Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
The Fiscal Year Ended December 31, 2006
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _______________ to __________________
Commission
file number: 001-32587
HEALTHCARE
ACQUISITION CORP.
(Exact
name of registrant as specified in its charter)
Delaware
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20-2726770
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(State
of incorporation)
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(I.R.S.
Employer Identification
No.)
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2116
Financial Center
666
Walnut Street
Des
Moines, Iowa 50309
(Address
of principal executive offices, including zip code)
(515)
244-5746
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $.0001 par value per share
Warrants
to purchase shares of Common Stock
(Title
Of
Class)
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No x.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
x No o.
The
aggregate market value of the outstanding common stock, other than shares held
by persons who may be deemed affiliates of the registrant, computed by reference
to the closing sales price for the Registrant's Common Stock on March 29, 2007,
as reported on the American Stock Exchange, was approximately $86,210,000.
As of
March 29, 2007, there were 11,650,000 shares of common stock, par value $.0001
per share, of the registrant outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
PART
I
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Item
1.
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Business
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5
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Item
1A.
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Risk
Factors
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14
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Item1B.
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Unresolved
Staff Comments
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33
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Item
2.
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Properties
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33
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Item
3.
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Legal
Proceedings
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34
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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34
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer
Purchases of Equity Securities
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35
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Item
6.
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Selected
Financial Data.
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39
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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40
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Item7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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40
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Item
8.
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Financial
Statements and Supplementary Data
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41
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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41
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Item
9A.
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Controls
and Procedures
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41
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Item
9B.
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Other
Information
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41
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PART
III
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Item
10.
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Directors
and Executive Officers of the Registrant
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42
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Item
11.
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Executive
Compensation
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47
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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52
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Item
13.
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Certain
Relationships and Related Transactions
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53
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Item
14.
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Principal
Accounting Fees and Services
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55
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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56
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Annual Report on Form 10-K that is not purely
historical is forward-looking statements. Our forward-looking statements
include, but are not limited to, statements regarding our or our management's
expectations, hopes, beliefs, intentions or strategies regarding the future.
They may also include statements about our pending acquisition of PharmAthene,
Inc. In addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. The words "anticipates," "believe,"
"continue," "could," "estimate," "expect," "intends," "may," "might," "plan,"
"possible," "potential," "predicts," "project," "should," "would" and similar
expressions may identify forward-looking statements, but the absence of these
words does not mean that a statement is not forward-looking. Forward-looking
statements in this Annual Report on Form 10-K may include, for example,
statements about:
got
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Business
conditions in the U.S. and abroad;
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Changing
interpretations of generally accepted accounting
principles;
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Outcomes
of government reviews;
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Inquiries
and investigations and related litigation;
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Continued
compliance with government regulations;
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Legislation
or regulatory environments, requirements or changes adversely
affecting
the business in which pharmathene is engaged;
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Management
of rapid growth;
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Intensity
of competition; and
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General
economic conditions.
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The
forward-looking statements contained in this Annual Report on Form 10-K is
based
on our current expectations and beliefs concerning future developments and
their
potential effects on us. There can be no assurance that future developments
affecting us will be those that we have anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond
our control) or other assumptions that may cause actual results or performance
to be materially different from those expressed or implied by these
forward-looking statements. These risks and uncertainties include, but are
not
limited to, those factors described under the heading "Risk Factors." Should
one
or more of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, actual results may vary in material respects from
those projected in these forward-looking statements. We undertake no obligation
to update or revise any forward-looking statements, whether as a result of
new
information, future events or otherwise, except as may be required under
applicable securities laws and/or if and when management knows or has a
reasonable basis on which to conclude that previously disclosed projections
are
no longer reasonably attainable.
PART
I
Item
1. Business.
Introduction
Healthcare
Acquisition Corp. (the "Company", “HAQ”, “we", or "us") is a blank check company
organized under the laws of the State of Delaware on April 25, 2005. We were
formed to acquire, through a merger, capital stock exchange, asset acquisition
or other similar business combination, one or more domestic or international
assets or an operating business in the healthcare industry. To date, our efforts
have been limited to organizational activities, our initial public offering
and
the search for a suitable business combination. As of the date of this filing,
we have not acquired any business operations and have no operations generating
revenue.
Our
executive offices are located at 2116 Financial Center, 666 Walnut Street,
Des
Moines, Iowa 50309 and our telephone number at that location is (515) 244-5746.
We do not currently have a website and consequently do not make available
materials we file with or furnish to the Securities and Exchange Commission.
We
will provide electronic or paper copies of such materials free of charge upon
request.
Recent
Developments
Initial
Public Offering
A
registration statement for our initial public offering was declared effective
on
July 28, 2005. On August 3, 2005, we sold 9,000,000 units in the initial public
offering. On August 16, 2005, we sold an additional 400,000 units pursuant
to
the overallotment option granted to the underwriters in our initial public
offering. Each of our units consisted of one share of our common stock, $.0001
par value per share, and one redeemable common stock purchase warrant. Each
warrant entitles the holder to purchase from us one share of common stock at
an
exercise price of $6.00 on the later of (i) July 28, 2006 or (ii) the
consummation of a business combination, and such warrants expire on the earlier
of (i) July 27, 2009 or (ii) their redemption. We received gross proceeds of
approximately $75,200,000 from our initial public offering (including exercise
of the overallotment option) of which $67,928,000 were placed in
trust.
On
July
29, 2005, our units commenced trading on the American Stock Exchange under
the
symbol "HAQ.U". On October 6, 2005, our units ceased trading and our common
stock and warrants commenced separately trading on the American Stock Exchange
under the symbols "HAQ" and "HAQ.WT", respectively. Our Common Stock and
warrants continue to trade.
Acquisitions
under 10b5-1 Plans of Our Executives
Pursuant
to an agreement with the representative of the underwriters in our initial
public offering, and subject to Rule 10b5-1 purchase plans, our officers
acquired an aggregate of 354,900 of our warrants in open-market transactions
during the fourth quarter of 2005. The purchases were as follows:
John
Pappajohn
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141,960
warrants
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Derace
L. Schaffer
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141,960
warrants
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Matthew
P. Kinley
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70,980
warrants
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No
purchases were made during fiscal year 2006.
Our
Activities since Completion of our Initial Public Offering
During
the period from the completion of our initial public offering through the
execution of the Merger Agreement with PharmAthene Inc described below, we
contacted those industry professionals who we believed could be of strategic
assistance in sourcing potential deals for us, including investment bankers,
business consultants, accountants and lawyers. Through the relationships of
our
board of directors, officers and directors and senior advisors, we also made
contact with certain large national and international concerns to determine
if
they had any interest in divesting any of their existing businesses or
operations. We also sought out owners and institutional owners of healthcare
industry businesses and investment bankers or business brokerage companies
that
are active in the healthcare industry.
Merger
Agreement with PharmAthene, Inc.
On
January 19, 2007, we and our wholly-owned subsidiary, PAI Acquisition Corp.,
also a Delaware corporation (“PAI”), entered into an Agreement and Plan of
Merger (the “Merger Agreement”) with PharmAthene, Inc., a Delaware corporation
(“PharmAthene”), pursuant to which PAI will merge into PharmAthene and
PharmAthene will become a wholly-owned subsidiary of HAQ. Following
consummation of the merger, it is anticipated that HAQ will change its name
to
PharmAthene, Inc. Because HAQ has no other operating business, following
the merger, PharmAthene will effectively become a public company.
PharmAthene is headquartered in Annapolis, Maryland, and has a subsidiary
located in Montreal, Canada.
We
have
filed a preliminary proxy statement with the SEC with respect to the transaction
with PharmAthene on February 9, 2007. As of the date of the filing of this
Form
10-K, the final proxy statement has not been completed. We have summarized
the
terms of the transaction below. Investors are urged to review the preliminary
proxy statement and final proxy statement, when completed, in their entirety.
