Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB
(Mark One)
x
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the quarterly period ended March 31, 2006

o
Transition report under Section 13 or 15(d) of the Exchange Act

 
For the transition period from _____________ to _____________
 
Commission File Number 000-51426
 
Fortress America Acquisition Corporation
(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware
  
20-2027651
(State or other Jurisdiction of
  
(I.R.S. Employer
Incorporation or Organization)
  
Identification No.)

4100 North Fairfax Drive, Suite 1150
Arlington, Virginia 22203-1664
(Address of Principal Executive Office)
 
(703) 528-7073
(Issuer's Telephone Number, Including Area Code)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  x   No  o 

As of May 1, 2006, 9,550,000 shares of common stock, par value $.0001 per share, were issued and outstanding.

Transitional Small Business Disclosure Format (check one):   Yes  o    No  x
 
 



PART I. FINANCIAL INFORMATION
Page
   
Item 1 - Financial Statements 
  
   
Condensed Balance Sheet
3
   
Condensed Statements of Operations
4
   
Condensed Statements of Stockholders' Equity
5
   
Condensed Statements of Cash Flows
6
   
Notes to Financial Statements
7
   
Item 2 - Management's Discussion and Analysis or Plan of Operation
11
   
Item 3 - Controls and Procedures
12
   
PART II. OTHER INFORMATION
13
Item 6 - Exhibits
13
Signatures
14


2

Fortress America Acquisition Corporation
(a corporation in the development stage)

Condensed Balance Sheet
 
   
March 31, 2006 (unaudited)
  
December 31, 2005
  
 
          
Assets
          
Current assets:
          
Cash
  
$
871,760
  
$
992,547
  
Investments held in Trust Fund
    
43,047,747
    
42,603,801
  
Prepaid expenses
    
26,164
    
50,165
  
Total current assets
    
43,945,671
    
43,646,513
  
Deferred tax asset
   
217,070
    
132,000
  
Total assets
  
$
44,162,741
  
$
43,778,513
  
               
Liabilities and Stockholders’ Equity
              
 
              
Current liabilities:
              
Accounts payable and accrued expenses
  
$
130,362
  
$
105,308
  
Income taxes payable
    
354,286
    
206,194
  
Deferred interest on investments
    
216,649
    
127,904
  
Total current liabilities
    
701,297
    
439,406
  
 
              
Common stock, subject to possible conversion, 1,559,220 shares at conversion value
    
8,388,604
    
8,388,604
  
               
Commitment
              
 
              
Stockholders' equity
             
Preferred stock, $.0001 par value, Authorized 1,000,000 shares; none issued
    
-
    
-
  
Common stock, $.0001 par value
              
Authorized 50,000,000 shares
              
Issued and outstanding 9,550,000 shares (which includes 1,559,220 subject to possible conversion) and 1,250,000 shares respectively
   
955
    
955
  
Additional paid-in capital
    
34,819,062
    
34,819,062
  
Income accumulated during the development stage
    
252,823
    
130,486
  
Total stockholders' equity
    
35,072,840
    
34,950,503
  
Total liabilities and stockholders' equity
  
$
44,162,741
  
$
43,778,513
  
               
See Notes to Unaudited Condensed Financial Statements. 
 

3

Fortress America Acquisition Corporation
(a corporation in the development stage)

Condensed Statement of Operations
(unaudited)
 
   
For the Three
Months Ended
March 31, 2006
  
For the Three
Months Ended
March 31, 2005
  
For the Period December 20, 2004
(inception) to
March 31, 2006
  
    Income:
              
    Net interest income
  
$
361,561
  
$
-
  
$
886,991
  
Total income
    
361,561
    
-
    
886,991
  
Expenses:
                    
Formation and operating costs
    
176,202
    
566
    
496,952
  
 
                    
Net income (loss) for the period before income taxes
    
185,359
    
(566
)
  
390,039
  
                     
    State and federal income taxes
    
63,022
    
-
    
137,216
  
                     
Net income (loss) for the period
  
$
122,337
  
$
(566
)
$
252,823
  
                     
Weighted average number of shares outstanding - basic and diluted 
    
9,550,000
    
1,372,222
    
5,874,464
  
                     
    Net income (loss) per share - basic and diluted
  
$
.01
  
$
(.00
)
$
.04
  


 
See Notes to Unaudited Condensed Financial Statements. 
 
