)
|
-
|
-
|
-
|
|||||||||||
|
Chesapeake
Tower Systems, Inc.
|
-
|
2,336
|
2,802
|
94
|
||||||||||||
|
Chesapeake
Tower Systems, Inc.
|
-
|
(8,225
|
)
|
(469,418
|
)
|
|||||||||||
|
Telco
P&C, L.L.C.
|
(8,000
|
)
|
-
|
(4,174
|
)
|
|||||||||||
|
GR
Partners
|
-
|
(2,801
|
)
|
(14,785
|
)
|
|||||||||||
|
LH
Cranston & Sons, Inc.
|
(11,575
|
)
|
-
|
(615,622
|
)
|
|||||||||||
|
S3
Integration, L.L.C.
|
-
|
150
|
150
|
9,381
|
||||||||||||
|
S3
Integration, L.L.C.
|
(60,556
|
)
|
(42,918
|
)
|
-
|
-
|
||||||||||
|
Total
Accounts receivable
|
$
|
149,829
|
$
|
- |
$
|
233,621
|
$
|
431,604
|
868,599
|
|||||||
|
Total
Accounts (payable)
|
$
|
(3,069,625
|
)
|
$
|
- |
$
|
(258,338
|
)
|
$
|
(486,243
|
)
|
(1,388,347
|
)
|
|||
F-26
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Reportable
Segment
(15) Commitments,
Contingencies and Other
Leases
Under
operating leases, the Company leases certain facilities, equipment and vehicles
for use in its operations. Total rent expense for the successor was $1.0 million
and $0.1 million for the year ended December 31, 2007 and December 31, 2006,
respectively. For the period January 1, 2007 through January 19, 2007 and for
the years ended December 31, 2006 and December 31, 2005, the predecessor
incurred rent expense of $0.0 million, $0.4 million, and $0.2 million,
respectively.
The
aggregate minimum rental commitments under non-cancelable leases for the periods
shown at December 31, 2007, are as follows:
|
Year
|
||||
|
2008
|
$
|
870,035
|
||
|
2009
|
719,747
|
|||
|
2010
|
641,296
|
|||
|
2011
|
564,367
|
|||
|
2012
|
56,140
|
|||
|
Total
|
$
|
2,851,585
|
||
The
Company occupied office space provided by an affiliate of an Initial
Stockholder. Such affiliate agreed that, until the acquisition or a target
business by the Company, it will make such office space, as well as certain
office and secretarial services, available to the Company, as may be required
by
the Company from time to time. The Company paid such affiliate $7,500 per month
for such services. Rent expense under this agreement amounted to $90,000 and
$37,500 for the twelve month periods ended December 31, 2006 and
December 31, 2005, respectively.
Legal
Matters
The
Company is not party to any litigation in any court, and management is not
aware
of any contemplated proceeding by any governmental authority against the
Company. From time to time, we are involved in various legal matters and
proceeding concerning matters arising in the ordinary course of business.
The
Company currently estimates that any ultimate liability arising out of
these matters and proceedings will not have a material adverse effect on
its
financial position, results of operations of cash flows.
Employment
Agreements
On
January 19, 2007, the Company entered into employment agreements with its
Chairman, Chief Executive Officer and President and a consulting agreement
(the
agreements) with an entity controlled by the Vice-Chairman, each of whom have
been serving in that capacity since then. In August 2007, the Company entered
into an employment agreement with its Chief Financial Officer. The employment
agreements were filed as part of a current report on Form 8-K on January 25,
2007 and on August 8, 2007, respectively. The agreements specify annual salary,
benefits and incentive compensation for the terms of the agreement. The
agreements also provide for twelve months salary if the employee or consultant
is terminated other than for cause.
