ITEM 1. Business
Forward Looking Statements
This Annual Report contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, and other loans,
real estate values, competition, changes in accounting principles, policies, or
guidelines, changes in legislation or regulation, and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing products and services.
Overview
We are a blank check company incorporated in Delaware on March 31, 2006, in
order to serve as a vehicle for a business combination with an operating
business or businesses. Our efforts in identifying a prospective target business
will not be limited to a particular industry, although we intend to focus our
efforts on cash flow positive companies that have historically generated
positive earnings before interest, taxes and depreciation in basic industry
opportunities involving energy services. Although we intend to focus our efforts
on acquiring an operating business in the energy services sector headquartered
in North America, we will consider opportunities to acquire a business unrelated
to the energy services sector should such an opportunity be presented to us.
Consequently, we are not limited to acquiring a company in any particular
industry or type of business.
On September 6, 2006, we completed our initial public offering of 8,600,000
units. Each unit consists of one share of our common stock and two warrants,
each to purchase one share of our common stock at an exercise price of $5.00 per
share. The units were sold at an offering price of $6.00 per unit, generating
gross proceeds of $51,600,000. After deducting the underwriting discounts and
commissions and the offering expenses, the total net proceeds to us from the
public offering that were deposited into a trust fund were approximately
$48,972,000. The net proceeds deposited into the trust fund remain on deposit in
the trust fund earning interest and dividends. As of September 30, 2007, there
was $50,743,430 held in the trust fund, which includes $2,000,000 raised in
connection with a prior private placement of common stock and warrants. On
October 3, 2006, the common stock and warrants began to trade on the American
Stock Exchange under the symbols "ESA" and "ESA-WS," respectively.
We are not presently engaged in, and we will not engage in, any substantive
commercial business until we consummate a business combination. We intend to
utilize our cash, including the funds held in the trust fund, capital stock,
debt or a combination of the foregoing in effecting a business combination. A
business combination may involve the acquisition of, or merger with, a company
which does not need substantial additional capital but which desires to
establish a public trading market for its shares, while avoiding what it may
deem to be adverse consequences of undertaking a public offering itself. These
include time delays, significant expense, loss of voting control and compliance
with various Federal and state securities laws. In the alternative, we may seek
to consummate a business combination with a company that may be financially
unstable or in its early stages of development or growth.
Examples of qualities we will look for in a target company include:
o experienced operating management groups;
o demonstrated track records of historical growth in revenues and
positive cash flow;
o involvement in an industry providing opportunity for additional
acquisitions;
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o regulatory or technical barriers to entry; and/or
o companies with identifiable growth prospects with a need for growth
capital.
We intend to seek our target business opportunities from various internal
and external sources. We believe that we will be able to generate deal flow from
internal sources primarily resulting from personal contacts and relationships
that our officers and directors have developed and maintain in the private
equity and mergers and acquisition industry, as well as through relationships
they have developed and maintain with various professionals, including
accountants, consultants, commercial bankers, attorneys, regional brokers and
other investors. Initially, we intend to utilize these contacts for the purpose
of assisting us in identifying and evaluating potential acquisition candidates,
although no such activities have been initiated yet. We will also seek to
generate potential transactions from external sources by contacting investment
bankers, venture capital funds, private equity funds, and other members of the
financial community which may present solicited or unsolicited proposals. While
our management team is experienced in running companies in a variety of
industries we have not run a company in the energy services sector. We are
working with our advisors to identify persons with expertise in the energy
services sector. Such individuals, it is hoped, will assist us in identifying
and evaluating acquisition opportunities in the energy services sector.
Selection of a target business and structuring of a business combination
Marshall T. Reynolds is supervising the process of evaluating prospective
target businesses, and we expect that he will devote substantial time to our
business once we have signed a term sheet with a target business that provides
for a business combination conditioned in part on the completion of due
diligence. Marshall T. Reynolds will be assisted in his efforts by us, together
with our outside attorneys, accountants and other representatives.
Subject to the requirement that our initial business combination, which may
be a transaction to acquire one or more businesses simultaneously, must be with
a target business with a fair market value that is at least 80% of our net
assets (excluding deferred non-accountable expense allocation of the
underwriters held in trust) at the time of such acquisition, our management will
have virtually unrestricted flexibility in identifying and selecting a
prospective target business. In evaluating a prospective target business, our
management will consider, among other factors, the following:
o financial condition and results of operation;
o cash flow potential;
o growth potential;
o experience and skill of management and availability of additional
personnel;
o capital requirements;
o competitive position;
o barriers to entry;
o stage of development of the products, processes or services;
o customer base;
o security measures employed to protect technology, trademarks or trade
secrets;
o degree of current or potential market acceptance of the products,
processes or services;
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o proprietary features and degree of intellectual property or other
protection of the products, processes or services;
o regulatory environment of the industry; and
o costs associated with effecting the business combination.
These criteria are not intended to be exhaustive and we have not
established any specific quantitative criteria or formula to evaluate a
prospective target business. We will consider acquiring an underperforming or
distressed company based on the above-listed factors, although we do not intend
to focus our efforts on acquiring such a company. Any evaluation relating to the
merits of a particular business combination will be based, to the extent
relevant, on the above factors as well as other considerations deemed relevant
by our management in effecting a business combination consistent with our
business objective. In evaluating a prospective target business, we will conduct
an extensive due diligence review which will encompass, among other things,
meetings with incumbent management and inspection of facilities, as well as
review of financial and other information which will be made available to us.
The structure of a particular business combination may take the form of a
merger, capital stock exchange, asset acquisition or other similar structure.
Although we have no current commitments to issue our securities, we may issue a
substantial number of additional shares of our common stock or preferred stock,
a combination of common and preferred stock, or debt securities, to complete a
business combination.
The time and costs required to select and evaluate a target business and to
structure and complete the business combination cannot presently be ascertained
with any degree of certainty. Any costs incurred with respect to the
identification and evaluation of a prospective target business with which a
business combination is not ultimately completed will result in a loss to us and
reduce the amount of capital available to otherwise complete a business
combination. However, we will not pay any finder's or consulting fees to our
initial stockholders, or any of their respective affiliates, for services
rendered to or in connection with a business combination. We will not, and no
other person or entity will, pay any finder's or consulting fees to our existing
directors, officers or stockholders, or any of their respective affiliates, for
services rendered to or in connection with a business combination. In addition,
we will not make any other payment to them out of the proceeds of our initial
public offering (or the funds held in trust) other than reimbursement for any
out-of-pocket expenses they incur in conducting due diligence, the payments to
Chapman Printing Co. for reimbursable expenses and for the repayment of the
$225,000 in advances from Marshall T. Reynolds to us (which consists of a
$150,000 loan plus the advance of $75,000 for the American Stock Exchange
listing fee). This arrangement is being agreed to by Chapman Printing Co. for
our benefit and is not intended to provide Marshall T. Reynolds compensation in
lieu of salary.
Fair market value of target business
The initial target business or businesses that we acquire must have a fair
market value equal to at least 80% of our net assets at the time of such
acquisition. Deferred non-accountable expense allocation of the underwriters
held in trust shall be excluded from our net assets when calculating the 80%
fair market value requirement. The fair market value of such business will be
determined by our board of directors based upon standards generally accepted by
the financial community, such as actual and potential sales, earnings and cash
flow and book value. To further minimize the potential appearance of a conflict
of interest, we will not consummate a business combination with an entity which
is affiliated with any of our initial stockholders, officers or directors unless
we obtain an opinion from an independent investment banking firm that the
business combination is fair to our stockholders from a financial point of view.
In the event that we obtain such opinion, we will file it with the Securities
and Exchange Commission.
Stockholder approval of business combination
Prior to the completion of a business combination, we will submit the
transaction to our stockholders for approval, even if the nature of the
acquisition is such as would not ordinarily require stockholder approval under
applicable state law. In connection with seeking stockholder approval of a
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business combination, we will furnish our stockholders with proxy solicitation
materials prepared in accordance with the Securities Exchange Act of 1934,
which, among other matters, will include a description of the operations of the
target business and audited historical financial statements of the business.