A
more complete description of the transactions described above, including
exhibits related thereto such as the Merger Agreement, is included in a Form
8-K
filed on January 19, 2007, a Form 8-K/A filed on January 25, 2007, as well
as
the Preliminary Proxy Statement on Schedule 14A filed on February 9, 2007.
We
will be scheduling a stockholder meeting following completion of the proxy
statement.
The
proxy
statement seeks approval of the following matters:
· |
the
proposed merger with PharmAthene;
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the
amendment to our amended and restated certificate of incorporation
to: (i) change our name from “Healthcare Acquisition Corp.” to
“PharmAthene, Inc.”; (ii) remove certain provisions containing procedural
and approval requirements applicable to us prior to the consummation
of
the business combination that will no longer be operative after the
consummation of the merger; and (iii) grant to holders of
convertible promissory notes issued in the merger the right to
designate three members to our board of directors for so long as
at least
30% of the original face value of such notes remain
outstanding;
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the
adoption of a Long-Term Incentive Plan pursuant to which we will
reserve
3,500,000 shares of common stock for issuance pursuant;
and
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such
other business as may properly come before the meeting or any adjournment
or postponement thereof.
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Under
the
terms of HAQ’s amended and restated certificate of incorporation, because HAQ
has entered into the Merger Agreement, HAQ now has until August 3, 2007 to
complete its business combination, having satisfied the criteria for extension
of time to complete a transaction set forth in its amended and restated
certificate of incorporation.
The
Merger Agreement provides that by virtue of the merger, and subject to certain
adjustments as hereafter described, PharmAthene stockholders and noteholders
will receive:
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(i)
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an
aggregate of 12,500,000 shares of HAQ common stock;
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(ii)
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$12,500,000
in 8% convertible notes of HAQ in exchange for $11,800,000 of
currently-outstanding 8% convertible PharmAthene notes, pursuant
to a Note
Exchange Agreement; and
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(iii)
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up
to $10,000,000 in milestone payments (if certain conditions are met),
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in
exchange for all of the issued and outstanding capital stock of PharmAthene.
HAQ
is also assuming certain outstanding vested and unvested options and warrants,
which shall be exchanged into options and warrants of HAQ on economically
equivalent terms. The 12,500,000 shares of HAQ common stock issued as
merger consideration will not increase due to the vesting, issuance or exercise
of any options or warrants of PharmAthene or the assumption of the PharmAthene
options and warrants and the actual number of shares of HAQ common stock
ultimately issued may be less to the extent options and warrants are not
exercised.
A
requisite majority of PharmAthene’s securityholders have consented to the merger
and the merger agreement and have agreed among themselves to the allocation
of
the merger consideration. A form of the Note Exchange Agreement, to be executed
at closing, and a form of the 8% Convertible Note, to be issued at closing,
have
been agreed upon and were filed as exhibits to the proxy statement filing.
Further, the stockholders and note holders of PharmAthene have agreed to a
lockup of the shares issuable to them in the merger under which lockup 50%
of
the shares will be released after six months and the remaining shares will
be
released after 12 months. HAQ has agreed to register the shares issuable to
the
PharmaAthen stockholders and note holders following the closing.
Overview
of the Healthcare Industry
The
healthcare industry constitutes one of the largest segments of the United States
economy. According to the Centers for Medicare and Medicaid Services, or CMS,
healthcare expenditures have increased from $245.8 billion in 1980 to a
forecasted $2.12 trillion in 2006, representing a Compound Annual Growth Rate,
or CAGR, of 8.6%. Further, in 2003, approximately 64% of total healthcare
expenditures were spent on the following categories: hospital care (31%),
physician and clinical services (23%) and prescription drugs (10%). In 2003,
healthcare expenditures totaled $1.7 trillion (or $5,800 per American) and
accounted for 15.3% of Gross Domestic Product, or GDP, which outpaced overall
economic growth by 3%. In the future, national health expenditures are projected
to reach $3.6 trillion by 2014, representing a CAGR of 7.4% over the next ten
years. Health spending is projected to reach 18.7% of GDP by 2014.
Funding
for healthcare comes from public and private sources. Medicaid and Medicare
programs were created in the mid 1960's. Medicare focuses on elderly coverage
(over 65 years old) and the disabled of any age. Medicaid provides coverage
for
the poor and indigent population and is jointly funded by the Federal and State
governments. In 2002, according to CMS, roughly 34% of healthcare payments
came
from Medicaid and Medicare. Private health insurance supports roughly 35% of
total costs. As healthcare costs rise, the private sector is responding by
shifting more of the cost of healthcare to employees by paying a smaller percent
of healthcare premiums. The employee, usually in the form of a payroll
deduction, must pay the amount of the premium not funded by the employer.
However, according to the U.S. Census Bureau, approximately 40 million Americans
were uninsured in 2003.
Our
management believes that, as a result of continued growth, there will be
numerous acquisition targets within the healthcare sector. Our management
believes that this growth will be driven by the following factors:
EXPANDING
AND AGING POPULATION. According to U.S. Census Bureau estimates, in 2005 the
American population was approximately 296 million and growing. Simultaneously,
we are witnessing the "graying of America", whereby the elderly population
is
increasing more rapidly than the rest of the population and represents the
largest users of healthcare services. According to the U.S. Census Bureau,
approximately 12% of the U.S. population was over-65 in 2003 and was forecasted
to account for roughly 20% of the population by 2030. By 2010, the number of
people in the United States between the ages of 40 and 60 is expected to grow
from roughly 58 million to more than 64 million.
EVOLVING
MEDICAL TREATMENTS. Advances in technology have favorably impacted the
development of new medical devices and treatments/therapies. The products are
generally more effective and easier-to-use. Some of these breakthroughs have
reduced hospital stays, costs and recovery periods. The continued advancement
of
technological breakthroughs should continue to boost services administered
by
healthcare providers.
INCREASED
CONSUMER AWARENESS. In recent years, the publicity associated with new
technological advances and new medical therapies has increased the number of
patients visiting healthcare professionals to seek treatment for new and
innovative therapies. Simultaneously, consumers have become more vocal due
to
rising costs and reduced access to physicians. Lastly, the rise in cosmetic
procedures has emerged as one of the fastest growing healthcare segments. Since
many cosmetic procedures require out-of-pocket expenditures, this rise may
reflect a growing willingness by consumers to pay for certain procedures out
of
their discretionary funds. We believe that more active and aware consumers
will
continue to stimulate a wide variety of healthcare segments.
ACCESS
TO
CAPITAL. The venture capital community has traditionally embraced healthcare
companies. Capital investments have allowed entities to grow and expand via
consolidation or organic growth. Therefore, we believe there are many mature
companies that may potentially serve as platforms for future acquisitions and
growth. According to Dow Jones VentureSource, 2,142 healthcare companies raised
venture capital financing rounds from 2001-2004. In that time period, 66
venture-backed healthcare companies completed initial public offerings and
194
venture-backed healthcare companies were acquired via merger and
acquisition.
Our
Management Team as of December 31, 2006
Mr.
Pappajohn, our chairman and secretary, has been an active private equity
investor in healthcare companies for more than 30 years and has served as a
director of more than 40 public companies. Mr. Pappajohn has been a founder
in
several public healthcare companies such as Caremark Rx, Inc., Quantum Health
Resources and Radiologix, Inc. Mr. Pappajohn and Dr. Schaffer, our vice chairman
and chief executive officer, have worked together for more than fifteen years
on
a variety of healthcare companies and have co-founded Allion Healthcare, Inc,
Patient Infosystems, Inc. and Radiologix all of which are public companies.
In
addition, Mr. Pappajohn and Dr. Schaffer have worked together on many private
healthcare companies, such as Logisticare, Inc. and Source Medical
Inc.
Dr.
Schaffer serves as a director of Allion Healthcare and Patient Infosystems.