The
agreements with the Chief Executive Officer and President also provide a share
performance bonus, as described below:
Up
to
$5.0 million in additional shares of common stock will be issuable if during
the
period from the closing of the acquisition through July 13, 2008, certain
share performance thresholds (alternative and not cumulative) set forth below
are satisfied:
| · |
if
the highest average share price of the Company’s common stock during any
60 consecutive trading day period between the closing of the acquisition
and July 13, 2008 exceeds $9.00 per share but is no more than $10.00
per share, each of the Chief Executive Officer and President will
be
entitled to $0.5 million worth of additional shares;
or
|
| · |
if
the highest average share price of Company’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $10.00 per share but is no more than $12.00 per
share, each of the Chief Executive Officer and President will be
entitled
to $1.5 million worth of additional shares;
or
|
| · |
if
the highest average share price of Company’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $12.00 per share but is no more than $14.00 per
share, each of the Chief Executive Officer and President will be
entitled
to $3.0 million worth of additional shares;
or
|
F-27
FORTRESS
INTERNATIONAL GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
| · |
if
the highest average share price of Company’s common stock during any 60
consecutive trading day period between the closing of the acquisition
and
July 13, 2008 exceeds $14.00 per share, each of the Chief Executive
Officer and President will be entitled to $5.0 million worth of additional
shares.
|
Customer
Concentration
The
Company earned approximately 36% of its revenue from three customers for
the
year ended December 31, 2007. Accounts receivable from these customers
at
December 31, 2007 was $7.7 million. For the predecessor years ended December
31,
2006 and December 31, 2005, the Company earned approximately 63% and 78%,
respectively, of it’s revenue from one customer. Accounts receivable from this
customer were $4.8 million and $7.8 million at December 31, 2006 and 2005,
respectively.
(16) Unaudited
Quarterly Financial Data
|
Successor
|
||||||||||||||||
|
2007
Quarter Ended
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||||
|
Revenue
|
$
|
18,223,808
|
$
|
12,692,772
|
$
|
10,862,307
|
$
|
8,676,937
|
||||||||
|
Operating
loss
|
(1,645,046
|
)
|
(2,725,168
|
)
|
(2,650,115
|
)
|
(1,662,454
|
)
|
||||||||
|
Net
income
|
(1,165,087
|
)
|
(2,621,052
|
)
|
(2,558,964
|
)
|
(1,032,008
|
)
|
||||||||
|
Net
income per share – basic and diluted
|
$
|
(0.10
|
)
|
$
|
(0.22
|
)
|
$
|
(0.21
|
)
|
$
|
(0.09
|
)
|
||||
|
2006
Quarter Ended
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||||
|
Total
interest income
|
$
|
449,400
|
$
|
444,941
|
$
|
410,904
|
$
|
361,561
|
||||||||
|
Net
income
|
124,118
|
207,978
|
190,839
|
122,337
|
||||||||||||
|
Net
income per share – basic and diluted
|
$
|
0.02
|
$
|
0.02
|
$
|
0.02
|
$
|
0.01
|
||||||||
|
Predecessor*
|
||||||||||||||||
|
2006
Quarter Ended
|
||||||||||||||||
|
January
1, 2007 through
January
17, 2007
|
December
31,
|
|
September
30,
|
|
June
30,
|
March
31,
|
||||||||||
|
Revenue
|
$
|
1,412,137
|
$
|
12,854,954
|
$
|
12,573,856
|
$
|
18,445,839
|
$
|
16,280,322
|
||||||
|
Operating
income (loss)
|
(284,902
|
)
|
324,820
|
541,237
|
1,257,233
|
1,415,720
|
||||||||||
|
Net
income
|
$
|
(281,153
|
)
|
$
|
314,858
|
$
|
536,813
|
$
|
1,252,500
|
$
|
1,410,755
|
|||||
|
2005
Quarter Ended
|
December
31,
|
September
30,
|
|
June
30,
|
|
March
31,
|
||||||||||
|
Revenue
|
$
|
15,204,834
|
$
|
15,733,713
|
$
|
18,038,896
|
$
|
9,654,850
|
||||||||
|
Operating
income (loss)
|
|
30,645
|
|
1,047,658
|
|
1,768,948
|
|
80,221
|
||||||||
|
Net
income
|
$
|
21,579
|
$
|
1,707,244
|
$
|
1,345,263
|
$
|
71,047
|
||||||||
* The
Predecessor was a limited liability company accordingly no earnings per share
data is computed.
Loss
per
share was calculated for each three-month period on a stand-alone basis. As
a
result of stock transactions during the periods, the sum of the loss per share
for the four quarters of each year may not equal the loss per share for the
twelve month periods.
(17) Subsequent
Events
On
January 2, 2008, the Company acquired all of the outstanding stock of
SMLB, Ltd, which provides consulting, facility management and equipment
integrations services for the mission-critical facilities in the Chicago area.
