Last month, The Washington Post ran an article on the Fortress America Acquisition Corp. filing.
McMillen Brings Big Names To New Venture
By Terence O'Hara
Monday, March 28, 2005; Page E01
C. Thomas McMillen, the former Maryland congressman and peripatetic entrepreneur, is having another go at the homeland security market, and former Homeland Security Department undersecretary Asa Hutchinson and former Sen. Don Nickles (R-Okla.) are along for the ride.
McMillen formed Fortress America Acquisition Corp., which last week registered with the Securities and Exchange Commission to raise $42 million from investors in an initial public offering for a company that is essentially a leap of faith: It is a shell with minimal assets and no operations, only promises to buy companies in industries such as biodefense, hazardous material cleanup and emergency preparedness.
Hutchinson and Nickles have attached their names to McMillen's company, Hutchinson as a special adviser and Nickles as a board member, according to Fortress's registration statement with the SEC.
But the mover behind the Bethesda company is McMillen, the 52-year-old founder and chairman, whose track record in the world of finance hasn't matched his prowess in sports and politics.
The 6-foot-11 McMillen was a star basketball player at the University of Maryland and a Rhodes scholar. He played 11 years in the NBA until 1986, then won the first of three terms as a Democratic U.S. representative from Maryland's 4th district.
McMillen's most prominent business venture since he left the House in 1993 was as co-founder and chief executive of Complete Wellness Centers Inc., a health care company that put together and managed alternative medicine centers. After a $6 million IPO in 1997, the company was briefly (and inconclusively) tangled in a federal health care fraud investigation in 1997 and 1998. McMillen's affiliation with the company ended badly: He sued Wellness after it terminated his employment agreement, according to SEC filings. Wellness, beset by creditor lawsuits, filed for bankruptcy liquidation in New Jersey in March 2001, with assets of $304,000 and debts of $4.4 million.
For much of the past six years, McMillen has been a merchant banker and has been affiliated with a number of small homeland security firms, either as an investor, director or adviser. He has also been chief executive of Washington Capital Advisors LLC, a Washington private equity firm.
At various times over the past two years, McMillen has tried to raise money to buy homeland security companies, according to a half-dozen private equity investors who said they were pitched by McMillen, all of whom spoke of the private discussions on condition of anonymity. These investors describe McMillen as a smart, convincing salesman -- he has a deep baritone to match his imposing frame and politician's charm -- who is eager to build a company in the hot homeland security industry.
Fortress America is McMillen's third go-round with a holding company formed to buy disparate homeland security firms. In April 2003, he joined with Sky Capital Holdings Ltd., a New York investment firm, to launch Global Secure Corp. in Washington to buy small players in homeland security. In less than a year, after leading three acquisitions and recruiting former political and national security figures to Global Secure's advisory board, McMillen stepped down as chief executive. He stayed on as a consultant to Global Secure until February, when he severed his ties to the company. Global Secure provided no explanation for McMillen's departure. The privately held company, which has raised nearly $30 million from private venture investors, has not disclosed how its investments have performed so far.
McMillen formed Fortress America in December. According to its prospectus it will be pursuing the same market as Global Secure, which has an almost identical business plan and has focused its acquisitions so far on local emergency preparedness services and equipment. Global Secure chief executive Craig Bandes declined to comment.
After stepping down as chief executive at Global Secure, McMillen became chairman of a company called Global Defense Corp., an Arlington company that, like Fortress America, is a homeland security "consolidator," according to SEC documents.
McMillen could not be reached for comment, and the other organizers of Fortress America did not return phone calls and e-mails about the new venture. Information about the company was drawn from its SEC registration statement and additional reporting.
The company's plan is to become, in effect, a publicly traded corporate buyout fund, known in the investment trade as a special purpose acquisition company, or SPAC.
When you invest in a SPAC you're buying the experience and merger-and-acquisition acumen of the executives involved, and you're betting on their ability to put together a real company with your investment.
SPACs are part of a broader category designated under Delaware law as "blank check" companies. Critics have said it's an apt name: In the 1980s, before the SEC toughened the rules for blank check companies, they were a favorite of penny stock promoters and were often associated with investment scams.
For all the risk, blank check companies can result in a substantial payoff for early investors -- if the companies invest well.
"They are for institutional, sophisticated investors," said Tim Halter of Halter Financial Group Inc., a New York firm that works with blank check companies.
Nationally, about a dozen SPACs are in registration or have sold stock in IPOs in the past year, according to a review of SEC filings. Most are raising capital for acquisitions of private companies in targeted industries -- health care, technology, industrial products, media and entertainment -- using both cash and their publicly traded stock as currency.
Fortress America's chief executive is Harvey L. Weiss. For two years until August, Weiss was chief executive of New York security software firm System Detection Inc. He has spent most of the past 35 years in executive roles at prominent information technology and network security firms.
Hutchinson is a former congressman who until recently ran the Homeland Security Department's border patrol and transportation security operations. An Arkansas Republican, he has announced he will run for governor of that state in 2006. Nickles, 56, retired from the Senate last year after 24 years and is now a Washington lobbyist. Fortress America's other outside director is David J. Mitchell, 43, who is a partner with McMillen in a "leveraged fund" called M&M Advisors.
McMillen and the other officers, directors and advisors of Fortress America can anticipate a big payout if the company succeeds.
On March 9, six key players bought a total of 1.75 million shares of stock in the company for 14 cents a share. Among the buyers were McMillen's Washington Capital Advisors, Weiss, Mitchell, Hutchinson and Nickles. The Paladin Homeland Security Fund, a Washington venture capital and buyout fund established last year by former Democratic Party operative Michael R. Steed, bought about 50,000 shares.
The 14-cent shares bought by Paladin and by Fortress America's organizers are being held in escrow but can be sold at the market price after three years, or whenever the company is sold or dissolved.
In its IPO, Fortress America is offering units, at $6 each, that provide one share of common stock plus warrants to buy two shares at $5 each. The warrants can't be exercised until the company merges with an operating company.
Mercator Partners Plans IPO
Fortress America isn't the only special purpose acquisition company in the Washington area looking to raise money in the public markets. Mercator Partners Acquisition Corp. is planning a $51.7 million IPO. Reston-based Mercator plans to use the money to buy companies in communications industries such as local and long-distance telephone, broadband, satellite, cable, and digital radio.
Officials at Mercator declined to comment.
H. Brian Thompson, 65, a veteran telecommunications industry executive in the Washington area, is Mercator's chairman and chief executive. Rhodric C. Hackman, 57, is president; Lior Samuelson, 55, is executive vice president; and David Ballarini, 41, is chief financial officer. All three are partners at Mercator Capital, a privately owned Reston investment bank specializing in mergers and acquisitions of telecommunications, defense and information technology companies.
The organizers and Mercator Capital put up $247,500 to buy about 5 million stock warrants for 5 cents a share. The warrants entitle the organizers to buy common stock at $5 a share.
Mercator, like Fortress, is offering units in its IPO that include both common stock and warrants.
Morgan E. O'Brien, vice chairman of Nextel Communications Inc., and Alex Mandl, former chief executive of Teligent, are special advisers to Mercator Partners Acquisition Corp.
The Fortress America and Mercator deals have some elements in common. None of the executives of either company will make a salary until a merger is done, though in each case the companies are renting office space (at no more than $7,500 a month) from their organizers.
For Mercator, the IPO proceeds must be returned to investors if the company doesn't accomplish a merger or sign a letter of intent within a year. For Fortress America, the money will be returned if a deal is not signed within 18 months.
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