He
has served as chairman of several healthcare companies, including Radiologix
when it was private. He has been an active co-investor and co-founder of
companies with Mr. Pappajohn for more than fifteen years. Dr. Schaffer has
also
served as a director on many healthcare boards, including several health systems
and more than ten healthcare services and technology companies. Dr. Schaffer
is
also currently a Clinical Professor of Radiology at Weill Cornell Medical
College.
Mr.
Kinley, our president and treasurer, has been involved in the financing and
development of more than twenty companies with Mr. Pappajohn in the past twelve
years. Mr. Kinley has worked with Dr. Schaffer for more than twelve years on
healthcare services and technology companies. Mr. Kinley has also held various
positions at KPMG Peat Marwick, working on tax, audit and merger and acquisition
issues.
Acquisition
Activities and Strategy During Fiscal 2006
As
of
December 31, 2006, we were not engaged in any substantive commercial business.
During
fiscal 2006, target business candidates were brought to our attention from
various unaffiliated sources, including investment bankers, venture capital
funds, private equity funds, leveraged buyout funds, management buyout funds
and
other members of the financial community, who present solicited or unsolicited
proposals. Our officers and directors as well as their affiliates also brought
to our attention target business candidates. We did not, and will not, pay
any
of our existing officers, directors or our stockholders prior to our initial
public offering or any entity with which they are affiliated any finder's fee
or
other compensation for services rendered to us prior to or in connection with
the consummation of a business combination. We will not enter into any business
combinations with any affiliates of our initial stockholders, officers or
directors.
Selection
of a target business and structuring of a business
combination
Subject
to the requirement that our initial business combination must be with a target
business with a fair market value that is at least 80% of our net assets at
the
time of such acquisition, our management has virtually unrestricted flexibility
in identifying and selecting a prospective target business. In evaluating a
prospective target business, (including any such target business that may have
international operations or assets) our management considered, among other
factors, the following:
· |
financial
condition and results of operation;
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· |
experience
and skill of management and availability of additional
personnel;
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· |
barriers
to entry into other industries;
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· |
stage
of development of the products, processes or
services;
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· |
degree
of current or potential market acceptance of the products, processes
or
services;
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· |
proprietary
features and degree of intellectual property or other protection
of the
products, processes or services;
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· |
regulatory
environment of the industry; and
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· |
costs
associated with effecting the business
combination.
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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. While we may pay fees or compensation
to third parties for their efforts in introducing us to a potential target
business, in no event, however, will we pay any of our officers, directors
or
persons who were stockholders prior to our initial public offering or any entity
with which they are affiliated any finder's fee or other compensation for
services rendered to us prior to or in connection with the consummation of
a
business combination, other than the $7,500 payable monthly to Equity Dynamics,
Inc. (an affiliate of our Chairman, Mr. Pappajohn, and our President, Mr.
Kinley) for office space and certain general and administrative services (a
prior arrangement with an affiliate of our Chief Executive Officer, Derace
Schaffer, M.D., pursuant to which we paid $1,500 a month for office space and
certain general and administrative services, as a portion of the $7,500, was
terminated on December 31, 2005). In addition, none of our officers, directors,
special advisors or persons who were stockholders prior to our initial public
offering will receive any finder's fee, consulting fees or any similar fees
from
any person or entity in connection with any business combination involving
us
other than any compensation or fees that may be received for any services
provided following such business combination.
In
connection with our proposed acquisition of PharmAthene, our board of directors
considered a wide variety of factors in addition to those listed above. In
light
of the complexity of those factors, our board of directors, as a whole, did
not
consider it practicable to, nor did it attempt to, quantify or otherwise assign
relative weights to the specific factors it considered in reaching its decision.
Individual members of our board of directors may have given different weight
to
different factors.
Our
board
of directors considered the nature of PharmAthene’s business and assets, its
current capitalization and resulting operating losses, the extent of the
liabilities to be assumed and the factors below, in reaching its determination
that the Merger is in the best interests of our stockholders and to approve
the
merger and enter into the Merger Agreement.
In
considering the merger, our board of directors gave consideration to the
following positive factors:
· |
PharmAthene
has a strong presence and commitment to the development of products
for
use in the defense against agents of biological warfare. We expect
the
strong development and commercialization capabilities of PharmAthene
together with its research capabilities will create an expanded
biodefense
platform with the possibility for multiple procurement stage products
and
near term revenue opportunities;
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· |
PharmAthene
is a leading company in the biodefense industry. The biodefense
industry
is a significant market in the U.S. and abroad due to the threat
of
biological warfare;
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· |
the
biodefense industry has been identified by the U.S. government
as a
priority evidenced by the enactment of Project Bioshield with funding
targets of $5.6 billion over 10 years;
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· |
PharmAthene
has two leading products, Valortim and Protexia that may provide
significant revenues to the combined company;
and
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· |
PharmAthene
has an experienced management team including David P. Wright,
Pharmathene’s Chief Executive Officer that has participated in the
development and marketing of many successful drug
launches.
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· |
PharmAthene has
been awarded U.S. government
contracts;
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· |
PharmAthene’s
business strategy;
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· |
PharmAthene’s
financial results, including potential for revenue growth
and operating
margins;
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· |
PharmAthene’s
competitive position;
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· |
the
industry dynamics, including barriers to
entry;
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· |
the
regulatory environment for
PharmAthene;
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· |
acquisition
opportunities in the industry;
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· |
the
valuation of comparable companies;
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· |
the
experience of our management, in particular,
Mr. Pappajohn and Dr.
Schaffer, in building, consolidating and investing
in similar businesses
in the U.S. including relationships we could
introduce to PharmAthene to
potentially enhance its growth; and
|
· |
the
involvement of certain of the stockholders and
noteholders of PharmAthene,
who we believe represent strong long term investors
with experience in
venture transactions and growth
companies.
|
Fair
market value of target
business
The
initial target business that we acquire must have a fair market value equal
to
at least 80% of our net assets at the time of such acquisition. The fair market
value of such business is 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. We believe that the
proposed acquisition of PharmAthene satisfies this standard.
Our
board
of directors has determined that the total aggregate purchase price for
PharmAthene is at least equal to a fair market value of $110 million
(assuming our common stock is valued at $7.75 per share). This determination
was
based on an analysis of PharmAthene’s current and projected revenue and EBITDA,
as compared to other publicly-traded businesses of a similar nature and the
acquisition multiples for other similar transactions in the biodefense industry
that have recently been publicly announced or completed. The range of the fair
market value exceeds $56.6 million, which is 80% of our net asset value of
approximately $70.7 million as of December 31, 2006.
If
our
board was unable to independently determine that the target business had a
sufficient fair market value, we would have obtained an opinion from an
unaffiliated, independent investment banking firm which is a member of the
National Association of Securities Dealers, Inc. with respect to the
satisfaction of such criteria. Any opinion, if obtained, would merely have
stated that fair market value meets the 80% of net assets threshold. We are
not
required to obtain an opinion from an investment banking firm as to the fair
market value if our board of directors independently determines that the target
business has sufficient fair market value.
The
terms
of the proposed merger were determined based upon arms-length negotiations
between HAQ and PharmAthene, who had no prior dealings. Under the circumstances,
our board of directors believes that the total consideration to be paid
appropriately reflects the fair market value of PharmAthene. In light of the
financial background and experience of several members of our management and
board of directors, our board also believes it is qualified to determine whether
the merger meets this requirement. Since our board of directors has determined
that the fair market value of the assets being purchased is substantially
greater than 80% of our net assets, we have not sought or obtained an outside
fairness or valuation advisor’s opinion with regard to as to whether the 80%
test has been met.
Opportunity
for 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 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 certain
required financial information regarding the business.