The closing consideration consisted of (i) $2.0 million in cash,
(ii) the issuance of 96,896 commons shares valued at approximately
$500,000, (iii) promissory note of $500,000 bearing interest at 6% over a five
year term, (iv) additional
earn-out amounts contingent upon the achievement of certain earnings targets
by
SMLB for each of the calendar years 2008-2009.
F-28
| Item 9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
| Item 9A(T). |
CONTROLS
AND PROCEDURES
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and performed an evaluation under the
supervision and with the participation of our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer)
of
the effectiveness of our disclosure controls and procedures (as defined in
Rule
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended)
as of
December 31, 2007. Based upon that evaluation, our Chief Executive Officer
and
Chief Financial Officer have concluded that as of December 31, 2007, our
disclosure controls and procedures were ineffective.
Changes
in Internal Control Over Financial Reporting
Through
December 31, 2006, we had no operations, no full-time personnel and very
few
personnel of any kind. Our activities from inception in late 2005 and into
2006
focused on completing our initial public offering, identifying acquisition
candidates and then completing the acquisition of TSS/Vortech on January
19,
2007. As of December 31, 2007, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer of the effectiveness of the design and operation of our
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were ineffective at that time for the purpose of ensuring that the information
required to be disclosed in our reports filed with the SEC under the Exchange
Act is (1) recorded, processed, summarized, and reported within the time
periods
specified in the SEC’s rules and forms and (2) is accumulated and communicated
to our management, including the Chief Executive Officer, as appropriate
to
allow timely decisions regarding required disclosure.
In
January 2007 we acquired TSS/Vortech and re-evaluated our internal control
process during 2007 based on the framework in "Internal Control-Interpreted
Framework" issued by Committee of Sponsoring Organizations of the Treadway
Commission (COSO). As a result of this re-evaluation, we have determined
that
our internal control over financial reporting is ineffective as of December
31,
2007. We had neither the resources, nor the personnel, to provide for an
adequate internal control environment. The following material weaknesses
in our
internal control over financial reporting were noted at December 31, 2007:
(i)
we did not have the ability to segregate duties; (ii) we lacked the formal
documentation of policies and procedures that were in place; (iii) we lacked
adequate financial personnel; (iv) we lacked general computer controls and
adequate procedures involving change management, and; (v) controls are
inadequate to reasonably assume compliance with generally accepted accounting
principles related to revenue.
44
We
have
begun to address the internal control weaknesses summarized above beginning
in
the first quarter of 2008, with the goal of eliminating such deficiencies by
the
end of 2008. We are working with a certified public accounting firm to serve
as
our internal auditors to further enhance our internal control environment and
a
Chief Financial Officer has been with the Company since August 20, 2007. The
acquisitions of TSS/Vortech will require the development of more robust
disclosure controls and procedures, which we are currently developing.
Management will continue to monitor, evaluate and test the operating
effectiveness of these controls during 2008.
This
Annual Report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
| Item 9B. |
OTHER
INFORMATION
|
None.
PART
III
| Item 10. |
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
required by this item regarding our directors, executive officers and corporate
governance matters may be found in Fortress International Group, Inc.’s Proxy
Statement relating to our 2008 Annual Meeting of Stockholders (the
“2008 Proxy Statement”) and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, may be found
under
the caption “Section 16(a) Beneficial Ownership Reporting
Compliance”
in the
2008 Proxy Statement and is incorporated herein by reference.
| Item 11. |
EXECUTIVE
COMPENSATION
|
The
information required by this item is included under the captions “Compensation
Discussion and Analysis,” “Executive Compensation” and “Compensation Committee
Report” in the 2008 Proxy Statement and incorporated herein by reference.
| Item 12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this item is included under the caption “Security
Ownership of Certain Beneficial Owners and Management” in the 2008 Proxy
Statement and is incorporated herein by reference.
| Item 13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item is included under the captions “Certain
Relationships and Related Transactions” and “Director Independence” in the 2008
Proxy Statement and is incorporated herein by reference
| Item 14. |
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
The
information required by this item is included under the caption “Independent
Public Accountants” in the 2008 Proxy Statement and is incorporated herein by
reference.