In connection with the vote required for any business combination, all of
our initial stockholders, including all of our officers and directors, have
agreed to vote their respective shares of common stock owned by them immediately
prior to our initial public offering, as well as any shares of common stock
acquired in connection with or following our initial public offering, in
accordance with the majority of the shares of common stock voted by the public
stockholders. We will proceed with the business combination only if a majority
of the shares of common stock voted by the public stockholders are voted in
favor of the business combination and public stockholders owning less than 20%
of the shares sold in our initial public offering both vote against the business
combination and exercise their conversion rights. We will only structure or
consummate a business combination in which all stockholders exercising their
conversion rights, up to 19.99%, are entitled to receive their pro rata portion
of the trust account (net of taxes payable). Additionally, we will not propose a
business combination to our stockholders which includes a provision that such
business combination will not be consummated if stockholders owning less than
19.99% vote against such business combination and exercise their conversion
rights as described herein. In addition, if we seek approval from our
stockholders to consummate a business combination within 90 days of the
expiration of 24 months (assuming that the period in which we need to consummate
a business combination has been extended, as provided in our amended and
restated certificate of incorporation) from the date of our initial public
offering, the proxy statement related to such business combination will also
seek stockholder approval for our board's recommended plan of dissolution and
distribution, in the event our stockholders do not approve such business
combination.
Conversion rights
At the time we seek stockholder approval of any business combination, we
will offer each public stockholder the right to have such stockholder's shares
of common stock converted to cash if the stockholder votes against the business
combination and the business combination is approved and completed. The actual
per-share conversion price will be equal to the amount in the trust account,
inclusive of any interest (calculated as of two business days prior to the
consummation of the proposed business combination), divided by the number of
shares of common stock sold in our initial public offering. Without taking into
account any interest earned on the trust account or related income taxes after
September 30, 2007, the per-share conversion price as of September 30, 2007
would be approximately $5.90 or $0.10 less than the per-unit offering price of
$6.00. We will take steps to try to protect the assets held in trust from
third-party claims. However, to the extent that such claims are successfully
made against the trust assets, they may reduce the per-share conversion price
below approximately $5.90.
An eligible stockholder may request conversion at any time after the
mailing to our stockholders of the proxy statement and prior to the vote taken
with respect to a proposed business combination at a meeting held for that
purpose, but the request will not be granted unless the stockholder votes
against the business combination and the business combination is approved and
completed. Any request for conversion, once made, may be withdrawn at any time
up to the date of the meeting. It is anticipated that the funds to be
distributed to stockholders entitled to convert their shares who elect
conversion will be distributed promptly after completion of a business
combination. Public stockholders who convert their stock into their share of the
trust account still have the right to exercise the warrants that they received
as part of the units. We will not complete any business combination if public
stockholders, owning an aggregate of 20% or more of the shares sold in our
initial public offering both vote against a business combination and exercise
their conversion rights. We will only structure or consummate a business
combination in which all stockholders exercising their conversion rights, up to
19.99%, are entitled to receive their pro rata portion of the trust account (net
of taxes payable). Additionally, we will not propose a business combination to
our stockholders which includes a provision that such business combination will
not be consummated if stockholders owning less than 19.99% vote against such
business combination and exercise their conversion rights as described herein.
In addition, if we seek approval from our stockholders to consummate a business
combination within 90 days of the expiration of 24 months (assuming that the
period in which we need to consummate a business combination has been extended,
as provided in our amended and restated certificate of incorporation) from the
date of our initial public offering, the proxy statement related to such
business combination will also seek stockholder approval for our board's
recommended plan of dissolution and distribution, in the event our stockholders
do not approve such business combination.
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Dissolution and liquidation if no business combination
If we do not complete a business combination within 18 months after
September 6, 2006, the date we completed our initial public offering, or within
24 months if the extension criteria described below have been satisfied, we will
be dissolved and distribute to all of our public stockholders, in proportion to
their respective equity interests, an aggregate sum equal to the amount in the
trust account, inclusive of any interest, plus any remaining net assets. Our
initial stockholders have waived their rights to participate in any liquidation
distribution with respect to shares of common stock owned by them immediately
prior to our initial public offering and with respect to the 3,076,923 warrants
purchased in the private placement. There will be no distribution from the trust
account with respect to our warrants, which will expire worthless.
We currently believe that any plan of dissolution and distribution
subsequent to the expiration of the 18 and 24 month deadlines would proceed in
the following manner:
o our board of directors will, prior to the passing of such deadline,
convene and adopt a specific plan of dissolution and distribution,
which it will then vote to recommend to our stockholders; at such time
it will also cause to be prepared a preliminary proxy statement
setting out such plan of dissolution and distribution and the board's
recommendation of such plan;
o upon such deadline, we would file the preliminary proxy statement with
the Securities and Exchange Commission;
o if the Securities and Exchange Commission does not review the
preliminary proxy statement, then 10 days following the passing of
such deadline, we will mail the proxy statements to our stockholders,
and 30 days following the passing of such deadline we will convene a
meeting of our stockholders at which they will either approve or
reject our plan of dissolution and distribution; and
o if the Securities and Exchange Commission does review the preliminary
proxy statement, we currently estimate that we will receive their
comments 30 days following the passing of such deadline. We will mail
the proxy statements to our stockholders following the conclusion of
the comment and review process (the length of which we cannot predict
with any certainty), and we will convene a meeting of our stockholders
at which they will either approve or reject our plan of dissolution
and distribution.
In the event we seek stockholder approval for a plan of dissolution and
distribution and do not obtain such approval, we will nonetheless continue to
pursue stockholder approval for our dissolution. Pursuant to the terms of our
amended and restated certificate of incorporation, our powers following the
expiration of the permitted time periods for consummating a business combination
will automatically thereafter be limited to acts and activities relating to
dissolving and winding up our affairs, including liquidation. The funds held in
our trust account may not be distributed except upon our dissolution and, unless
and until such approval is obtained from our stockholders, the funds held in our
trust account will not be released. Consequently, holders of a majority of our
outstanding stock must approve our dissolution in order to receive the funds
held in our trust account and the funds will not be available for any other
corporate purpose. In addition, if we seek approval from our stockholders to
consummate a business combination within 90 days of the expiration of 24 months
(assuming that the period in which we need to consummate a business combination
has been extended, as provided in our amended and restated certificate of
incorporation) from the date of our initial public offering, the proxy statement
related to such a business combination will also seek stockholder approval for
our board's recommended plan of distribution and dissolution, in the event our
stockholders do not approve such a business combination. If we seek approval
from our stockholders to consummate a business combination more than 90 days
before the expiration of 24 months (assuming that the period in which we need to
consummate a business combination has been extended, as provided in our amended
and restated certificate of incorporation) from the date of our initial public
offering, the proxy statement related to such business combination will not be
required to seek stockholder approval for our board's recommended plan of
dissolution and distribution, in the event our stockholders do not approve such
business combination, although we may include such proposal in our discretion.
If no proxy statement seeking the approval of our stockholders for a business
combination has been filed 30 days prior to the date which is 24 months from the
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date of our initial public offering, our board will, prior to such date,
convene, adopt and recommend to our stockholders a plan of dissolution and
distribution, and on such date file a proxy statement with the Securities and
Exchange Commission seeking stockholder approval for such plan. Immediately upon
the approval by our stockholders of our plan of dissolution and distribution, we
will liquidate our trust account to our public stockholders.
If we were to expend none of the net proceeds of our initial public
offering, other than the proceeds deposited in the trust account, and without
taking into account interest, if any, earned on the trust account subsequent to
September 30, 2007, the per-share liquidation price as of September 30, 2007
would be approximately $5.90 or $0.10 less than the per-unit offering price of
$6.00. The proceeds deposited in the trust account could, however, become
subject to the claims of our creditors which could be senior to the claims of
our public stockholders. Although we will seek to have all vendors, prospective
target businesses or other entities we engage execute agreements with us waiving
any right, title, interest or claim of any kind in or to any monies held in the
trust account for the benefit of our public stockholders, there is no guarantee
that they will execute such agreements or even if they execute such agreements
that they would be prevented from bringing claims against the trust fund. If any
third party refused to execute an agreement waiving such claims to the monies
held in the trust account, we would perform an analysis of the alternatives
available to us if we chose not to engage such third party and evaluate if such
engagement would be in the best interest of our stockholders if such third party
refused to waive such claims. Examples of possible instances where we may engage
a third party that refused to execute a waiver include the engagement of a third
party consultant whose particular expertise or skills are believed by management
to be significantly superior to those of other consultants that would agree to
execute a waiver or in cases where management is unable to find a provider of
required services willing to provide the waiver. In any event, our management
would perform an analysis of the alternatives available to it and would only
enter into an agreement with a third party that did not execute a waiver if
management believed that such third party's engagement would be significantly
more beneficial to us than any alternative. In addition, there is no guarantee
that such entities will agree to waive any claims they may have in the future as
a result of, or arising out of, any negotiations, contracts or agreements with
us and will not seek recourse against the trust account for any reason. If we
liquidate before the completion of a business combination and distribute the
proceeds held in trust to our public stockholders, Marshall T. Reynolds has
agreed to indemnify us against any claims by any vendor, prospective target
business or other entities that would reduce the amount of the funds in trust.