In
connection with the vote required for any business combination, all persons
who
were stockholders prior to our initial public offering, 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 in
accordance with the majority of the shares of common stock voted by the public
stockholders. This voting arrangement does not apply to shares purchased
following our initial public offering in the open market by such persons, and
with respect to shares so acquired by such persons; such stockholders may vote
against a proposed business combination and exercise their conversion rights
in
the event that the business combination transaction is approved. 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 exercise their conversion rights. Voting against the business
combination alone will not result in conversion of a stockholder's shares into
a
pro rata share of the trust fund. Such stockholder must have also exercised
its
conversion rights described below.
We
have
filed a preliminary proxy statement with the SEC with respect to the transaction
with PharmAthene, and we plan to schedule a meeting of our stockholders to
approve the merger and certain related transactions, as indicated above.
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 fund,
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 sold in our initial public offering. Without taking into any account
interest earned on the trust fund, the initial per-share conversion price would
be $7.23 or $0.77 less than the per-unit offering price of $8.00. 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 fund 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 20% or more
of
the shares sold in our initial public offering, exercise their conversion
rights.
Because
the initial per share conversion price is $7.23 per share (plus any interest),
which is lower than the $8.00 per unit price paid in our initial public offering
and which may be lower than the market price of the common stock on the date
of
the conversion, there may be a disincentive on the part of public stockholders
to exercise their conversion rights. The term public stockholders means the
holders of common stock sold as part of the units in our initial public offering
or in the open market.
Liquidation
if no business combination
If
we do
not complete a business combination by August 3, 2007, we will be dissolved
and
will distribute to all of our public stockholders, in proportion to their
respective equity interests, an aggregate sum equal to the amount in the trust
fund, inclusive of any interest, plus any remaining net assets. Our 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. There will be no distribution from the trust fund with respect
to our warrants, which will expire worthless.
If
we
were to expend all of the net proceeds of our initial public offering, other
than the proceeds deposited in the trust fund, and without taking into account
interest, if any, earned on the trust fund, the initial per-share liquidation
price would be $7.23 or $0.77 less than the per-unit initial public offering
price of $8.00. The proceeds deposited in the trust fund could, however, become
subject to the claims of our creditors which could be prior to the claims of
our
public stockholders. We cannot assure you that the actual per-share liquidation
price will not be less than $7.23, plus interest, due to claims of creditors.
Our chairman and all of our executive officers have agreed pursuant to
agreements with us and Maxim Group LLC, the representative of the underwriters
in our initial public offering, that, if we distribute the proceeds held in
trust to our public stockholders, they will be personally liable under certain
circumstances (for example, if a vendor does not waive any rights or claims
to
the trust fund) to pay debts and obligations to vendors or other entities that
are owed money by us for services rendered or products sold to us in excess
of
the net proceeds of our initial public offering not held in the trust account,
to the extent necessary to ensure that such claims do not reduce the amount
in
the trust account. We cannot assure you, however, that they would be able to
satisfy those obligations.
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. The agreement with Pharmathene qualified us to extend the period
in
which we may consummate a business combination for this additional six-month
period. If we are unable to do so by August 3, 2007, we will then liquidate.
Upon notice from us, the trustee of the trust fund will commence liquidating
the
investments constituting the trust fund 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 promptly after the expiration
of
the 24-month period.
Our
public stockholders shall be entitled to receive funds from the trust fund
only
in the event of our liquidation or if the stockholders seek to convert their
respective shares into cash upon a business combination which the stockholder
voted against and which is actually completed by us. In no other circumstances
shall a stockholder have any right or interest of any kind to or in the trust
fund. Voting against the business combination alone will not result in
conversion of a stockholder's shares into a pro rata share of the trust fund.
Such stockholder must have also exercised its conversion rights described
above.
Available
Information
We
are
subject to the information requirements of the Exchange Act. Therefore, we
file
periodic reports, proxy statements and other information with the SEC. Such
reports, proxy statements and other information may be obtained by visiting
the
Public Reference Room of the SEC at 100 F Street, NW, Washington, DC 20549.
You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements
and
other information regarding issuers that file electronically.
Item
1A. Risk
Factors
An
investment in our securities involves a high degree of risk. You should consider
carefully all of the material risks described below, which refer to our business
and operations as of December 31, 2006, together with the other information
contained in this annual report on Form 10-K before making a decision to invest
in our securities. If any of the events described herein occur, our business,
financial conditions, and results of operations may be materially adversely
affected. In that event, the trading price of our securities could decline,
and
you could lose all or part of your investment.
RISKS
ASSOCIATED WITH OUR POTENTIAL BUSINESS
With
respect to the proposed acquisition of PharmAthene, we refer you to the
preliminary proxy statement filed with the SEC (and final proxy statement once
it has been approved) for a discussion of the material risks applicable to
the
business and operations of PharmAthene.
WE
ARE A
NEWLY FORMED COMPANY WITH NO OPERATING HISTORY AND, ACCORDINGLY, YOU WILL NOT
HAVE ANY BASIS ON WHICH TO EVALUATE OUR ABILITY TO ACHIEVE OUR BUSINESS
OBJECTIVE.
We
are a
recently formed company with no operating results to date. Since we do not
have
any operations or an operating history, you have no basis upon which to evaluate
our ability to achieve our business objective, which is to acquire one or more
domestic or international assets or an operating business in the healthcare
industry. Other than researching prospective business combinations and
conducting initial due diligence, neither we nor any of our agents or affiliates
has yet taken any measure, directly or indirectly, to enter into a business
combination. We will not generate any revenues or income (other than interest
income on the proceeds of our initial public offering) until, at the earliest,
after the consummation of a business combination.
IF
WE ARE
FORCED TO LIQUIDATE BEFORE A BUSINESS COMBINATION, OUR PUBLIC STOCKHOLDERS
WILL RECEIVE LESS THAN $8.00 PER INITIAL PUBLIC OFFERING PRICE UPON DISTRIBUTION
OF THE TRUST FUND AND OUR WARRANTS WILL EXPIRE WORTHLESS.
If
we are
unable to complete a business combination and are forced to liquidate our
assets, the per-share liquidation will be less than $8.00 because of the
expenses of our initial public offering, our general and administrative expenses
and the anticipated costs of seeking a business combination after our initial
public offering. Furthermore, there will be no distribution with respect to
our
outstanding warrants and, accordingly, the warrants will expire worthless if
we
liquidate before the completion of a business combination.
BECAUSE
THERE ARE NUMEROUS COMPANIES WITH A BUSINESS PLAN SIMILAR TO OURS SEEKING TO
EFFECTUATE A BUSINESS COMBINATION, IT MAY BE MORE DIFFICULT FOR US TO COMPLETE
A
BUSINESS COMBINATION.
Based
upon publicly available information as of the date of this filing, approximately
85 similarly structured blank check companies have completed initial public
offerings since August 2003 and numerous others have filed registration
statements. Of these companies, only 19 companies have consummated a business
combination, while 24 other companies have announced they have entered into
a
definitive agreement for a business combination, but have not consummated such
business combination. Accordingly, there are approximately 38 blank check
companies with approximately $3.1 billion in trust that are seeking to carry
out
a business plan similar to our business plan. While some of those companies
have
specific industries that they must complete a business combination in, a number
of them may consummate a business combination in any industry they choose.
We
may therefore be subject to competition from these and other companies seeking
to consummate a business plan similar to ours which will, as a result, increase
demand for privately-held companies to combine with companies structured
similarly to ours. Further, the fact that only 19 such companies have completed
a business combination and 24 such companies have entered into a definitive
agreement for a business combination may be an indication that there are only
a
limited number of attractive target businesses available to such entities or
that many privately-held target businesses may not be inclined to enter into
business combinations with publicly held blank check companies like us. We
cannot assure you that we will be able to successfully compete for an attractive
business combination. Additionally, because of this competition, we cannot
assure you that we will be able to effectuate a business combination within
the
required time periods. If we are unable to find a suitable target business
within such time periods, we will be forced to liquidate.