45
PART
IV
| Item 15. |
EXHIBITS,
FINANCIAL STATEMENTS
SCHEDULES
|
(a)(1)
Financial
Statements:
We
have
filed the following documents as part of this Annual Report on Form
10-K:
|
Page
|
||||
|
Consolidated
Financial Statements:
|
|
|
||
|
Report
of Independent Registered Public
Accounting Firm
|
F-2
|
|||
|
Consolidated
Balance Sheets as of December
31, 2007
(Successor), December 31, 2006 (Successor),
January 19, 2007 (Predecessor) and December 31, 2006
(Predecessor)
|
F-6
|
|||
|
Consolidated
Statements of Operations for the three years ended December
31, 2007
(Successor), December 31, 2006 (Successor) and December 31,
2005
(Successor), and for the period from January 1, 2007 through
January 19,
2007 (Predecessor) and for the years ended December 31, 2006
(Predecessor)
and December 31, 2005 (Predecessor)
|
F-7
|
|||
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2007 (Successor), 2006 (Successor) and 2005 (Successor) and
Consolidated Statements of Members’ Equity for the period from January 1,
2007 through January 19, 2007 (Predecessor), and for the years
ended
December 31, 2007 (Predecessor) and 2006 (
Predecessor).
|
F-8
|
|||
|
Consolidated
Statements of Cash Flows for the three years ended December
31, 2007
(Successor), December
31, 2006 (Successor) and December 31, 2005 (Successor), and
for the period
from January 1, 2007 through January 19, 2007 (Predecessor)
and for
the years ended December 31, 2006 (Predecessor) and December
31, 2005
(Predecessor)
|
F-9
|
|||
|
Notes
to Consolidated Financial Statements
|
F-10
|
15(a)
(2). Summplementary Financial Data:
Schedule II—Valuation
and Qualifying Accounts for fiscal year ended December 31, 2007, and the
period from January 1, 2007 through January 19, 2007 and years ended
2006 and 2007.
|
Balance
at
|
Balance
at
|
||||||||||||
|
Beginning
|
End
of
|
||||||||||||
|
Successor
|
of
Period
|
Additions
|
Deductions
|
Period
|
|||||||||
|
2007
|
|||||||||||||
|
Allowance
for doubtful accounts
|
-
|
|
(79,611
|
) |
14,611
|
|
(65,000
|
)
|
|||||
|
Allowance
for unrealizable deferred tax assets
|
-
|
(2,476,404 | ) |
436,165
|
(2,040,239
|
) | |||||||
|
2006
|
|||||||||||||
|
Allowance
for unrealizable deferred tax assets
|
|||||||||||||
|
|
Balance
at
|
Balance
at
|
|||||||||||
|
|
Beginning
|
Additions
|
End
of
|
||||||||||
|
Predecessor
|
of
Period
|
at
Cost
|
Deductions
|
Period
|
|||||||||
|
January
1, 2007-January 19, 2007
|
|||||||||||||
|
Allowance
for doubtful accounts
|
(75,000
|
)
|
-
|
-
|
(75,000
|
)
|
|||||||
|
2006
|
|
||||||||||||
|
Allowance
for doubtful accounts
|
(25,000
|
)
|
35,112
|
(85,112
|
)
|
(75,000
|
)
|
||||||
46
(2) Financial
Statements Schedules:
(3) Index
to Exhibits:
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Second
Amended and Restated Certificate of Incorporation dated January 19,
2007 (previously filed with the Commission as Exhibit 3.1 to
the Current
Report on Form 8-K filed on January 25, 2007 and incorporated herein
by reference)
|
|
3.1.1
|
Amendment
to the Second Amended and Restated Certificate of Incorporation
(previously filed with the Commission as Exhibit A-1 to the Company’s
Definitive Proxy Statement filed on May 22, 2007 and incorporated
herein
by reference)
|
|
|
3.2
|
|
Amended
and Restated By-laws (previously filed with the Commission as
Exhibit 4.2
to the Company’s Registration Statement on Form S-8 No. 333-142906, filed
on May 14, 2007 and incorporated herein by reference)
|
|
4.1
|
|
Specimen
Unit Certificate (previously filed with the Commission as Exhibit
4.1 to
the Company’s Registration Statement on Form S-1 No. 333-123504, effective
July 13, 2005 and incorporated herein by
reference)
|
|
4.2
|
|
Specimen
Common Stock Certificate (previously filed with the Commission
as Exhibit
4.2 to the Company’s Registration Statement on Form S-1 No. 333-123504,
effective July 13, 2005 and incorporated herein by
reference)
|
|
4.3
|
|
Specimen
Warrant Certificate (previously filed with the Commission as
Exhibit 4.3
to the Company’s Registration Statement on Form S-1 No. 333-123504,