However, we cannot assure you that Marshall T. Reynolds will be able to satisfy
those obligations. Furthermore, we cannot assure you that the actual per-share
liquidation price will not be less than $5.90, plus available interest, due to
claims of creditors.
If we enter into either a letter of intent, an agreement in principle or a
definitive agreement to complete a business combination prior to the expiration
of 18 months after the consummation of our initial public offering, but are
unable to complete the business combination within the 18-month period, then we
will have an additional six months in which to complete the business combination
contemplated by the letter of intent, agreement in principle or definitive
agreement. If we are unable to do so within 24 months following the consummation
of our initial public offering, we will then liquidate. Upon notice from us, the
trustee of the trust account will commence liquidating the investments
constituting the trust account and will turn over the proceeds to our transfer
agent for distribution to our public stockholders. We anticipate that our
instruction to the trustee would be given after the expiration of the applicable
18-month or 24-month period. We cannot provide investors a specific timetable
for our dissolution and liquidation and there will be delays in the distribution
of funds from the trust account due to the time involved in the dissolution
process.
If we do not complete a business combination within 18 months after
September 6, 2006, the date we completed our initial public offering (or within
24 months after the consummation of our initial public offering if a letter of
intent, agreement in principle or definitive agreement is executed within 18
months after the consummation of our initial public offering and the business
combination relating thereto is not consummated within such 18-month period), we
will dissolve and distribute to our public stockholders an amount equal to the
amount in the trust account, inclusive of any interest, net of taxes plus any
remaining assets. The Delaware General Corporation Law provides two procedures
for persons to file a claim against a corporation that dissolves. Under Delaware
law, creditors of a corporation have a superior right to stockholders in the
distribution of assets upon dissolution. Consequently, if the trust account is
dissolved and paid out prior to all creditors being paid on their claims,
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stockholders may be held liable for claims by third parties against a
corporation to the extent of distributions received by them in a dissolution.
If the corporation complies with procedures set forth at Section 280 of the
Delaware General Corporation Law, it must provide a 60-day notice period during
which any third-party claims can be brought against the corporation, a 90-day
period during which the corporation may reject any claims brought, and an
additional 150-day waiting period before any liquidating distributions are made
to stockholders, any liability of stockholders with respect to a liquidating
distribution is limited to the lesser of such stockholder's pro rata share of
the claim or the amount distributed to the stockholder, and any liability of the
stockholder would be barred after the third anniversary of the dissolution. If
reasonable provision for claims cannot be made out of funds generated by the
interest on the trust account, such provision could reduce the amount
immediately distributable in liquidation. Consequently, final liquidating
distribution of amounts remaining in provision for claims could be delayed.
In the event that the corporation chooses not to follow the procedures set
forth at Section 280 of the Delaware General Corporation Law for permitting
claims to be filed against a corporation, Section 281(b) of the Delaware General
Corporation Law requires that the corporation, or any successor entity, adopt a
plan of distribution under which the dissolved corporation: (i) pays, or makes
reasonable provision to pay all claims and obligations, including contingent,
conditional, or unmatured contractual claims known to the corporation or
successor entity; (ii) makes provisions which are reasonably sufficient to
provide compensation for any claim against the corporation which is the subject
of a pending action, suit or proceeding to which the corporation is a party; and
(iii) provides compensation for claims that have not been made against the
corporation, but based on facts known to the corporation or successor entity are
likely to arise within 10 years after the date of dissolution. The plan of
dissolution must provide that all claims will be paid in full. If there are
insufficient assets to satisfy such claims the plan must indicate that claims
shall be paid, or provided for according to their priority and, among claims of
equal priority, ratably to the extent there are assets legally available. Any
remaining assets shall be distributed to the stockholders of the dissolved
corporation.
We cannot predict at this time whether we will comply with the procedures
set forth in Sections 280 or 281(b) of the Delaware General Corporation Law.
Compliance with Sections 280 and 281(b) is designed to provide a "safe harbor"
such that directors (or governing persons of a successor entity) will not be
held personally liable to unpaid claimants of the corporation for having
improperly distributed assets. If we elect to comply with Section 280 of the
Delaware General Corporation Law, we would obtain greater certainty as to
potential claims, and we, or our successor entity may reject, in whole or in
part, claims that are made. In addition, should we choose to comply with Section
280, a claimant who receives actual notice as required by Section 280 would be
barred from receiving payment if the claimant failed to present the claim in
accordance with the timeframes described above. If we elect to comply with the
procedures set forth at Section 281(b) of the Delaware General Corporation Law,
stockholders will not know at the time of dissolution the scope of potential
claims against the corporation. Our stockholders could therefore, potentially be
liable for claims to the extent of distributions received by them in a
dissolution and any liability of our stockholders will extend beyond the third
anniversary of such dissolution.
We intend to pay the costs of any dissolution from our working capital.
Dissolution of a company under Delaware law requires filing a Plan of
Dissolution with the State of Delaware and will require an affirmative vote of
stockholders; therefore we cannot provide investors a specific timetable for our
dissolution and liquidation and there will be delays with distributing the funds
in the trust account due to the process of dissolving the company. In addition,
we estimate our total costs and expenses for implementing and completing a plan
of dissolution and liquidation will be in the range of $50,000 to $75,000. This
amount includes all costs and expenses relating to filing of our dissolution in
the State of Delaware, the winding up of our company and the costs of a proxy
statement and meeting relating to the approval by our stockholders (if required)
of our plan of dissolution and liquidation. We believe that there should be
sufficient interest on the trust account available to us to fund the $50,000 to
$75,000 of expenses, although we cannot give you assurances that these will be
sufficient funds for such purposes. If these funds are not sufficient, we will
use funds from the trust fund to pay these costs. Delaware law provides that
stockholders must approve the dissolution of the corporation. In the event that
stockholders do not approve the dissolution of the corporation the Board of
Directors will request that the trust account be distributed to stockholders,
and the corporate charter will continue to exist; however, we will become
inactive. We will not invest, reinvest or trade in securities, nor will we take
any other action that would cause us to be considered an "investment company"
under the Investment Company Act of 1940. Since creditors have a priority claim
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to the corporate assets, perfected claims against us would result in reduced
distributions from the trust to stockholders. Furthermore, in the event that we
file for bankruptcy, protection or an involuntary bankruptcy case is filed
against us, a bankruptcy court may prohibit the payment of trust funds to
stockholders during the pendency of bankruptcy proceeding. If we liquidate
before the completion of a business combination and distribute the proceeds held
in trust to our public stockholders, Marshall T. Reynolds has agreed to
indemnify us against any claims by any vendor, prospective target business or
other entities that would reduce the amount of the funds in the trust. For
example, a potential target business may bring an action claiming that we failed
to bargain in good faith, resulting in a lost opportunity and claiming damages.
Under such circumstances, we may seek indemnification for any losses that may be
adjudged against us.
Our public stockholders will receive funds from the trust account only in
the event of our dissolution and liquidation (assuming there are no outstanding
claims against the trust) or if the stockholders seek to convert their
respective shares into cash upon a business combination which the stockholder
voted against and which is completed by us. In no other circumstances will a
stockholder have any right or interest of any kind to or in the trust account.