IF
THIRD
PARTIES BRING CLAIMS AGAINST US, THE PROCEEDS HELD IN TRUST COULD BE REDUCED
AND
THE PER-SHARE LIQUIDATION PRICE RECEIVED BY STOCKHOLDERS WILL BE LESS THAN
$7.23
PER SHARE.
Our
placing of funds in trust may not protect those funds from third party claims
against us. 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. Nor is there any 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. Accordingly,
the proceeds held in trust could be subject to claims which could take priority
over the claims of our public stockholders and the initial public offering
per-share liquidation price could be less than $7.23 per share held in the
trust
account, plus interest, due to claims of such creditors. If we are unable to
complete a business combination and are forced to liquidate, our chairman and
executive officers will be personally liable under certain circumstances (for
example, if a vendor does not waive any rights or claims to the trust account)
to ensure that the proceeds in the trust fund are not reduced by the claims
of
various vendors or other entities that are owed money by us for services
rendered or products sold to us, to the extent necessary to ensure that such
claims do not reduce the amount in the trust fund. However, we cannot assure
you
that our executive officers will be able to satisfy those
obligations.
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
LIKELY CAUSE A CHANGE IN CONTROL OF OUR OWNERSHIP.
Our
certificate of incorporation authorizes the issuance of up to 100,000,000 shares
of common stock, par value $.0001 per share, and 1,000,000 shares of preferred
stock, par value $.0001 per share. As of the date hereof, there are 78,500,000
authorized but un-issued 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 underwriters warrants) and all of the 1,000,000
shares of preferred stock available for issuance. We will issue a substantial
number of additional shares of our common stock to complete our proposed
business combination with PharmAthene. The issuance of additional shares of
our
common stock or any number of shares of our preferred stock:
· |
may
significantly reduce the equity interest of current investors in
our
securities;
|
· |
will
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
|
· |
may
adversely affect prevailing market prices for our common
stock.
|
Additionally,
the healthcare industry is capital intensive, traditionally using substantial
amounts of indebtedness to finance acquisitions, capital expenditures and
working capital needs. If we finance the purchase of assets or operations
through the issuance of debt securities, it could result in:
· |
default
and foreclosure on our assets if our operating revenues after a business
combination were insufficient to pay our debt
obligations;
|
· |
acceleration
of our obligations to repay the indebtedness even if we have made
all
principal and interest payments when due if the debt security contained
covenants that required the maintenance of certain financial ratios
or
reserves and any such covenant were breached without a waiver or
renegotiation of that covenant;
|
· |
our
immediate payment of all principal and accrued interest, if any,
if the
debt security was payable on demand; and our inability to obtain
additional financing, if necessary, if the debt security contained
covenants restricting our ability to obtain additional financing
while
such security was outstanding.
|
OUR
ABILITY TO EFFECT A BUSINESS COMBINATION AND TO EXECUTE ANY POTENTIAL BUSINESS
PLAN AFTERWARDS WILL BE TOTALLY DEPENDENT UPON THE EFFORTS OF OUR KEY PERSONNEL,
SOME OF WHOM MAY JOIN US FOLLOWING A BUSINESS COMBINATION AND WHOM WE WOULD
HAVE
ONLY A LIMITED ABILITY TO EVALUATE.
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
we expect most of our management and other key personnel, particularly our
chairman of the board, vice chairman and president to each remain associated
with us following a business combination, we may employ other personnel
following the business combination. 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. 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
the same as part of any such 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 via 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' 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. If management
negotiates to be retained post-business combination as a condition to any
potential business combination, such negotiations may result in a conflict
of
interest.
OUR
OFFICERS AND DIRECTORS MAY ALLOCATE THEIR TIME TO OTHER BUSINESSES THEREBY
CAUSING CONFLICTS OF INTEREST IN THEIR DETERMINATION AS TO HOW MUCH TIME TO
DEVOTE TO OUR AFFAIRS. THIS 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. We do not intend to have any full
time employees prior to the consummation of a business combination. Each of
our
officers are engaged in several other business endeavors and are not obligated
to contribute any specific number of hours per week to our affairs.
If
our
officers' 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.
OUR
OFFICERS AND DIRECTORS ARE CURRENTLY 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 WHICH ENTITY A
PARTICULAR BUSINESS OPPORTUNITY SHOULD BE PRESENTED TO.
Our
officers and directors may in the future become affiliated with other 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 with which they are or
may
be affiliated. Further, certain of our officers and directors are currently
involved in other businesses that are similar to the business activities that
we
intend to conduct following a business combination. Due to these existing
affiliations, they have prior fiduciary obligations to present potential
business opportunities to those entities prior to presenting them to us which
could cause additional conflicts of interest. Accordingly, they have conflicts
of interest in determining to which entity a particular business opportunity
should be presented.
ALL
OF
OUR DIRECTORS OWN SHARES OF OUR SECURITIES WHICH 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 directors own shares of common stock in our company which were issued prior
to our initial public offering, but have waived their right to receive
distributions with respect to those shares upon our liquidation if we are unable
to complete a business combination. Additionally, our chairman, chief executive
officer, president and one of our directors have purchased an aggregate of
366,900 warrants on the open market. Other than with respect to 12,000 warrants
purchased by one of our directors, these warrants will not be sold until the
consummation of a business combination. The shares and warrants owned by these
directors will be worthless if we do not consummate a business combination.
The
personal and financial interests of these directors may influence their
motivation in identifying and selecting a target business and completing a
business combination in a timely manner. Consequently, these 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.
PERSONS
WHO WERE STOCKHOLDERS PRIOR TO OUR INITIAL PUBLIC OFFERING WILL NOT RECEIVE
REIMBURSEMENT FOR ANY OUT-OF-POCKET EXPENSES INCURRED BY THEM TO THE EXTENT
THAT
SUCH EXPENSES EXCEED THE AMOUNT IN THE TRUST FUND UNLESS THE BUSINESS
COMBINATION IS CONSUMMATED AND THEREFORE THEY MAY HAVE A CONFLICT OF
INTEREST.
Persons
who were stockholders prior to our initial public offering will not receive
reimbursement for any out-of-pocket expenses incurred by them to the extent
that
such expenses exceed the amount in the trust fund unless the business
combination is consummated and there are sufficient funds available for
reimbursement after such consummation. The financial interest of such persons
could influence their motivation in selecting a target business and thus, there
may be a conflict of interest when determining whether a particular business
combination is in the stockholders' best interest.
IT
IS
PROBABLE THAT WE WILL ONLY BE ABLE TO COMPLETE ONE BUSINESS COMBINATION, WHICH
WILL CAUSE US TO BE SOLELY DEPENDENT ON A SINGLE BUSINESS.
The
gross
proceeds from our initial public offering, including the exercise of a portion
of the overallotment option were approximately $75,200,000, of which $67,928,000
was placed in trust for use in consummating a business combination. Our initial
business combination must be with a business with a fair market value of at
least 80% of our net assets at the time of such acquisition. Consequently,
it is
probable that we will have the ability to complete only a single business
combination, although this may entail the simultaneous acquisitions of several
assets or closely related operating businesses at the same time. Accordingly,
the prospects for our ability to effect our business strategy may
be:
· |
solely
dependent upon the performance of a single business;
or
|
· |
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. Furthermore, since our
business combination may entail the simultaneous acquisitions of several assets
or operating businesses at the same time and may be with different sellers,
we
will need to convince such sellers to agree that the purchase of their assets
or
businesses is contingent upon the simultaneous closings of the other
acquisitions.
WE
MAY BE
UNABLE TO OBTAIN ADDITIONAL FINANCING, IF REQUIRED, 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.
Although
we believe that the net proceeds of our initial public offering will be
sufficient to allow us to consummate a business combination, in as much as
we
have not yet identified any prospective target business, we cannot ascertain
the
capital requirements for any particular transaction. If the net proceeds of
our
initial public offering 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 is required to provide any
financing to us in connection with or after a business combination.