effective July 13, 2005 and incorporated herein by
reference)
|
|
4.4
|
|
Warrant
Agreement between Continental Stock Transfer & Trust Company and the
Company (previously filed with the Commission as Exhibit 4.4
to the
Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
4.4.1
|
Warrant
Clarification Agreement between Continental Stock Transfer & Trust
Company and the Company (previously filed with the Commission
as Exhibit
4.5 to the Company’s Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 2006 and incorporated herein by
reference)
|
|
|
4.4.2
|
Warrant
Clarification Agreement No. 2 between Continental Stock Transfer
&
Trust Company and the Company (previously filed with the Commission
as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December
14, 2006 and incorporated herein by reference)
|
|
|
4.5
|
|
Unit
Purchase Option (previously filed with the Commission as Exhibit
4.5 to
the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
4.5.1
|
Amendment
to Unit Purchase Option (previously filed with the Commission
as Exhibit
4.6 to the Company’s Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 2006 and incorporated herein by
reference)
|
|
|
4.5.2
|
Amendment
No. 2 to Unit Purchase Option (previously filed with the Commission
as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December
14, 2006 and incorporated herein by reference)
|
|
|
10.1
|
|
Second
Amended and Restated Membership Interest Purchase Agreement dated
July 31, 2006 among Fortress America Acquisition Corporation, VTC,
L.L.C., Vortech, L.L.C., Thomas P. Rosato and Gerard J. Gallagher,
and
Thomas P. Rosato as Members’ Representative (previously filed with the
Commission as Exhibit 10.1 to the Company’s Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 2006 and
incorporated
herein by reference)
|
|
10.2
|
|
Amendment
to the Second Amended and Restated Membership Interest Purchase
Agreement
dated January 16, 2007 among Fortress America Acquisition
Corporation, VTC, L.L.C., Vortech, L.L.C., Thomas P. Rosato and
Gerard J.
Gallagher, and Thomas P. Rosato as Members’ Representative (previously
filed with the Commission as Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on January 19, 2007 and incorporated herein by
reference)
|
|
10.3
|
|
Escrow
Agreement (Balance Sheet Escrow) dated January 19, 2007 among
Fortress America Acquisition Corporation, VTC, L.L.C., Vortech,
L.L.C.,
Thomas P. Rosato and Gerard J. Gallagher, Thomas P. Rosato as
Members’
Representative, and SunTrust Bank (previously filed with the
Commission as
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
January 25, 2007 and incorporated herein by
reference)
|
|
10.4
|
|
Escrow
Agreement (General Indemnity) among Fortress America Acquisition
Corporation, VTC, L.L.C., Vortech, L.L.C., Thomas P. Rosato and
Gerard J.
Gallagher, Thomas P. Rosato as Members’ Representative, and SunTrust Bank
(previously filed with the Commission as Exhibit 10.4 to the
Company’s
Current Report on Form 8-K filed on January 25, 2007 and incorporated
herein by reference)
|
|
10.5
|
|
Registration
Rights Agreement among Fortress America Acquisition Corporation
and Thomas
P. Rosato and Gerard J. Gallagher (previously filed with the
Commission as
Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on
January 25, 2007 and incorporated herein by
reference)
|
|
10.6
|
|
Fortress
America Acquisition Corporation 2006 Omnibus Incentive Compensation
Plan
(previously filed with the Commission as Exhibit E to the Company’s
Definitive Proxy Statement filed on December 27, 2006 and incorporated
herein by reference)
|
47
|
Exhibit
Number
|
|
Description
|
|
10.7
|
|
Employment
Agreement between Harvey L. Weiss and the Company, dated January 19,
2007 (previously filed with the Commission as Exhibit 10.7
to the
Company’s Current Report on Form 8-K filed on January 25, 2007 and
incorporated herein by reference)
|
|
10.8
|
|
Executive
Consulting Agreement dated January 19, 2007 by Fortress America
Acquisition Corporation and Washington Capital Advisors, Inc.