Competition
In identifying, evaluating and selecting a target business, we may
encounter intense competition from other entities having a business objective
similar to ours. Many of these entities are well established and have extensive
experience identifying and effecting business combinations directly or through
affiliates. Many of these competitors possess greater technical, human and other
resources than us and our financial resources will be relatively limited when
contrasted with those of many of these competitors. Further:
o our obligation to seek stockholder approval of a business combination
may delay or threaten the completion of a transaction;
o our obligation to convert into cash shares of common stock held by our
public stockholders in certain instances may reduce the resources
available to us for a business combination; and
o our outstanding warrants and the option, and the future dilution they
potentially represent, may not be viewed favorably by certain target
businesses.
Any of these factors may place us at a competitive disadvantage in
successfully negotiating a business combination. Our management believes,
however, that to the extent that our target business is a privately held entity,
our status as a well-financed public entity may give us a competitive advantage
over entities having a similar business objective as ours in acquiring a target
business with significant growth potential on favorable terms.
If we succeed in effecting a business combination, there will be, in all
likelihood, intense competition from competitors of the target business. We
cannot assure you that, subsequent to a business combination, we will have the
resources or ability to compete effectively.
Employees
We have two executive officers, both of whom are members of our board of
directors. These individuals are not obligated to devote any specific number of
hours to our matters and intend to devote only as much time as they deem
necessary to our affairs, although we expect for Marshall T. Reynolds to devote
substantial time to our business once we have signed a letter of intent or
agreement in principle with a target business that provides for a business
combination conditioned in part on the completion of due diligence. The amount
of time they will devote in any time period will vary based on the availability
of suitable target businesses to investigate. We do not intend to have any full
time employees prior to the consummation of a business combination.
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ITEM 1A. Risk Factors
We are a development stage company with no operating history and, accordingly,
you will not have any basis on which to evaluate our ability to achieve our
business objectives.
We are a recently incorporated development stage company with no operating
results to date. Since we do not have any operating history, you will have no
basis upon which to evaluate our ability to achieve our business objective,
which is to acquire an operating business. We have no plans, arrangements or
understandings with any prospective acquisition candidates. We will not generate
any revenues (other than interest income on the proceeds from our offering)
until, at the earliest, after the consummation of a business combination. We
cannot assure you as to when or if a business combination will occur.
We may not be able to consummate a business combination within the required time
frame, in which case we would be forced to liquidate.
We must complete a business combination, which may be a transaction to
acquire one or more businesses simultaneously, with a fair market value of at
least 80% of our net assets (excluding deferred compensation of the underwriters
held in trust) at the time of acquisition within 18 months after September 6,
2006, the date we completed our initial public offering (or within 24 months
after the consummation of our initial public offering if a letter of intent,
agreement in principle or a definitive agreement has been executed within 18
months after the consummation of our initial public offering and the business
combination relating thereto has not yet been consummated within such 18-month
period). If we fail to consummate a business combination within the required
time frame, we will be forced to liquidate our assets. We may not be able to
find a suitable target business within the required time frame. In addition, our
negotiating position and our ability to conduct adequate due diligence on any
potential target may be reduced as we approach the deadline for the consummation
of a business combination. We do not have any specific business combination
under consideration and we have not had any preliminary contacts or discussions
with any target business regarding a business combination.
If we are unable to complete a business combination and are forced to liquidate
and distribute the trust account, our public stockholders may receive less than
$6.00 per share upon distribution of the trust account and our warrants will
expire worthless.
Our assets, the per-share liquidation distribution may be less than $6.00
because of the expenses of our offering, our general and administrative expenses
and the anticipated costs of seeking a business combination. Without taking into
account interest earned on the trust account or related income taxes subsequent
to September 30, 2007, the per-share conversion price as of September 30, 2007
would be approximately $5.90, or $0.10 less than the offering price of $6.00.
Interest earned on the trust account, net of taxes, will be included in payments
to our stockholders in the event of a liquidation. At September 30, 2007 the
$1,200,000 allowed distributions for working capital was completed. No other
distributions will be made from the trust account, except for the payment of
taxes on interest earned. Furthermore, there will be no distribution with
respect to our outstanding warrants, which will expire worthless if we liquidate
before the completion of a business combination. For a more complete discussion
of the effects on our stockholders if we are unable to complete a business
combination, see the section appearing elsewhere in this annual report entitled
"Dissolution and liquidation if no business combination."
We expect that all costs associated with implementing our plan of
dissolution and liquidation as well as payments to any creditors will be funded
from the interest on the trust account available to us as working capital, but
if those funds are not sufficient for those purposes or to cover our liabilities
and obligations, the amount distributed to our public stockholders would be less
than $5.90 per share. We estimate that our total costs and expenses for
implementing and completing our stockholder-approved plan of dissolution and
liquidation will be in the range of $50,000 to $75,000. This amount includes all
costs and expenses relating to filing of our dissolution in the State of
Delaware, the winding up of our company and the costs of a proxy statement and
meeting relating to the approval by our stockholders of our plan of dissolution
and liquidation. We believe that there should be sufficient interest on the
trust account available to us to fund the $50,000 to $75,000 of expenses,
although we cannot give you assurances that these will be sufficient funds for
such purposes.
9
Under Delaware law, the requirements and restrictions relating to our initial
public offering contained in our certificate of incorporation may be amended,
which could reduce or eliminate the protection afforded to our stockholders by
such requirements and restrictions.
Our certificate of incorporation set forth certain requirements and
restrictions relating to our initial public offering that shall apply to us
until the consummation of a business combination. Specifically, our certificate
of incorporation provides, among other things, that:
o prior to the consummation of our initial business combination, we
shall submit such business combination to our stockholders for
approval;
o we may consummate our initial business combination if: (i) approved by
a majority of the shares of common stock voted by the public
stockholders (holders of shares contained in the units sold in this
offering), and (ii) public stockholders owning less than 20% of the
shares contained in the units purchased by the public stockholders in
this offering exercise their conversion rights;
o if our initial business combination is approved and consummated,
public stockholders who voted against the business combination and
exercised their conversion rights will receive their pro rata share of
the trust account;
o if a business combination is not consummated or a letter of intent, an
agreement in principle or a definitive agreement is not signed within
the time periods specified, then we will be dissolved and distribute
to all of our public stockholders their pro rata share of the trust
account; and
o we may not consummate any other merger, capital stock exchange, stock
purchase, asset acquisition or similar transaction other than a
business combination that meets the conditions specified in this
prospectus, including the requirement that our initial business
combination (or series of business combinations) be with one or more
operating businesses whose fair market value, either individually or
collectively, is equal to at least 80% of our net assets (excluding
deferred compensation of the underwriters held in trust) at the time
of such business combination.
Our certificate of incorporation prohibits the amendment of the
above-described provisions. However, the validity of provisions prohibiting
amendment of the certificate of incorporation under Delaware law has not been
settled. A court could conclude that the prohibition on amendment violates the
stockholders' implicit rights to amend the corporate charter. In that case, the
above-described provisions would be amendable and any such amendment could
reduce or eliminate the protection afforded to our stockholders. However, we
view the foregoing provisions as obligations to our stockholders, and we will
not take any actions to waive or amend any of these provisions.
Since we have not yet selected any target business with which to complete a
business combination, we are unable to currently ascertain the merits or risks
of any particular target business' operations or the industry or business in
which we may ultimately operate.
Although we intend to focus on acquiring an operating business in the
energy service sector headquartered in North America, we may acquire a company
operating in any industry we choose. There is no reliable basis for you to
currently evaluate the possible merits or risks of the particular industry in
which we may ultimately operate or the target business which we may ultimately
acquire. To the extent we complete a business combination with an entity in its
development stage, we may be affected by numerous risks inherent in the business
operations of those entities. If we complete a business combination with an
entity in an industry characterized by a high level of risk, we may be affected
by the currently unascertainable risks of that industry. Although our management
will endeavor to evaluate the risks inherent in a particular industry or target
business, we cannot assure you that we will properly ascertain or assess all of
the significant risk factors.
10
We may acquire a target business with a history of poor operating performance
and there is no guarantee that we will be able to improve the operating
performance of that target business.
Due to the competition for business combination opportunities, we may
acquire a target business with a history of poor operating performance if we
believe that target business has attractive technology or presents a business
opportunity that can take advantage of trends in the energy services sector.