4

 
Fortress America Acquisition Corporation
(a corporation in the development stage)
Condensed Statement of Stockholders' Equity
For the period from December 20, 2004 (inception) to March 31, 2006

           
Addition
  
Income
(Deficit)
Accumulated
During the
      
   
Common Stock
  
paid-in
  
Development
      
   
Shares
  
Amount
  
capital
  
Stage
  
Total
  
Common shares issued December 20, 2004 at $.02 per share
    
1,250,000
  
$
125
  
$
24,875
        
$
25,000
  
Net Loss
                            
$
(1,056
)
  
(1,056
)
Balance at December 31, 2004
    
1,250,000
    
125
    
24,875
    
(1,056
)
  
23,944
  
                                 
Redemption of common stock 
    
(1,250,000
)
  
(125
)
  
(24,875
)
        
(25,000
)
Common shares issued March 9, 2005 at $0.01429 per share 
    
1,750,000
    
175
    
24,825
          
25,000
  
Common shares issued July 20, 2005, net of underwriters’ discount and offering expenses (includes 1,399,300 shares subject to possible conversion)
    
7,000,000
    
700
    
38,687,329
          
38,688,029
  
Common shares issued August 24, 2005, net of underwriters’ discount and offering expenses (includes 159,920 shares subject to possible conversion)
    
800,000
    
80
    
4,495,412
          
4,495,492
  
Proceeds subject to possible conversion of 1,559,220 shares
                
(8,388,604
)
        
(8,388,604
)
Proceeds from issuance of option
                
100
          
100
  
Net Income
                                
131,542
    
131,542
  
Balance at December 31, 2005
    
9,550,000
    
955
    
34,819,062
    
130,486
    
34,950,503
  
                                 
Unaudited:
                                
Net income
                                     
122,337
    
122,337
  
Balance at March 31, 2006
    
9,550,000
  
$
955
  
$
34,819,062
  
$
252,823
  
$
35,072,840
  
 
See Notes to Unaudited Condensed Financial Statements

 
5

Fortress America Acquisition Corporation
 
(a corporation in the development stage)
 
Condensed Statement of Cash Flows
(unaudited)
 
   
For the Three
Months Ended
March 31, 2006
  
For the Three
Months Ended
March 31, 2005
  
For the period December 20, 2004
(inception) to
March 31, 2006
  
Cash flow from operating activities
              
Net income (loss)
 
$
122,337
  
$
(566
)
$
252,823
  
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                    
Deferred income taxes
    
(85,070
)
  
-
    
(217,070
)
Interest income on treasury bills
    
(443,946
)
  
-
    
(1,083,747
)
Decrease (Increase) in prepaid expenses
    
24,001
    
-
    
(26,164
)
Increase in accounts payable and accrued expenses
    
25,054
    
-
    
130,362
  
Increase in income taxes payable
    
148,092
    
-
    
354,286
  
Increase in deferred interest
    
88,745
    
-
    
216,649
  
Net cash used in operating activities
    
(120,787
)
  
(566
)
  
(372,861
)
                     
Cash flows from investing activities
                    
   Investments placed in Trust Fund
    
-
    
-
    
(41,964,000
)
Net cash used in investing activities
    
-
    
-
    
(41,964,000
)
 
                    
Cash flows from financing activities
                    
Gross proceeds of public offering, including over-allotment option exercise
    
-
    
-
    
46,800,000
  
Proceeds of issuance of option
    
-
    
-
    
100
  
Proceeds from notes payable, stockholders
    
-
    
47,500
    
70,000
  
Payment of notes payable, stockholders
    
-
    
-
    
(70,000
)
Proceeds from sale of shares of common stock
    
-
    
-
    
50,000
  
Redemption of common stock
    
-
    
-
    
(25,000
)
Payment of costs of public offering, including over-allotment option exercise
    
-
    
-
    
(3,616,479
)
Payment of deferred offering costs
          
(61,304
)
  
-
  
Advances from stockholder
    
-
    
437
    
-
  
Net cash (used in) provided by financing activities
    
-
    
(13,367
)
  
43,208,621
  
 
                    
Net (decrease) increase in cash
    
(120,787
)
  
(13,933
)
  
871,760
  
Cash at beginning of the period
    
992,547
    
25,000
    
-
  
Cash at the end of the period
  
$
871,760
  
$
11,067
  
$
871,760
  
 
See Notes to Unaudited Condensed Financial Statements. 


6
 
Fortress America Acquisition Corporation
(a corporation in the development stage)
Notes to Unaudited Condensed Financial Statements
 

1. Organization and Proposed Business Operations 
   
Fortress America Acquisition Corporation (the “Company”) was incorporated in Delaware on December 20, 2004 as a blank check company, the objective of which is to acquire one or more operating businesses in the homeland security industry. The Company has elected December 31 as its fiscal year-end.
     