(previously
filed with the Commission as Exhibit 10.8 to the Company’s Current Report
on Form 8-K filed on January 25, 2007 and incorporated herein by
reference)
|
|
10.9
|
|
Executive
Employment Agreement dated January 19, 2007 by Fortress America
Acquisition Corporation and Thomas P. Rosato (previously filed
with the
Commission as Exhibit 10.9 to the Company’s Current Report on Form 8-K
filed on January 25, 2007 and incorporated herein by
reference)
|
|
10.10
|
|
Executive
Employment Agreement dated January 19, 2007 by Fortress America
Acquisition Corporation and Gerard J. Gallagher (previously
filed with the
Commission as Exhibit 10.10 to the Company’s Current Report on Form 8-K
filed on January 25, 2007 and incorporated herein by
reference)
|
|
10.11
|
|
Voting
Agreement dated January 19, 2007 by Fortress America Acquisition
Corporation, Thomas P. Rosato, Gerard J. Gallagher, C. Thomas
McMillen and
Harvey L. Weiss (previously filed with the Commission as Exhibit
10.11 to
the Company’s Current Report on Form 8-K filed on January 25, 2007
and incorporated herein by reference)
|
|
10.12
|
|
Letter
Agreement among the Company, Sunrise Securities Corp. and C.
Thomas
McMillen (previously filed with the Commission as Exhibit 10.1
to the
Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
10.13
|
|
Letter
Agreement among the Company, Sunrise Securities Corp. and Harvey
L. Weiss
(previously filed with the Commission as Exhibit 10.2 to the
Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2005 and
incorporated herein by reference)
|
|
10.14
|
|
Letter
Agreement among the Company, Sunrise Securities Corp. and David
J.
Mitchell (previously filed with the Commission as Exhibit 10.3
to the
Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
10.15
|
|
Letter
Agreement among the Company, Sunrise Securities Corp. and Donald
L.
Nickles (previously filed with the Commission as Exhibit 10.4
to the
Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
10.16
|
|
Agreement
among the Company, Sunrise Securities Corp. and Paladin Homeland
Security
Fund, L.P., Paladin Homeland Security Fund (NY City), L.P.,
Paladin
Homeland Security Fund (CA), L.P. and Paladin Homeland Security
Fund
(Cayman Islands), L.P. (previously filed with the Commission
as Exhibit
10.5 to the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
10.17
|
|
Letter
Agreement among the Company, Sunrise Securities Corp. and Asa
Hutchinson
(previously filed with the Commission as Exhibit 10.6 to the
Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2005 and
incorporated herein by reference)
|
|
10.18
|
|
Investment
Management Trust Agreement between Continental Stock Transfer
& Trust
Company and the Company (previously filed with the Commission
as Exhibit
10.7 to the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
|
10.19
|
|
Stock
Escrow Agreement between the Company, Continental Stock Transfer
&
Trust Company and the Initial Stockholders (previously filed
with the
Commission as Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2005 and incorporated herein by
reference)
|
|
10.20
|
|
Registration
Rights Agreement among the Company and the Initial Stockholders
(previously filed with the Commission as Exhibit 10.9 to the
Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2005 and
incorporated herein by reference)
|
|
10.21
|
|
Warrant
Purchase Agreement between C. Thomas McMillen, Harvey L. Weiss
and Sunrise
Securities Corp. (previously filed with the Commission as Exhibit
10.10 to
the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 and incorporated herein by
reference)
|
48
|
Exhibit
Number
|
|
Description
|
|
10.22
|
|
Letter
Agreement between the Company and Global Defense Corp. (previously
filed
with the Commission as Exhibit 10.11 to the Company’s Annual Report on
Form 10-KSB for the year ended December 31, 2005 and incorporated
herein by reference)
|
|
10.23
|
|
Agreement
and Plan of Merger among Fortress America Acquisition Corporation
and FAAC
Merger Corporation dated June 29, 2005 (previously filed with the
Commission as Exhibit 10.15 to the Company’s Registration Statement on
Form S-1 No. 333-123504, effective July 13, 2005 and incorporated
herein by reference)
|
|
10.24
|
Non-Employee
Director Compensation Policy (previously filed with the Commission