However, we have not identified any specific technology or business that we wish
to acquire. Furthermore, we may acquire a poorly performing target business
outside the energy services sector that has an attractive technology or presents
a business opportunity. Moreover, acquiring a target company with a history of
poor operating performance can be extremely risky and we may not be able to
improve operating performance. If we cannot improve the operating performance of
such a target business following our business combination, then our business,
financial condition and results of operations will be adversely affected.
Factors that could result in us not being able to improve operating performance
include, among other things:
o inability to predict changes in technological innovation;
o inability to hire personnel with appropriate experience to assist us
in achieving our turnaround goals;
o competition from superior or lower-priced products;
o loss of a material contract or goodwill associated with prior
ownership;
o lack of financial resources;
o inability to attract and retain key executives and employees;
o inability to compete with businesses offering similar services;
o claims for infringement of third-party intellectual property rights
and/or the availability of third-party licenses; and
o changes in, or costs imposed by, government regulation.
Our management team has been successful in improving the profitability of a
number of companies.
Our officers and directors will allocate their time to other businesses, thereby
causing conflicts of interest in their determination as to how much time to
devote to our affairs, which could have a negative impact on our ability to
consummate a business combination.
Our officers and directors are not required to commit their full time to
our affairs, which may result in a conflict of interest in allocating their time
between our operations and other businesses. This could have a negative effect
on our ability to consummate a business combination. We do not intend to have
any full-time employees prior to the consummation of a business combination. All
of our executive officers are engaged in several other business endeavors and
are not obligated to contribute any specific number of hours to our affairs,
although we expect Marshall T. Reynolds to devote substantial time to our
business during the process of conducting due diligence on a potential target
company. If our executive officers' or directors' other business affairs require
them to devote more substantial amounts of time to such affairs, it could limit
their ability to devote time to our affairs and could have a negative impact on
our ability to consummate a business combination. We cannot assure you that
these conflicts will be resolved in our favor.
11
Stockholders may be held liable for claims by third parties against us to the
extent of distributions received by them in a dissolution.
Upon the approval by our stockholders of our plan of dissolution and
distribution, we will liquidate our trust account to our public stockholders and
pay, or reserve for payment in accordance therewith, from funds not held in
trust, our liabilities and obligations. If we do not complete a business
combination within 18 months after the consummation of our initial public
offering on September 6, 2006 (or within 24 months after the consummation of our
initial public offering if a letter of intent, agreement in principle or
definitive agreement is executed within 18 months after the consummation of our
initial public offering and the business combination relating thereto is not
consummated within such 18-month period), we will dissolve. Under Sections 280
through 282 of the Delaware General Corporation Law, stockholders may be held
liable for claims by third parties against a corporation to the extent of
distributions received by them in a dissolution. If the corporation complies
with certain procedures under Section 281(b) intended to ensure that it adopts a
plan of dissolution under which the plan (i) makes reasonable provision for all
claims against it, (ii) makes such provisions as will be reasonably likely to be
sufficient to provide compensation for any claims against the corporation which
is the subject of a proceeding or action, and (iii) makes such provision as will
be reasonably likely to be sufficient to provide compensation for claims that
have not been made known to the corporation within ten years after the date of
dissolution, any liability of stockholders with respect to a liquidating
distribution is limited to the lesser is such stockholder's pro rata share of
the claim or the amount distributed to the stockholder. If reasonable provision
for claims cannot be made out of funds generated by the interest on the trust
account or otherwise are not paid by Mr. Reynolds in accordance with his
indemnification, such claims could reduce the amount immediately distributable
in liquidation. We intend to comply with the procedures set forth in Section
281(b) of the Delaware General Corporation Law. However, if we do not comply
with those procedures, our stockholders could potentially be liable for any
claims to the extent of distributions received by them in a dissolution and any
liability of our stockholders will extend beyond the third anniversary of such
dissolution, in accordance with Section 278 of the Delaware General Corporation
Law. We cannot predict at this time which procedure of Delaware law we would
comply with in the event of liquidation. If we elect to comply with Section 280
of the Delaware General Corporation Law, we would obtain greater certainty as to
potential claims, and the corporation, or successor entity may reject, in whole
or in part, claims that are made. In addition, should we choose to comply with
Section 280, a claimant who receives actual notice as required by Section 280
would be barred from receiving payment if the claimant failed to present the
claim in accordance with the required timeframes. Specifically if the
corporation complies with certain procedures intended to ensure that it makes
reasonable provision for all claims against it, including a 60-day notice period
during which any third-party claims can be brought against the corporation, a
90-day period during which the corporation may reject any claims brought, and an
additional 150-day waiting period before any liquidating distributions are made
to stockholders, any liability of stockholders with respect to a liquidating
distribution is limited to the lesser of such stockholder's pro rata share of
the claim or the amount distributed to the stockholder, and any liability of the
stockholder would be barred after the third anniversary of the dissolution. If
we elect to comply with the procedures set forth at Section 281(b) of the
Delaware General Corporation Law, stockholders will not know at the time of
dissolution the scope of potential claims against the corporation. Our
stockholders could therefore, potentially be liable for claims to the extent of
distributions received by them in a dissolution and any liability of our
stockholders will extend beyond the third anniversary of such dissolution.
A significant portion of working capital could be expended in pursuing
acquisitions that are not consummated.
It is anticipated that the investigation of each specific target business
and the negotiation, drafting and execution of relevant agreements, disclosure
documents and other instruments will require substantial management time and
attention and substantial costs for accountants, attorneys and others. In
addition, we may opt to make a deposit or down payment or pay exclusivity or
similar fees in connection with structuring and negotiating a business
combination. If a decision is made not to complete a specific business
combination, the costs incurred up to that point in connection with the
abandoned transaction, potentially including a deposit or down payment or
exclusivity or similar fees, would not be recoverable. Furthermore, even if an
agreement is reached relating to a specific target business, we may fail to
consummate the transaction for any number of reasons, including those beyond our
control such as the shares representing 20% or more of the shares of common
stock purchased by our public stockholder vote against the transaction and
exercise their conversion rights even though a majority of our public
stockholders approve the transaction. Any such event will result in a loss to us
of the related costs incurred, which could adversely affect subsequent attempts
12
to locate and acquire or merge with another business. For more information, see
the section entitled "Selection of a target business and structuring of a
business combination."
You will not be entitled to protections normally afforded to investors of blank
check companies.
Since the net proceeds of our initial public offering are intended to be
used to complete a business combination with a target business that we have not
yet identified, we may be deemed to be a "blank check" company under the United
States securities laws. However, since we have net tangible assets in excess of
$5,000,000 and have filed a Current Report on Form 8-K with the Securities and
Exchange Commission, or SEC, including an audited balance sheet demonstrating
this fact, we believe that we are exempt from rules promulgated by the SEC to
protect investors of blank check companies, such as Rule 419 promulgated under
the Securities Act of 1933, as amended. Accordingly, investors will not be
afforded the benefits or protections of those rules. Because we do not believe
we are subject to Rule 419, our units were immediately tradable and we have a
longer period of time to complete a business combination in certain
circumstances.
If third parties bring claims against us, the proceeds held in trust could be
reduced and the per share liquidation or conversion price received by
stockholders could be less than $5.90 per share.
Our placing of funds in trust may not protect those funds from third party
claims against us or in the event a third party forces us into bankruptcy.