PERSONS
WHO WERE STOCKHOLDERS PRIOR TO OUR INITIAL PUBLIC OFFERING, INCLUDING OUR
OFFICERS AND DIRECTORS, CONTROL A SUBSTANTIAL INTEREST IN US AND THUS MAY
INFLUENCE CERTAIN ACTIONS REQUIRING STOCKHOLDER VOTE.
Upon
consummation of our offering, persons who were stockholders prior to our initial
public offering (including all of our officers and directors) collectively
owned
19.3% of our issued and outstanding shares of common stock, not including an
aggregate of 366,900 warrants purchased on the open market by our chairman,
chief executive officer, president and one of our directors, which are not
currently exercisable. Other than with respect to 12,000 warrants
purchased by one of our directors, these warrants cannot be sold until after
consummation of a business combination.
Our
board
of directors is divided into two classes, each of which will generally serve
for
a term of two years with only one class of directors being elected in each
year.
It is unlikely that there will be an annual meeting of stockholders to elect
new
directors prior to the consummation of a business combination, in which case
all
of the current directors will continue in office at least until the consummation
of the business combination. If there is an annual meeting, as a consequence
of
our "staggered" board of directors, initially only a minority of the board
of
directors will be considered for election and persons who were stockholders
prior to our initial public offering, because of their ownership position,
will
have considerable influence regarding the outcome. Accordingly, such
stockholders will continue to exert control at least until the consummation
of a
business combination. In addition, such stockholders and their affiliates and
relatives are not prohibited from purchasing our securities in the open market.
If they do, we cannot assure you that persons who were stockholders prior to
our
initial public offering will not have considerable influence upon the vote
in
connection with a business combination.
OUR
OUTSTANDING WARRANTS MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF COMMON
STOCK AND MAKE IT MORE DIFFICULT TO EFFECT A BUSINESS COMBINATION.
In
connection with our initial public offering, as part of the units (including
overallotments issued to the underwriters), we issued warrants to purchase
9,400,000 shares of common stock. 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 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 the shares issued to complete
the business combination. Accordingly, our warrants 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 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 are exercised, you may experience dilution to your
holdings.
IF
PERSONS WHO WERE STOCKHOLDERS PRIOR TO OUR INITIAL PUBLIC OFFERING EXERCISE
THEIR REGISTRATION RIGHTS, IT MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE
OUR
COMMON STOCK AND THE EXISTENCE OF THESE RIGHTS MAY MAKE IT MORE DIFFICULT TO
EFFECT A BUSINESS COMBINATION.
Persons
who were stockholders prior to our initial public offering are entitled to
require us to register the resale of their shares of common stock at any time
after the date on which their shares are released from escrow, which, except
in
limited circumstances, will not be before August 3, 2009. If such stockholders
exercise their registration rights with respect to all of their shares of common
stock, then there will be an additional 2,250,000 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
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.
THE
AMERICAN STOCK EXCHANGE MAY DELIST OUR SECURITIES FROM TRADING ON ITS EXCHANGE
WHICH COULD LIMIT INVESTORS' ABILITY TO MAKE TRANSACTIONS IN OUR SECURITIES
AND
SUBJECT US TO ADDITIONAL TRADING RESTRICTIONS.
Our
securities are listed 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 in the future prior to a business combination.
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 de-lists our securities from trading on its exchange
and
we are not able to list our securities on another exchange or to have them
quoted on NASDAQ, our securities could be quoted on the OTC Bulletin Board,
or
"pink sheets". As a result, we could face significant material adverse
consequences including:
· |
a
limited availability of market quotations for our
securities;
|
· |
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 securities;
|
· |
a
limited amount of news and analyst coverage for our company;
and
|
· |
a
decreased ability to issue additional securities or obtain additional
financing in the future.
|
The
National Securities Markets Improvement Act of 1996, which is a federal statute,
prevents or preempts the states from regulating the sale of certain securities,
which are referred to as "covered securities". Since we will be listed on the
American Stock Exchange, our securities will be covered securities. Although
the
states are preempted from regulating the sale of our securities, the federal
statute does allow the states to investigate companies if there is a suspicion
of fraud, and if there is a finding of fraudulent activity, then the states
can
regulate or bar the sale of covered securities in a particular case. While
we
are not aware of a state having used these powers to prohibit or restrict the
sale of securities issued by blank check companies generally, certain state
securities regulators view blank check companies unfavorably and might use
these
powers, or threaten to use these powers, to hinder the sale of securities of
blank check companies in their states.
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 our securities are no longer listed on the American Stock Exchange or
another exchange or quoted on NASDAQ and 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. Under these rules,
broker-dealers who recommend such securities to persons other than institutional
accredited investors must:
· |
make
a special written suitability determination for the
purchaser;
|
· |
receive
the purchaser's written agreement to a transaction prior to
sale;
|
· |
provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in "penny stocks" and which describe the
market
for these "penny stocks" as well as a purchaser's legal remedies;
and
|
· |
obtain
a signed and dated acknowledgment 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.
|
If
our
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate 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.
IF
WE ARE
DEEMED TO BE AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940,
OUR
ACTIVITIES MAY BE RESTRICTED WHICH, AMONG OTHER PROBLEMS, MAY MAKE IT DIFFICULT
FOR US TO COMPLETE A BUSINESS COMBINATION. SUCH RESTRICTIONS
INCLUDE:
· |
restrictions
on the nature of our investments;
and
|
· |
restrictions
on the issuance of securities.
|
In
addition, we may have imposed upon us burdensome requirements,
including:
· |
registration
as an investment company;
|
· |
adoption
of a specific form of corporate structure;
and
|
· |
reporting,
record keeping, voting, proxy and disclosure requirements and 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” with specific maturity
dates, or in money market funds meeting specific requirements under the
Investment Company Act of 1940. 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 act, compliance with these additional regulatory
burdens would require additional expense that we have not allotted
for.
OUR
DIRECTORS MAY NOT BE CONSIDERED “INDEPENDENT” UNDER THE POLICIES OF THE NORTH
AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC.
All
of
our officers or directors own shares of our common stock, and no salary or
other
compensation will be paid to our officers or directors for services rendered
by
them on our behalf prior to or in connection with a business combination. We
believe that two members of our board of directors are "independent" as that
term is commonly used. However, under the policies of the North American
Securities Administrators Association, Inc., because our directors may receive
reimbursement for out-of-pocket expenses incurred by them in connection with
activities on our behalf such as identifying potential target businesses and
performing due diligence on suitable business combinations, state securities
administrators could take the position that such individuals are not
"independent." If this were the case, they would take the position that we
would
not have the benefit of independent directors examining the propriety of
expenses incurred on our behalf and subject to reimbursement. Additionally,
there is no limit on the amount of out-of-pocket expenses that could be incurred
and there will be no review of the reasonableness of the expenses by anyone
other than our board of directors, which would include persons who may seek
reimbursement, or a court of competent jurisdiction if such reimbursement is
challenged. Although we believe that all actions taken by our directors on
our
behalf will be in our best interests, whether or not two of them are deemed
to
be “independent,” we cannot assure you that this will actually be the case. If
actions are taken, or expenses are incurred that are actually not in our best
interests, it could have a material adverse effect on our business and
operations and the price of our stock held by the public
stockholders.
WE
MAY
ACQUIRE A DOMESTIC BUSINESS WITH OPERATIONS OUTSIDE OF THE UNITED STATES, AND
MAY FACE CERTAIN ECONOMIC AND REGULATORY CHALLENGES THAT WE MAY BE UNABLE TO
MEET.