as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
May 21, 2007 and incorporated herein by reference)
|
|
|
10.25
|
Form
of Restricted Stock Agreement (Employees Only) (previously
filed with the
Commission as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on May 21, 2007 and incorporated herein by
reference)
|
|
|
10.26
|
Executive
Employment Agreement, dated as of August 6, 2007, between
Fortress
International Group, Inc. and Timothy C. Dec (previously
filed with the
Commission as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on August 8, 2007 and incorporated herein by
reference)*
|
|
|
10.27
|
Prepayment
Agreement, dated as of August 29, 2007, between Fortress
International
Group, Inc. and Thomas P. Rosato (previously filed with the
Commission as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August
30, 2007 and incorporated herein by reference)*
|
|
|
10.28
|
Stock
Purchase Agreement dated September 24, 2007 between Innovative
Power
Systems Inc., the Stockholders of Innovative Power Systems
Inc., Quality
Power Systems, Inc., the Stockholders of Quality Power Systems,
Inc., and
the Company (previously filed with the Commission as Exhibit
10.1 to the
Company’s Current Report on Form 8-K filed on September 27, 2007
and
incorporated herein by reference)
|
|
|
10.29†
|
Membership
Interest Purchase Agreement dated November 30, 2007 between
Rubicon
Integration, L.L.C., each of the members of Rubicon and the
Company
|
|
|
10.30
|
Stock
Purchase Agreement by and among SMLB, Ltd, the Stockholders
of SMLB, Ltd,
and the Company dated January 2, 2008 (previously filed with
the
Commission as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on January 1, 2008 and incorporated herein by
reference)
|
|
|
21
|
Significant
Subsidiaries of the Registrant
|
|
|
23.1
|
Consent
of Grant Thornton LLP regarding Fortress International Group,
Inc.
financial statements for the year ended December 31,
2007.
|
|
|
23.2
|
Consent
of Grant Thornton LLP regarding Vortech L.L.C. and VTC L.L.C.
financial
statements for the period ending January 1, 2007 through
January 19,
2007.
|
|
|
23.3
|
Consent
of Goldstein Golub Kessler LLP
|
|
|
23.4
|
Consent
of McGladrey & Pullen, LLP
|
|
|
31.1
|
|
Certificate
of Fortress International Group, Inc. Principal Executive
Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
|
Certificate
of Fortress International Group, Inc. Principal Financial
Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certificates
of Fortress International Group, Inc. Principal Executive
Officer and
Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002
|
|
*
|
Management
contract or compensatory plan or arrangement.
|
|
†
|
Confidential
treatment has been requested as to certain portions, which have
been filed
separately with the Securities and Exchange
Commission.
|
49
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
Fortress
International Group, Inc.
|
||||
|
Date:
|
March
31, 2008
|
By:
|
/s/
Thomas P. Rosato
|
|
|
Thomas
P. Rosato
|
||||
|
Chief
Executive Officer
|
||||
|
(Authorized
Officer and Principal Executive Officer)
|
||||
|
Date:
|
March
31, 2008
|
By:
|
/s/
Timothy C. Dec
|
|
|
Timothy
C. Dec
|
||||
|
Chief
Financial Officer
|
||||
|
(Authorized
Officer and Principal Financial and Accounting
Officer)
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities indicated below and on the dates indicated.
|
Signatures
|
Title
|
Date
|
||
|
Name
|
Position
|
Date
|
||
|
|
Chief
Executive Officer and Director
|
|||
| /s/ Thomas P. Rosato |
(Principal
Executive Officer)
|
March
31, 2008
|
||
|
Thomas
P. Rosato
|
||||
|
|
||||
|
/s/
Gerard J. Gallagher
|
President
and Director
|
March
31, 2008
|
||
|
Gerard
J. Gallagher
|
|
|||
|
/s/
Timothy C. Dec
|
Chief Financial Officer |
March
31, 2008
|
||
|
Timothy
C. Dec
|
(Principal Financial Officer) | |||
|
/s/
Asa Hutchinson
|
Director
|
March
31, 2008
|
||
|
Asa
Hutchinson
|
||||
|
/s/
C. Thomas McMillen
|
Director
|
March
31, 2008
|
||
|
C.
Thomas McMillen
|
||||
|
/s/
David J. Mitchell
|
Director
|
March
31, 2008
|
||
|
David
J. Mitchell
|
||||
|
/s/
John Morton, III
|
Director
|
March
31, 2008
|
||
|
John
Morton, III
|
||||
|
/s/
Donald L. Nickles
|
Director
|
March
31, 2008
|
||
|
Donald
L. Nickles
|
||||
|
/s/
Harvey L. Weiss
|
Director
|
March
31, 2008
|
||
|
Harvey
L. Weiss
|
50