   
The financial statements at March 31, 2006 and for the periods from inception to March 31, 2006 and the three months ended March 31, 2005 are unaudited. In the opinion of management, all adjustments (consisting of normal adjustments) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2006, the results of its operations for the three month period ended March 31, 2006 and 2005 and for the period from December 20, 2004 (inception) through March 31, 2006, and its cash flows for the three month period ended March 31, 2006 and for the period from December 20, 2004 (inception) through March 31, 2006. Operating results for the interim period presented are not necessarily indicative of the results to be expected for a full year. The condensed balance sheet at December 31, 2005 has been derived from the audited financial statements.
     
   
The Company was formed on December 20, 2004 and consummated an initial public offering (“IPO”) on July 20, 2005. In addition, on August 24, 2005 the underwriters for the IPO exercised their over-allotment option (the “Over-Allotment Option Exercise” and, together with the IPO, the “Offering”). The Offering generated total net proceeds of $43,183,521. The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all the net proceeds of the Offering are intended to be generally applied toward consummating a business combination with (or acquisition of) one or more operating businesses in the homeland security industry (“Business Combination”). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. Upon the closing of the Offering, approximately $41,964,000 of the net proceeds was deposited in a trust fund account (“Trust Fund”) and has been invested in Treasury Bills until the earlier of (i) the consummation of its first Business Combination; or (ii) the liquidation of the Company. The Treasury Bills have been accounted for as trading securities and are recorded at their market value of approximately $43,048,000 at March 31, 2006. The excess of market value over cost, exclusive of the deferred interest described further below, is included in interest income in the accompanying statement of operations. The proceeds not deposited into the Trust Fund may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. The Company, after signing a definitive agreement for the acquisition of a target business, will submit such transaction for stockholder approval. All of the Company stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have agreed to vote their 1,750,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After consummation of the Company’s first Business Combination, all of these voting safeguards will no longer be applicable.

7

Fortress America Acquisition Corporation
(a corporation in the development stage) (continued)
Notes to Unaudited Financial Statements

   
In the event (i) the Business Combination is not approved by a majority of the shares of common stock held by the Public Stockholders or (ii) 20% or more of the shares of common stock held by the Public Stockholders vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated.
     
   
With respect to the first Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his or her shares into cash. The per share conversion price will equal the amount in the Trust Fund, calculated as of two business days prior to the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding approximately 19.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Fund computed without regard to the shares held by the Initial Stockholders. Accordingly, a portion of the net proceeds of the Offering (19.99% of the amount originally held in the Trust Fund) has been classified as common stock subject to possible conversion in the accompanying balance sheets and 19.99% of the related interest earned has been recorded as deferred interest.
     
   
The Company’s Amended and Restated Certificate of Incorporation provides for the mandatory liquidation of the Company in the event that the Company does not consummate a Business Combination within 12 months from the date of the consummation of the Offering, or 18 months from the consummation of the Offering if certain extension criteria have been satisfied. There is no assurance that the Company will be able to successfully effect a Business Combination during this period. This factor raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements are prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering price per share in the Offering.
     

8

Fortress America Acquisition Corporation
(a corporation in the development stage) (continued)
Notes to Unaudited Financial Statements

   
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share Based Payment”. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to adopt SFAS 123(R) effective January 1, 2006.  The Company does not believe that the adoption of SFAS No. 123(R) will have a significant impact on its financial condition or results of operations.
     
   
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
     
2. Commitment
 
Commencing January 1, 2005, the Company occupied office space from, and had certain office and secretarial services made available to it by, an unaffiliated third party. Rent expense under this agreement for each of the periods from December 20, 2004 (inception) to March 31, 2006 and from January 1, 2006 to March 31, 2006 amounted to $1,362 and $0, respectively. The rental agreement expired June 30, 2005.
 
    
   
Commencing on the consummation of the Offering, the Company occupies office space provided by an affiliate of an Initial Stockholder. Such affiliate has agreed that, until the acquisition or a target business by the Company, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services. Rent expense under this agreement for each of the periods from December 20, 2004 (inception) to March 31, 2006 and from January 1, 2006 to March 31, 2006 amounted to $60,000 and $22,500, respectively.
     
3. Common Stock
 
On December 20, 2004, the Company issued 1,250,000 shares of common stock. On March 8, 2005, the Company authorized the redemption of the 1,250,000 shares of common stock at the original subscription price. On March 9, 2005, the Company issued 1,750,000 shares of common stock to the original stockholders along with new stockholders (in the aggregate, these stockholders are the Initial Stockholders).
   
On July 20, 2005, the Company issued 7,000,000 shares of Common Stock in connection with the IPO. On August 24, 2005, the Company issued 800,000 share of Common Stock pursuant to the Over-Allotment Option Exercise.

9

Fortress America Acquisition Corporation
(a corporation in the development stage) (continued)
Notes to Unaudited Financial Statements

4. 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.
 