While
we
expect to acquire a business or assets in the United States, we may acquire
a
business or assets with operations outside the United States. There are certain
risks inherent in doing business in international markets, particularly in
the
healthcare industry, which is heavily regulated and controlled in many
jurisdictions outside the United States. These risks include:
· |
less
developed healthcare infrastructures and generally higher
costs;
|
· |
difficulty
in obtaining the necessary healthcare regulatory approvals for any
potential expansion, and the possibility that any approvals that
may be
obtained would impose restrictions on the operation of the our
business;
|
· |
the
inability to manage and coordinate the healthcare regulatory requirements
of multiple jurisdictions that are constantly evolving and subject
to
unexpected change;
|
· |
difficulties
in staffing and managing foreign
operations;
|
· |
fluctuations
in exchange rates;
|
· |
reduced
or no protection for intellectual property rights;
and
|
· |
potentially
adverse tax consequences.
|
Our
inability to manage these risks effectively could adversely affect our proposed
business and limit our ability to expand our operations, which would have a
material adverse effect on the our business, financial condition and results
of
operations.
OUR
STOCKHOLDERS MAY BE HELD LIABLE FOR CLAIMS BY THIRD PARTIES AGAINST US TO THE
EXTENT OF DISTRIBUTIONS RECEIVED BY THEM.
We
will
dissolve and liquidate if we do not complete a business combination by August
3,
2007. Under 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 set forth in Section 280 of the Delaware General
Corporation Law 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. Although we will seek
stockholder approval to liquidate the trust account to our public stockholders
as part of our plan of dissolution and liquidation, we do not intend to comply
with those procedures. Because we will not be complying with Section 280, we
will seek stockholder approval to comply with Section 281(b) of the Delaware
General Corporation Law, requiring us to adopt a plan of dissolution that will
provide for our payment, based on facts known to us at such time, of (i) all
existing claims, (ii) all pending claims and (iii) all claims that may be
potentially brought against us within the subsequent 10 years. However, because
we are a blank check company, rather than an operating company, and our
operations will be limited to searching for prospective target businesses to
acquire, the only likely claims to arise would be from our vendors (such as
accountants, lawyers, investment bankers, etc.) or potential target businesses.
We intend to have all vendors and prospective target businesses execute
agreements with us waiving any right, title, interest or claim of any kind
in or
to any monies held in the trust account. As a result, the claims that could
be
made against us are significantly limited and the likelihood that any claim
that
would result in any liability extending to the trust is minimal. However,
because we will not be complying with Section 280, our public stockholders
could
potentially be liable for any claims to the extent of distributions received
by
them in dissolution and any such liability of our stockholders will likely
extend beyond the third anniversary of such dissolution. Accordingly, we cannot
assure you that third parties will not seek to recover from our public
stockholders amounts owed to them by us.
WE
WILL
DISSOLVE AND LIQUIDATE IF WE DO NOT CONSUMMATE A BUSINESS
COMBINATION.
Pursuant
to our amended and restated certificate of incorporation, if we do not complete
a business combination by August 3, 2007, we will dissolve, liquidate and wind
up. We view this obligation to dissolve and liquidate as an obligation to our
public stockholders and neither we nor our board of directors will take any
action to amend or waive any provision of our certificate of incorporation
to
allow us to survive for a longer period of time if it does not appear we will
be
able to consummate a business combination within the foregoing time periods.
Upon dissolution, we will distribute to all of our public stockholders, in
proportion to their respective equity interest, an aggregate sum equal to the
amount in the trust account (net of taxes payable). Our initial stockholders
have waived their rights to participate in any liquidation distribution with
respect to their initial shares and have agreed to vote in favor of any plan
of
dissolution and liquidation which we will present to our stockholders for vote.
There will be no distribution from the trust account with respect to our
warrants which will expire worthless. We will pay the costs of our dissolution
and liquidation of the trust account from our remaining assets outside of the
trust fund, and we estimate such costs to be between $50,000 and $75,000. Upon
notice from us, the trustee of the trust account will liquidate the investments
constituting the trust account and will turn over the proceeds to our transfer
agent for distribution to our public stockholders as part of our
stockholder-approved plan of dissolution and liquidation. Concurrently, we
shall
pay, or reserve for payment, from funds held outside of the trust account if
available, our liabilities and obligations, although we cannot give you
assurances that there will be sufficient funds for such purpose. The amounts
held in the trust account may be subject to claims by third parties, such as
vendors, prospective target business or other entities, if we do not obtain
waivers in advance from such third parties prior to such parties providing
us
with services or entering into arrangements with them.
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 liquidation subsequent to
the
expiration dates described above would proceed in approximately the following
manner:
· |
our
board of directors will, consistent with its obligations described
in our
amended and restated certificate of incorporation to dissolve, prior
to
the passing of the such deadline, convene and adopt a specific plan
of
dissolution and liquidation 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 liquidation
as
well as the board’s recommendation of such
plan;
|
· |
upon
such deadline, we would file our preliminary proxy statement with
the
Securities and Exchange Commission;
|
· |
if
the Securities and Exchange Commission does not review the preliminary
proxy statement, then, approximately 10 days following the passing
of such
deadline, we will mail the proxy statements to our stockholders,
and
approximately 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 liquidation;
and
|
· |
if
the Securities and Exchange Commission does review the preliminary
proxy
statement, we currently estimate that we will receive their comments
approximately 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 which may be substantial)
and we
will convene a meeting of our stockholders at which they will either
approve or reject our plan of dissolution and
liquidation.
|
In
the
event we seek stockholder approval for a plan of dissolution and liquidation
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 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 liquidation 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
liquidation.
RISKS
ASSOCIATED WITH THE HEALTHCARE INDUSTRY
With
respect to the proposed acquisition of PharmAthene, we refer you to the
preliminary proxy statement filed with the SEC (and final proxy statement once
it has been approved) for a discussion of the material risks applicable to
the
industry in which PharmAthene operates.
Even
if
we acquire domestic or international assets or operations, of which no
assurances can be given, our proposed business will be subject to numerous
risks, including the following:
CHANGES
IN THE HEALTHCARE INDUSTRY ARE SUBJECT TO VARIOUS INFLUENCES, EACH OF WHICH
MAY
AFFECT OUR PROSPECTIVE BUSINESS.
The
healthcare industry is subject to changing political, economic, and regulatory
influences. These factors affect the purchasing practices and operations of
healthcare organizations. Any changes in current healthcare financing and
reimbursement systems could cause us to make unplanned enhancements of our
prospective products or services, or result in delays or cancellations of
orders, or in the revocation of endorsement of our prospective products or
services by clients. Federal and state legislatures have periodically considered
programs to reform or amend the U.S. healthcare system at both the federal
and
state level. Such programs may increase governmental regulation or involvement
in healthcare, lower reimbursement rates, or otherwise change the environment
in
which healthcare industry participants operate. Healthcare industry participants
may respond by reducing their investments or postponing investment decisions,
including investments in our prospective products or services.
Many
healthcare industry participants are consolidating to create integrated
healthcare systems with greater market power. As the healthcare industry
consolidates, competition to provide products and services to industry
participants will become even more intense, as will the importance of
establishing a relationship with each industry participant. These industry
participants may try to use their market power to negotiate price reductions
for
our prospective products and services. If we were forced to reduce our prices,
our operating results could suffer if we could not achieve corresponding
reductions in our expenses.
ANY
BUSINESS WE ACQUIRE WILL BE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. ANY
CHANGES TO THE LAWS AND REGULATIONS GOVERNING OUR PROSPECTIVE BUSINESS, OR
THE
INTERPRETATION AND ENFORCEMENT OF THOSE LAWS OR REGULATIONS, COULD CAUSE US
TO
MODIFY OUR OPERATIONS AND COULD NEGATIVELY IMPACT OUR OPERATING
RESULTS.
We
believe that our prospective business will be extensively regulated by the
federal government and any states in which we decide to operate. The laws and
regulations governing our operations, if any, are generally intended to benefit
and protect persons other than our stockholders. The government agencies
administering these laws and regulations have broad latitude to enforce them.
