Asa Hutchinson, one of he Fortress America principals, is running for the office of governor in Arkansas.
Hutchinson’s $2,800 outlay, ‘sweat’ pay off
BY MARK MINTON
Posted on Wednesday, June 7, 2006
URL: nwanews.com
Asa Hutchinson, the Republican candidate for governor, has turned $ 2,800 into $ 1 million as a founding shareholder in a company that went public with no revenues, products or employees — but with a stock offering that promised lavish profits for insiders risking tiny sums.
As a “blank-check” company, Fortress America Acquisition Corp. ’s only business plan was to find and buy an unspecified company doing business in some aspect of homeland security. In the wake of an initial public offering that raised $ 42 million, Fortress America announced its acquisition Tuesday.
The deal not only gives the empty shell an identity but moves Hutchinson and Fortress America’s other politically connected insiders significantly closer to a hefty payday.
Hutchinson said his $ 1,080,000 windfall is all on paper, that the investment is “highly speculative” and that he could still lose all the money he invested.
He acknowledged that the $ 2,800 he put up wasn’t much.
“In this case,” Hutchinson said in an interview Tuesday, “the investment is almost biblical in proportion: A little up front, but a whole lot of sweat equity.”
Hutchinson, who draws no salary as a special adviser to Fortress America, said he spent two long days in presentations to potential investors and an unspecified number of hours screening takeover targets and offering advice in conference calls to Fortress America’s headquarters in Arlington, Va.
Despite those efforts, he overlooked his Fortress America holdings on the financial-disclosure form he is required to file as a gubernatorial candidate. On the form, filed May 4, Hutchinson listed his stock and options in two other companies, and even disclosed bank and credit-union accounts with balances under $1,000. He said he forgot to list his 200,000 shares in Fortress America.
“Just totally an oversight,” Hutchinson said Tuesday.
Hutchinson disclosed the holding in an amended form filed May 5. He checked the little box that reported the stock’s value at “over $ 12,500,” the most specificity the form requires.
Blank-check companies have never fit neatly into little boxes. Hardly normal investments, the quirky companies collect money from investors without telling them what they’re buying. All investors get is a vague promise that the organizers will try to find a company to buy. Fifty blank-check companies have gone public since January 2005.
With no operating history to pitch, blank-check companies have to sell the qualifications of their management teams.
The six founding shareholders in Fortress America include former U. S. Rep. Tom McMillen of Maryland, former U. S. Sen. Don Nickles of Oklahoma, and a private-equity firm that counts former CIA Director James Woolsey among its partners.
Hutchinson fits in that group. He can point to three terms in Congress and two years as undersecretary for border and transportation security at the federal Department of Homeland Security.
The founders put up a total of $ 25,000 to stake Fortress America in March 2005. For that, they awarded themselves 1.75 million shares, according to Securities and Exchange Commission filings.
They paid 1.4 cents a share.
Four months later, they took Fortress America public, issuing 7 million shares, packaged with 14 million warrants, at an offering price of $ 6. A warrant entitles the holder to buy more stock, at a later date, for a specified price. The shares, listed on the Over the Counter Bulletin Board, were trading Tuesday for $ 5.40. At that price, the founders’ $ 25, 000 stake is now worth about $ 9.5 million. There is a catch: Under the rules for blank-check offerings, Hutchinson and the other founding shareholders can’t touch their shares for two years. And they can’t get them out of escrow at all unless they close the deal they announced Tuesday.
SEALING A DEAL Fortress America had a oneyear deadline to sign a deal and 18 months to close it, or else return the $ 42 million raised in its initial public offering. The $ 38.5 million purchase of VTC LLC beat the first deadline by one month. But Fortress America stockholders still have to approve the acquisition by an 80 percent vote, or the deal is off. VTC, which is based in Beltsville, Md., and does business as Total Site Solutions and as Vortech LLC, makes its niche in the development of “missioncritical” facilities, some of which are classified, Hutchinson said.
VTC has $ 58.6 million in revenues, and it is profitable.
Hutchinson said VTC’s key executives will stay on. But his own role in the company he helped to create only 15 months ago is far less certain.
Hutchinson said he doubts he will be named to the board of the combined company, to be known as Fortress International, and he is unsure whether he will be retained as a special adviser.