Although we will seek to have all vendors, prospective target businesses or
other entities we engage execute agreements with us waiving any right, title,
interest or claim of any kind in or to any monies held in the trust account for
the benefit of our public stockholders, there is no guarantee that they will
execute such agreements or even if they execute such agreements that they would
be prevented from bringing claims against the trust fund. If any third party
refused to execute an agreement waiving such claims to the monies held in the
trust account, we would perform an analysis of the alternatives available to us
if we chose not to engage such third party and evaluate if such engagement would
be in the best interest of our stockholders if such third party refused to waive
such claims. Examples of possible instances where we may engage a third party
that refused to execute a waiver include the engagement of a third party
consultant whose particular expertise or skills are believed by management to be
significantly superior to those of other consultants that would agree to execute
a waiver or in cases where management is unable to find a provider of required
services willing to provide the waiver. In any event, our management would
perform an analysis of the alternatives available to it and would only enter
into an agreement with a third party that did not execute a waiver if management
believed that such third party's engagement would be significantly more
beneficial to us than any alternative. If we engage any vendor that refuses to
execute such a waiver, the proceeds held in trust could be subject to claims
which could take priority over the claims of our public stockholders and the
per-share liquidation price could be less than $5.90, plus interest, due to
claims of such creditors. Moreover, a court may conclude that any third party
waivers are unenforceable. Marshall T. Reynolds has agreed to indemnify us
against any claims by any vendor, prospective target business or other entities
that would reduce the amount of the funds in the trust, including indemnifying
us against claims that could be made in the event a third party waiver is deemed
to be unenforceable. For example, a potential target business may bring an
action claiming that we failed to bargain in good faith, resulting in a lost
opportunity and claiming damages. Under such circumstances, we may seek
indemnification for any losses that may be adjudged against us. However, we
cannot assure you that Marshall T. Reynolds will be able to satisfy those
obligations. We sought to confirm that Mr. Reynolds has sufficient funds to
satisfy his obligations by reviewing his ownership in other public and private
companies, and based on such review, we believe that Mr. Reynolds has access to
sources of liquidity (including his marketable securities, and access to funding
sources) in the event he is required to satisfy those obligations. In addition,
to the extent such claims are successfully made against us prior to the approval
of a business combination, such third party claims may result in the per share
conversion price received by the stockholders who vote against a business
combination and elect to convert their shares into cash being less than
approximately $5.90 per share because such claims would be paid directly by us,
thereby decreasing the funds available to such stockholders.
In addition, successful third party claims against us which result in the
payment in monies from the trust will reduce the funds available for the
acquisition of a target business.
Additionally, if we are forced to file a bankruptcy case or an involuntary
bankruptcy case is filed against us which is not dismissed, the funds held in
13
our trust account will be subject to applicable bankruptcy law, and may be
included in our bankruptcy estate and subject to the claims of third parties
with priority over the claims of our stockholders. To the extent any bankruptcy
claims deplete the trust account we cannot assure you we will be able to return
to our public stockholders the liquidation amounts due them.
We may issue shares of our capital stock or debt securities to complete a
business combination which would reduce the equity interest of our stockholders
and could likely cause a change in control of our ownership.
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000
shares of preferred stock, par value $0.0001 per share. Immediately after our
initial public offering, there were 17,623,077 authorized but unissued shares of
our common stock available for issuance (after appropriate reservation for the
issuance of shares upon full exercise of our outstanding warrants and the
purchase option granted to Ferris, Baker Watts, Incorporated), and all of the
1,000,000 shares of preferred stock available for issuance. Although we have no
commitment as of the date of this annual report to issue our securities, we may
issue a substantial number of additional shares of our common stock or preferred
stock, a combination of common and preferred stock, or debt securities, to
complete a business combination. Although we anticipate that any business
combination will be structured such that our company is the surviving entity and
the stockholders of the target company would not control the combined company,
there is a possibility of a change in control if we issue capital securities or
convertible debt to complete a business combination. The issuance of additional
shares of our common stock or any number of shares of our preferred stock:
o may significantly dilute the equity interest of investors in our
initial public offering;
o may subordinate the rights of holders of common stock if the preferred
stock is issued with rights senior to those afforded to our common
stock;
o could likely cause a change in control if a substantial number of our
shares of common stock are issued, which may affect, among other
things, our ability to use our net operating loss carry forwards, if
any, and most likely also result in the resignation or removal of our
present officers and directors; and
o may adversely affect prevailing market prices for our common stock.
Similarly, if we issue debt securities, it could result in:
o default and foreclosure on our assets if our operating revenues after
a business combination were insufficient to service our debt
obligations;
o acceleration of our obligations to repay the indebtedness even if we
have made all principal and interest payments when due if the debt
security contains covenants that require the maintenance of certain
financial ratios or reserves and any such covenant is breached without
a waiver or renegotiation of that covenant;
o our immediate payment of all principal and accrued interest, if any,
if the debt security is payable on demand; and
o our inability to obtain additional financing, if necessary, if the
debt security contains covenants restricting our ability to obtain
additional financing while such security is outstanding.
For a more complete discussion of the possible structure of a business
combination, see the section entitled "Selection of a target business and
structuring of a business combination."
14
The ability of our stockholders to exercise their conversion rights may not
allow us to effectuate the most desirable business combination or optimize our
capital structure.
At the time we seek stockholder approval of any business combination, we
will offer each public stockholder the right to have such stockholder's shares
of common stock converted to cash if the stockholder votes against the business
combination and the business combination is approved and completed. Accordingly,
if a business combination requires us to use substantially all of our cash to
pay the purchase price, because we will not know how many stockholders may
exercise such conversion rights, we may either need to reserve part of the trust
fund for possible payment upon such conversion, or we may need to arrange third
party financing to help fund the business combination in case a larger
percentage of stockholders exercise their conversion rights than we expected.
Therefore, we may not be able to consummate a business combination that requires
us to use all of the funds held in the trust account as part of the purchase
price, or the business combination may be more highly leveraged than desirable.
As a result, we may not be able to effectuate the most attractive business
combination available to us.
Our ability to effect a business combination and to execute any potential
business plan afterwards will be dependent upon the efforts of our key
personnel.
Our ability to effect a business combination will be totally dependent upon
the efforts of our key personnel. The future role of our key personnel following
a business combination, however, cannot presently be fully ascertained. Although
some of our key personnel (most likely, Marshall T. Reynolds, Jack M. Reynolds
and Edsel R. Burns) may remain associated with the target business following a
business combination, some or all of the management of the target business may
remain in place. While we intend to closely scrutinize any additional
individuals we engage after a business combination, we cannot assure you that
our assessment of these individuals will prove to be correct. The individuals
may be unfamiliar with the requirements of operating a public company as well as
with United States securities laws, which could cause us to have to expend time
and resources helping them become familiar with such laws. This could be
expensive and time consuming and could lead to various regulatory issues which
may adversely affect our operations. Moreover, our current management will only
be able to remain with the combined company after the consummation of a business
combination if they are able to negotiate and agree to mutually acceptable
employment terms, which would be determined at such time between the respective
parties and which may be a term of the business combination, as part of any such
combination, which terms would be disclosed to stockholders in any proxy
statement relating to a business combination. If we acquired a target business
in an all cash transaction, it would be more likely that current members of
management would remain with us if they chose to do so. If a business
combination were structured as a merger whereby the stockholders of the target
company were to control the combined company following a business combination,
it may be less likely that management would remain with the combined company
unless it was negotiated as part of the transaction as part of the acquisition
agreement; an employment agreement or other arrangement. In making the
determination as to whether current management should remain with us following
the business combination, management will analyze the experience and skill set
of the target business's management and negotiate as part of the business
combination that certain members of current management remain if it is believed
that it is in the best interests of the combined company post-business
combination.
The financial interest of our officers and directors, including any
compensation arrangements they may seek, could influence their motivation in
selecting, negotiating and structuring a transaction with a target business.
This would result in the current directors and officers having a conflict of
interest when determining whether a particular business combination is in the
stockholders' or company's best interest.
An effective registration statement may not be in place when an investor desires
to exercise warrants, thus precluding such investor from being able to exercise
his, her or its warrants.
No 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, a
prospectus relating to common stock issuable upon exercise of the warrants 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, we have agreed to use our
15
best efforts to meet these conditions and to maintain a current prospectus
relating to common stock issuable upon exercise of the warrants until the
expiration of the warrants. However, we cannot assure you that we will be able
to do so. Additionally, we have no obligation to settle the warrants for cash in
the absence of an effective registration statement or under any other
circumstances. The warrants may be deprived of any value, the market for the
warrants may be limited and the holders of warrants may not be able to exercise
their warrants if the prospectus relating to the common stock issuable upon the
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. Consequently, the warrants may expire unexercised or
unredeemed.
We may redeem your unexpired warrants prior to their exercise while a prospectus
is not current, thereby making your warrants worthless.
We have the ability to redeem outstanding warrants, in whole or in part, at
any time after they become exercisable and prior to their expiration, at the
price of $0.01 per warrant, provided that the last reported sales price of the
common stock equals or exceeds $8.50 per share for any 20 trading days within a
30 trading-day period following proper notice of such redemption. Such
redemption can and may occur while a prospectus is not current and therefore the
warrants are not exercisable. If this occurs, your warrants would be worthless.
