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