Early on, Hutchinson said, he traveled to New York and Connecticut and spent two days in presentations to hedge-fund managers — “a bunch of 30-somethings that control billions of dollars” — and other institutional investors.
Besides Hutchinson’s experience, Fortress America could tout the homeland-security credentials of such Washington heavyweights as Woolsey and retired Air Force Lt. Gen. Kenneth Minihan, former director of the National Security Agency.
Woolsey and Minihan are partners in Paladin Capital Group, a Washington-based private-equity firm whose homeland-security fund was a founding investor in Fortress America.
McMillen, the former University of Maryland and National Basketball Association player, Rhodes Scholar and three-term congressman from Maryland, started Fortress America in December 2004, hoping to tap into the billions of dollars that governments and companies have been plowing into homeland security since the Sept. 11, 2001, terrorism attacks.
HUNTING VTC In an interview Monday, Mc-Millen said Fortress America looked at 40 to 50 companies before settling on VTC. “We think we’ve found a pretty good one,” said McMillen, who bought 575,000 shares for $ 8,050 that are now worth $ 3.1 million. He said he and Harvey Weiss, Fortress America’s president and chief executive — who also has 575, 000 shares — have put in significant sweat equity. “Harvey and I spent an enormous amount of time reviewing deals over the last year,” McMillen said. He said Hutchinson also has made valuable contributions, participating in board meetings and offering advice.
“We talked about a few deals,” McMillen said. “He’s directed us to a couple of companies. We use his counsel to determine whether this is a good area to be in and not to be in. He knows, I think, what is a growth opportunity, what is not a growth opportunity.”
Despite a paper profit of more than $ 3 million on his own investment, McMillen said there is no guaranteed windfall for him or other insiders. “It’s not a slam dunk,” said the 6-11 McMillen, who played center for the Atlanta Hawks.
McMillen said Fortress America was the first blank-check company to go public seeking a homeland-security niche, and it is the first to announce an acquisition.
But there has been a stream of initial public offerings lately from blank checks, also known as special-purpose acquisition companies. Dealogic, which tracks public offerings, tallied 29 blank-check offerings that raised $2 billion last year, up from 13 worth $451 million in 2004. So far in 2006, there have been 21 offerings worth $ 1.6 billion, and there is a backlog of 26 more deals, according to Dealogic.
Despite the recent popularity, critics say blank-check companies’ stock deals typically reward select insiders with outsized gains at the cost of other investors.
“It just has a very slimy feel to it,” said David Menlow, president of IPO Financial Network, a Wall Street research firm. Menlow said he can understand a company founder getting rich after struggling to build a business and finally taking it public. But he said the profits that a few savvy insiders are reaping from blank-check companies such as Fortress America are difficult to justify. “This is how people legally get taken care of without violating the law,” he said.
SAFEGUARDS Blank checks have a reputation to overcome. According to the Securities and Exchange Commission Web site: “In 1990, the U. S. Congress found that offerings by these kinds of companies were common vehicles for fraud and manipulation.” But investor safeguards have been put in place since then, and the blank-check concept is attracting big names in business and government. Among those who have put their names on recent blank-check offerings: Steve Wozniak, co-founder of Apple Computer Inc., and ESPN Chairman Emeritus Herbert Granath.
Under the tightened regulations, investors who buy shares in blank-check companies in the public markets can choose to cash out if they don’t like the look of the company being acquired. The company must make an acquisition within a year or 18 months, or else liquidate. Founding shareholders must put their shares into escrow, typically for three years after the public offering.
Big paydays for insiders are also a typical feature, Menlow said. While the inside shareholders gain from ultra-cheap shares, the new buyers lose.
Fortress America discloses this in the prospectus outlining the offering for prospective investors: “Our existing stockholders paid an aggregate of $ 25,000 or approximately 1.4 cents a share for their shares, and accordingly IPO buyers will experience immediate and substantial dilution... of approximately 29 percent” of the money they invest.
Hutchinson said he and the other Fortress America officials pitching the stock to investors pointed out the issue at every meeting. The investors buy anyway, because they think the value will go up, Hutchinson said. “They’re very knowledgeable investors, and they said the growth potential exceeds that,” Hutchinson said.
“In today’s world, people are looking for growth opportunities.”
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