Private placement warrants have a superior exercise right to warrants received
in our initial public offering.
Warrants issued in the private placement may be exercised pursuant to an
exemption to the requirement that the securities underlying such warrant be
registered pursuant to an effective registration statement. Therefore, such
warrants may be exercised whether or not a current registration statement is in
place. The warrants received in our initial public offering are not issued under
this exemption, therefore they may only be exercised if a current registration
statement is in place. We are required only to use our best efforts to maintain
a current registration statement; therefore, the warrants issued in our initial
public offering may expire worthless.
The loss of key executives could adversely affect our ability to operate.
Our operations are dependent upon a relatively small group of key
executives consisting of Marshall T. Reynolds, our Chairman and Chief Executive
Officer, and Jack M. Reynolds, a director and our President. We believe that our
success depends on the continued service of our executive management team.
Although we currently intend to retain our existing management and enter into
employment or other compensation arrangements with them following our initial
business combination, the terms of which have not yet been determined, we cannot
assure you that such individuals will remain with us for the immediate or
foreseeable future. We do not have employment contracts with any of our current
executives. The unexpected loss of the services of one or more of these
executives could have a detrimental effect on us.
Our officers and directors may not have significant experience or knowledge of
the industry of the target business. This inexperience may adversely affect our
ability to successfully operate the business we acquire.
We cannot assure you that our officers and directors will have experience
or sufficient knowledge relating to the industry of the target business to make
an appropriate acquisition decision. As a consequence, once we acquire a target
business, we may not have the ability to successfully operate it.
Some of our officers and directors may in the future become affiliated with
entities engaged in business activities similar to those intended to be
conducted by us and, accordingly, may have conflicts of interest in determining
to which entity a particular business opportunity should be presented.
Some of our officers and directors may in the future become affiliated with
entities, including other "blank check" companies engaged in business activities
similar to those intended to be conducted by us. Additionally, our officers and
directors may become aware of business opportunities which may be appropriate
for presentation to us as well as the other entities to which they have
fiduciary obligations. Accordingly, they may have conflicts of interest in
determining to which entity a particular business opportunity should be
presented. We cannot assure you that these conflicts will be resolved in our
favor.
16
All of our officers and directors directly or indirectly own shares of our
common stock that will not participate in liquidation distributions and
therefore they may have a conflict of interest in determining whether a
particular target business is appropriate for a business combination.
All of our officers and directors directly or indirectly own stock in us,
but do not have a right with respect to those shares of common stock acquired by
them prior to our initial public offering to receive distributions upon our
liquidation. Our initial stockholders paid $25,000 or approximately $0.01 per
share for the 2,150,000 shares. Additionally, our five directors (as well as a
sixth individual) in accordance with an agreement with Ferris, Baker Watts,
Incorporated purchased an aggregate of 3,076,923 warrants in a private placement
that occurred prior to our initial public offering. Such warrants have no right
to liquidation distributions. The shares and warrants owned by our officers and
directors will be worthless if we do not consummate a business combination. The
personal and financial interests of our officers and directors may influence
their motivation in identifying and selecting a target business and completing a
business combination within the required time frame. Consequently, our officers'
and directors' discretion in identifying and selecting a suitable target
business may result in a conflict of interest when determining whether the
terms, conditions and timing of a particular business combination are
appropriate and in our stockholders' best interest.
It is probable that we will only complete one business combination, which will
cause us to be solely dependent on a single business and a limited number of
products or services.
The net proceeds from our initial public offering and the private placement
provided us with approximately $48,972,000, which we may use to complete a
business combination. Our initial business combination must be with a business
or businesses with a fair market value of at least 80% of our net assets
(excluding deferred compensation of the underwriters held in trust) at the time
of such acquisition. Should we complete only a single business combination with
one target business, the prospects for our success may be:
o solely dependent upon the performance of a single business; or
o dependent upon the development or market acceptance of a single or
limited number of products, processes or services.
In this case, we will not be able to diversify our operations or benefit
from the possible spreading of risks or offsetting of losses, unlike other
entities which may have the resources to complete several business combinations
in different industries or different areas of a single industry.
None of our officers or directors has ever been a principal of, or has ever been
affiliated with, a company formed with a business purpose similar to ours. As a
result, they may be unable to successfully evaluate the profitability of a
target business or complete an acquisition within the time frames required.
Our officers and directors have never served as officers or directors of a
development stage public company with the business purpose of raising funds to
acquire an operating business. We may be unable to successfully evaluate the
profitability of a target business or complete an acquisition within the time
frame required and forced to liquidate and distribute the trust account, in
which case our public stockholders may receive less than $6.00 per share upon
distribution of the trust account because of the expense of our initial public
offering, taxes paid with respect to interest earned on the trust account
applied toward working capital and our general and administrative expenses,
resulting in a partial loss to investors' initial investment. Accordingly, you
may not be able to adequately evaluate their ability to successfully consummate
a business combination.
Because of our limited resources and the significant competition for business
combination opportunities, we may not be able to consummate an attractive
business combination.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds, operating businesses and other financial buyers competing for
acquisitions. Many of these entities are well established and have extensive
experience in identifying and effecting business combinations directly or
through affiliates. Many of these competitors possess greater technical, human
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and other resources than we do and our financial resources will be relatively
limited when contrasted with those of many of these competitors. Our ability to
compete in acquiring certain sizable target businesses will be limited by our
available financial resources. This inherent competitive limitation gives others
an advantage in pursuing the acquisition of certain target businesses. Further,
the obligation that we have to seek stockholder approval of a business
combination may delay the consummation of a transaction, and our obligation to
convert into cash the shares of common stock held by public stockholders in
certain instances may reduce the resources available for a business combination.
Additionally, our outstanding warrants, and the future dilution they potentially
represent, may not be viewed favorably by certain target businesses. Any of
these obligations may place us at a competitive disadvantage in successfully
negotiating a business combination.
If we do not consummate a business combination and dissolve, payments from the
trust account to our public stockholders may be delayed.
We currently believe that any plan of dissolution and distribution
subsequent to the expiration of the 18 and 24 month deadlines would proceed in
the following manner:
o our board of directors will convene and adopt a specific plan of
dissolution and distribution, which it will then vote to recommend to
our stockholders; at such time it will also cause to be prepared a
preliminary proxy statement setting out such plan of dissolution and
distribution and the board's recommendation of such plan;
o upon such deadline, we would file the preliminary proxy statement with
the Securities and Exchange Commission;
o if the Securities and Exchange Commission does not review the
preliminary proxy statement, then 10 days following the passing of
such deadline, we will mail the proxy statements to our stockholders,
and 30 days following the passing of such deadline we will convene a
meeting of our stockholders at which they will either approve or
reject our plan of dissolution and distribution; and
o if the Securities and Exchange Commission does review the preliminary
proxy statement, we currently estimate that we will receive their
comments 30 days following the passing of such deadline. We will mail
the proxy statements to our stockholders following the conclusion of
the comment and review process (the length of which we cannot predict
with any certainty), and we will convene a meeting of our stockholders
at which they will either approve or reject our plan of dissolution
and distribution.
In the event we seek stockholder approval for a plan of dissolution and
distribution and do not obtain such approval, we will nonetheless continue to
pursue stockholder approval for our dissolution. Our powers following the
expiration of the permitted time periods for consummating a business combination
will automatically thereafter be limited to acts and activities relating to
dissolving and winding up our affairs, including liquidation. The funds held in
our trust account may not be distributed except upon our dissolution and, unless
and until such approval is obtained from our stockholders, the funds held in our
trust account will not be released. Consequently, holders of a majority of our
outstanding stock must approve our dissolution in order to receive the funds
held in our trust account and the funds will not be available for any other
corporate purpose.
These procedures, or a vote to reject any plan of dissolution and
distribution by our stockholders, may result in substantial delays in the
liquidation of our trust account to our public stockholders as part of our plan
of dissolution and distribution.
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If additional financing is required, we may be unable to complete a business
combination or to fund the operations and growth of the target business, which
could compel us to restructure the transaction or abandon a particular business
combination.