 
10



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This Quarterly Report on Form 10-Q and the documents incorporated by reference into the Quarterly Report on Form 10-Q include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should,” or, in each case, their negative or other variations or comparable terminology. Such statements include, but are not limited to, any statements relating to our ability to consummate any acquisition or other business combination and any other statements that are not historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:

 
·
our dependence on key personnel, some of whom may or may not join us following a business combination;
 
·
our personnel allocating their time to other businesses and potentially having conflicts of interest with our business;
 
·
our potentially being unable to timely complete a business combination;
 
·
the ownership of our securities being concentrated;
 
·
risks associated with the homeland security industry; and
 
·
those other risks and uncertainties detailed in the Company’s filings with the Securities and Exchange Commission.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

Introduction

The following discussion should be read in conjunction with our financial statements and related notes thereto contained in this report.

We were formed on December 20, 2004, to serve as a vehicle to acquire an operating business in the homeland security industry through a merger, capital stock exchange, asset acquisition or other similar business combination. We intend to utilize cash derived from the proceeds of our recently completed public offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination.

Three month period ended March 31, 2006 compared to three month period ended March 31, 2005

For the three months ended March 31, 2006, we had total income of $361,561, consisting of net interest income on investments held in trust and on cash balances maintained. We had no income for the three month period ended March 31, 2005.

Total expenses for the three month period ended March 31, 2006 were $239,224, consisting of $176,202 in operating expenses and $63,022 in income tax expense. We had a net gain of $122,337 for this period. For the three month period ended March 31, 2005, total expenses were $566, consisting of formation expenses. We had a net loss of $566 for this period.


11
 
Period from December 20, 2004 (inception) through March 31, 2006

For the period from December 20, 2004 (inception) through March 31, 2006, we had total income of $886,991, consisting of net interest income on investments held in trust and on cash balances maintained. Total expenses for this period were $634,168, consisting of $496,952 in formation and operating expenses and $137,216 in income tax expense. We had a net gain of $252,823 for the period.

General

We consummated our IPO on July 20, 2005. Gross proceeds from our IPO were $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 the 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 the trust fund. The remaining proceeds ($1,219,521) were made available to be used by us to provide for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

We will use substantially all of the net proceeds of the Offering to acquire a target business in the homeland security industry, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust fund as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe we will have sufficient available funds outside of the trust fund to operate through January 20, 2007, assuming that a business combination is not consummated during that time. Over this period, we anticipate approximately $75,000 of expenses for the due diligence and investigation of a target business, $350,000 of expenses for legal, accounting and other expenses attendant to the due diligence investigations, structuring and negotiating of a business combination, $135,000 for the administrative fee payable to Global Defense Corporation, $100,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $567,000 for general working capital that will be used for miscellaneous expenses and reserves, including approximately $67,500 for director and officer liability insurance premiums.

ITEM 3. CONTROLS AND PROCEDURES.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2006. Based on that evaluation, our chief executive officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


12

PART II.

OTHER INFORMATION
 
ITEM 6: EXHIBITS
 
 
(a) 
Exhibits:
     
 
3.1
Amended and restated certificate of incorporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to Registrant’s Registration Statement on Form S-1 (File No. 333-123504) filed with the SEC on July 5, 2005).
     
 
3.2
By-laws (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to Registrant’s Registration Statement on Form S-1 (File No. 333-123504) filed with the SEC on March 23, 2005).
     
 
4.1
Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
     
 
4.2
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
     
 
4.3
Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
     
 
4.4
Warrant Agreement between Continental Stock Transfer & Trust Company and the Company.
     
 
31
Section 302 Certification by Principal Executive and Financial Officer
     
 
32
Section 906 Certification by Principal Executive and Financial Officer


13


SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
FORTRESS AMERICA ACQUISITION CORPORATION
Dated: May 12, 2006
 
 
/s/ Harvey L. Weiss                   
Harvey Weiss
Chief Executive Officer
 

14
 


EXHIBIT INDEX

Exhibit Number
  
Description of Document
3.1
  
Amended and restated certificate of incorporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to Registrant’s Registration Statement on Form S-1 (File No. 333-123504) filed with the SEC on July 5, 2005).
3.2
  
By-laws (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to Registrant’s Registration Statement on Form S-1 (File No. 333-123504) filed with the SEC on March 23, 2005).
4.1
  
Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
4.2
  
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
4.3
  
Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement No. 333-123504, effective July 13, 2005).
4.4
  
Warrant Agreement between Continental Stock Transfer & Trust Company and the Company (incorporated by reference to Exhibit 4.4 of the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2006).
31
  
Section 302 Certification by Principal Executive and Financial Officer
32
  
Section 906 Certification by Principal Executive and Financial Officer
 
 
15