We cannot currently ascertain the capital requirements for any particular
transaction. If the net proceeds of our initial public offering and the private
placement prove to be insufficient, either because of the size of the business
combination or the depletion of the available net proceeds in search of a target
business, or because we become obligated to convert into cash a significant
number of shares from dissenting stockholders, we will be required to seek
additional financing. We cannot assure you that such financing would be
available on acceptable terms, if at all. To the extent that additional
financing proves to be unavailable when needed to consummate a particular
business combination, we would be compelled to restructure the transaction or
abandon that particular business combination and seek an alternative target
business candidate. In addition, if we consummate a business combination, we may
require additional financing to fund the operations or growth of the target
business. The failure to secure additional financing could have a material
adverse effect on the continued development or growth of the target business.
None of our officers, directors or stockholders are required to provide any
financing to us in connection with or after a business combination.
The American Stock Exchange may delist our securities from quotation on its
exchange which could limit investors' ability to make transactions in our
securities and subject us to additional trading restrictions.
We currently list our securities on the American Stock Exchange, a national
securities exchange. We cannot assure you that our securities will continue to
be listed on the American Stock Exchange. Additionally, in connection with our
business combination, it is likely that the American Stock Exchange may require
us to file a new initial listing application and meet its initial listing
requirements as opposed to its more lenient continued listing requirements. We
cannot assure you that we will be able to meet those initial listing
requirements at that time. If the American Stock Exchange delists our securities
from trading on its exchange, we could face significant material adverse
consequences, including:
o reduced liquidity with respect to our securities;
o a determination that our common stock is a "penny stock" which will
require brokers trading in our common stock to adhere to more
stringent rules and possibly resulting in a reduced level of trading
activity in the secondary trading market for our common stock;
o limited amount of news and analyst coverage for us; and
o a decreased ability to issue additional securities or obtain
additional financing in the future.
We may enter into a business transaction with an affiliate of our officers,
directors or initial shareholders. Such a transaction may create a conflict of
interest.
While we intend to focus primarily on acquiring an operating business in
the energy services sector, the possibility exists that we may acquire a
business affiliated with one of our officers, directors or initial shareholders.
We would enter into a business combination with an affiliate only in conjunction
with or subsequent to an acquisition of an unaffiliated company to the extent
the unaffiliated members of our Board of Directors determine the affiliated
company added a complementary component to the unaffiliated company transaction
in the form of a product or service that the unaffiliated company needed but did
not have. In no instance would we acquire an affiliated company unless such
acquisition was part of a business combination with an unaffiliated company or
subsequent to a business combination with an unaffiliated company that satisfied
the net asset valuation threshold.
Should we seek to acquire an affiliated business, a potential or actual
conflict of interest would exist. For example, such a transaction may create an
appearance that a director or officer recommended a business combination solely
for personal profit and not because it was in our best interest. Our management
and board intend to act in accord with their fiduciary duties to us, and to our
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shareholders, including obtaining an independent fairness opinion in the event
we decide to pursue a business transaction with an affiliate of our directors,
officers or initial shareholders. None of us, our directors, and our officers,
contacts or sources are aware of any current opportunity to acquire an
affiliated company.
Our initial stockholders, including our officers and directors, control a
substantial interest in us and this may influence certain actions requiring a
stockholder vote.
Our initial stockholders (including all of our officers and directors)
collectively own approximately 23.0% of our issued and outstanding shares of
common stock. In connection with the vote required for our initial business
combination, all of our initial stockholders, including all of our officers and
directors, have agreed to vote the shares of common stock owned by them
immediately before our initial public offering, as well as any shares of common
stock acquired in connection with or following our initial public offering, in
accordance with the majority of the shares of common stock voted by the public
stockholders.
Failure to maintain a current prospectus relating to the common stock underlying
our warrants may allow our warrants to expire worthless.
No warrants will be exercisable unless at the time of exercise a prospectus
relating to common stock issuable upon exercise of the warrants 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 our warrants.
Under the terms of a warrant agreement between Continental Stock Transfer &
Trust Company, New York, New York, as warrant agent, and us, we have agreed only
to use our best efforts to maintain a current prospectus relating to common
stock issuable upon exercise of the warrants until the expiration of the
warrants. However, we cannot assure you that we will be able to maintain a
current prospectus. In the absence of an effective registration statement, we
have no obligation to settle the warrants in cash, and the warrants may expire
unexecuted or unredeemed. The warrants may be deprived of any value and the
market for the warrants may be limited if the prospectus relating to the common
stock issuable upon the 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 outstanding warrants may have an adverse effect on the market price of our
common stock and make it more difficult to effect a business combination using
our common stock as consideration.
In connection with our initial public offering and the private placement,
as part of the units, we issued warrants to purchase 20,276,923 shares of common
stock. We also issued an option to purchase up to 450,000 units to Ferris, Baker
Watts, Incorporated, which, if exercised, will result in the issuance of an
additional 900,000 warrants. To the extent we issue shares of common stock to
effect a business combination, the potential for the issuance of substantial
numbers of additional shares upon exercise of these warrants and the option
could make us a less attractive acquisition vehicle in the eyes of a target
business as such securities, when exercised, will increase the number of issued
and outstanding shares of our common stock and reduce the value of any shares
issued to complete the business combination. Accordingly, our warrants and the
option may make it more difficult to effectuate a business combination or
increase the cost of the target business. Additionally, the sale, or even the
possibility of sale, of the shares underlying the warrants and the option could
have an adverse effect on the market price for our securities or on our ability
to obtain future public financing. If and to the extent these warrants and the
option are exercised, you may experience dilution to your holdings.
If our initial stockholders exercise their registration rights, it may have an
adverse effect on the market price of our common stock and the existence of
these rights may make it more difficult to effect a business combination.
Our initial stockholders may request that we register the resale of the
2,150,000 shares of common stock they acquired prior to our initial public
offering and our five directors (as well as a sixth individual) may request us
to register for resale of the shares of common stock underlying the 3,076,923
warrants they purchased in the private placement at any time after we announce
that we have entered a letter of intent, an agreement in principle or a
definitive agreement in connection with a business combination. If our initial
stockholders exercise their registration rights with respect to all of their
initial shares of common stock as well as have the securities underlying their
warrants registered, then there will be an additional 5,226,923 shares of common
stock eligible for trading in the public market. The presence of this additional
number of shares of common stock eligible for trading in the public market may
20
have an adverse effect on the market price of our common stock. In addition, the
existence of these rights may make it more difficult to effectuate a business
combination or increase the cost of the target business, as the stockholders of
the target business may be discouraged from entering into a business combination
with us or will request a higher price for their securities as a result of these
registration rights and the potential future effect their exercise may have on
the trading market for our common stock.
If we are deemed to be an investment company, we may be required to institute
burdensome compliance requirements and our activities may be restricted, which
may make it difficult for us to complete a business combination.
If we are deemed to be an investment company under the Investment Company
Act of 1940, our activities may be restricted, including:
o restrictions on the nature of our investments; and
o restrictions on the issuance of securities,
which may make it difficult for us to complete a business combination. In
addition, we may have imposed upon us burdensome requirements, including:
o registration as an investment company;
o adoption of a specific form of corporate structure;
o reporting, record keeping, voting, proxy, compliance and disclosure
requirements; and
o complying with other rules and regulations.
We do not believe that our anticipated principal activities will subject us
to the Investment Company Act of 1940. To this end, the proceeds held in trust
may only be invested by the trust agent in "government securities" (within the
meaning of the Investment Company Act of 1940) with specific maturity dates. By
restricting the investment of the proceeds to these instruments, we intend to
meet the requirements for the exemption provided in Rule 3a-1 promulgated under
the Investment Company Act of 1940. If we were deemed to be subject to the
Investment Company Act of 1940, compliance with these additional regulatory
burdens would require additional expense.
If our common stock becomes subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,000 or less and our
common stock has a market price per share of less than $5.00, transactions in
our common stock may be subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers
who recommend such securities to persons other than institutional accredited
investors must:
o make a special written suitability determination for the purchaser;
o receive the purchaser's written agreement to a transaction prior to
sale;
o provide the purchase with risk disclosure documents that identify
certain risks associated with investing in "penny stocks" and that
describe the market for these "penny stocks," as well as a purchaser's
legal remedies; and
o obtain a signed and dated acknowledgement from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
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If our common stock becomes subject to these rules, broker-dealers may find
it difficult to effect customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.