These laws and regulations along with the terms of any government contracts
we
may enter into would regulate how we do business, what products and services
we
could offer, and how we would interact with the public. These laws and
regulations, and their interpretations, are subject to frequent change. Changes
in existing laws or regulations, or their interpretations, or the enactment
of
new laws or regulations could reduce our revenue, if any, by:
· |
imposing
additional capital requirements;
|
· |
increasing
our liability;
|
· |
increasing
our administrative and other costs;
|
· |
increasing
or decreasing mandated benefits;
|
· |
forcing
us to restructure our relationships with providers;
or
|
· |
requiring
us to implement additional or different programs and
systems.
|
For
example, Congress enacted the Health Insurance Portability and Accountability
Act of 1996 which mandates that health plans enhance privacy protections for
member protected health information. This requires health plans to add, at
significant cost, new administrative, information and security systems to
prevent inappropriate release of protected member health information. Compliance
with this law is uncertain and has affected the revenue streams of entities
subject to it. Similarly, individual states periodically consider adding
operational requirements applicable to health plans, often without identifying
funding for these requirements. California recently required all health plans
to
make available to members independent medical review of their claims. Any
analogous requirements applied to our prospective products or services would
be
costly to implement and could affect our prospective revenues.
We
believe that our business, if any, will be subject to various routine and
non-routine governmental reviews, audits and investigation. Violation of the
laws governing our prospective operations, or changes in interpretations of
those laws, could result in the imposition of civil or criminal penalties,
the
cancellation of any contracts to provide products or services, the suspension
or
revocation of any licenses, and exclusion from participation in government
sponsored health programs, such as Medicaid and the State Children's Health
Insurance Program. If we become subject to material fines or if other sanctions
or other corrective actions were imposed upon us, we might suffer a substantial
reduction in revenue, and might also lose one or more of our government
contracts and as a result lose significant numbers of members and amounts of
revenue.
The
current administration's issuance of new regulations, its review of the existing
Health Insurance Portability and Accountability Act of 1996 rules and other
newly published regulations, the states' ability to promulgate stricter rules,
and uncertainty regarding many aspects of the regulations may make compliance
with any new regulatory landscape difficult. In order to comply with any new
regulatory requirements, any prospective business we acquire may be required
to
employ additional or different programs and systems, the costs of which are
unknown to us at this time. Further, compliance with any such new regulations
may lead to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we would be able to recover our costs of
complying with any new regulations. Any new regulations and the related
compliance costs could have a material adverse effect on our
business.
IF
WE ARE
UNABLE TO ATTRACT QUALIFIED HEALTHCARE PROFESSIONALS AT REASONABLE COSTS, IT
COULD LIMIT OUR ABILITY TO GROW, INCREASE OUR OPERATING COSTS AND NEGATIVELY
IMPACT OUR BUSINESS.
We
may
rely significantly on our ability to attract and retain qualified healthcare
professionals who possess the skills, experience and licenses necessary to
meet
the certification requirements and the requirements of the hospitals, nursing
homes and other healthcare facilities with which we may work, as well as the
requirements of applicable state and federal governing bodies. We will compete
for qualified healthcare professionals with hospitals, nursing homes and other
healthcare organizations. Currently, for example, there is a shortage of
qualified nurses in most areas of the United States. Therefore, competition
for
nursing personnel is increasing, and nurses’ salaries and benefits have risen.
This may also occur with respect to other healthcare professionals on whom
our
business may become dependent.
Our
ability to attract and retain such qualified healthcare professionals will
depend on several factors, including our ability to provide attractive
assignments and competitive benefits and wages. We cannot assure you that we
will be successful in any of these areas. Because we may operate in a fixed
reimbursement environment, increases in the wages and benefits that we must
provide to attract and retain qualified healthcare professionals or increases
in
our reliance on contract or temporary healthcare professionals could negatively
affect our revenue. We may be unable to continue to increase the number of
qualified healthcare professionals that we recruit, decreasing the potential
for
growth of our business. Moreover, if we are unable to attract and retain
qualified healthcare professionals, we may have to limit the number of clients
for whom we can provide any of our prospective products or
services.
WE
MAY
FACE SUBSTANTIAL RISKS OF LITIGATION AS A RESULT OF OPERATING IN THE HEALTHCARE
INDUSTRY. IF WE BECOME SUBJECT TO MALPRACTICE AND RELATED LEGAL CLAIMS, WE
COULD
BE REQUIRED TO PAY SIGNIFICANT DAMAGES, WHICH MAY NOT BE COVERED BY
INSURANCE.
Litigation
is a risk that each business contends with, and businesses operating in the
healthcare industry do so more than most. In recent years, medical product
companies have issued recalls of medical products, and physicians, hospitals
and
other health care providers have become subject to an increasing number of
legal
actions alleging malpractice, product liability or related legal theories.
Many
of these actions involve large monetary claims and significant defense costs.
We
intend to maintain liability insurance in amounts that we believe will be
appropriate for our prospective operations. We also intend to maintain business
interruption insurance and property damage insurance, as well as an additional
umbrella liability insurance policy. However, this insurance coverage may not
cover all claims against us. Insurance coverage may not continue to be available
at a cost allowing us to maintain adequate levels of insurance. If one or more
successful claims against us were not covered by or exceeded the coverage of
our
insurance, our financial condition could be adversely affected.
WE
MAY BE
DEPENDENT ON PAYMENTS FROM MEDICARE AND MEDICAID. CHANGES IN THE RATES OR
METHODS GOVERNING THESE PAYMENTS FOR OUR PROSPECTIVE PRODUCTS OR SERVICES,
OR
DELAYS IN SUCH PAYMENTS, COULD ADVERSELY AFFECT OUR PROSPECTIVE
REVENUE.
A
large
portion of our revenue may consist of payments from Medicare and Medicaid
programs. Because these are generally fixed payments, we would be at risk for
the cost of any products or services provided to our clients. We cannot assure
you that Medicare and Medicaid will continue to pay in the same manner or in
the
same amount that they currently do. Any reductions in amounts paid by government
programs for our prospective products or services or changes in methods or
regulations governing payments would adversely affect our potential revenue.
Additionally, delays in any such payments, whether as a result of disputes
or
for any other reason, would also adversely affect our potential
revenue.
IF
OUR
COSTS WERE TO INCREASE MORE RAPIDLY THAN FIXED PAYMENT ADJUSTMENTS WE RECEIVE
FROM MEDICARE, MEDICAID OR OTHER THIRD-PARTY PAYORS FOR ANY OF OUR POTENTIAL
PRODUCTS OR SERVICES, OUR REVENUE COULD BE NEGATIVELY IMPACTED.
We
may
receive fixed payments for our prospective products or services based on the
level of service or care that we provide. Accordingly, our revenue may be
largely dependent on our ability to manage costs of providing any products
or
services and to maintain a client base. We may become susceptible to situations
where our clients may require more extensive and therefore more expensive
products or services than we may be able to profitably deliver. Although
Medicare, Medicaid and certain third-party payers currently provide for an
annual adjustment of various payment rates based on the increase or decrease
of
the medical care expenditure category of the Consumer Price Index, these
increases have historically been less than actual inflation. If these annual
adjustments were eliminated or reduced, or if our costs of providing our
products or services increased more than the annual adjustment, any revenue
stream we may generate would be negatively impacted.
WE
MAY
DEPEND ON PAYMENTS FROM THIRD-PARTY PAYORS, INCLUDING MANAGED CARE
ORGANIZATIONS. IF THESE PAYMENTS ARE REDUCED, ELIMINATED OR DELAYED, OUR
PROSPECTIVE REVENUES COULD BE ADVERSELY AFFECTED.
We
may be
dependent upon private sources of payment for any of our potential products
or
services. Any amounts that we may receive in payment for such products and
services may be adversely affected by market and cost factors as well as other
factors over which we have no control, including regulations and cost
containment and utilization decisions and reduced reimbursement schedules of
third-party payers. Any reductions in such payments, to the extent that we
could
not recoup them elsewhere, would have a material adverse effect on our
prospective business and results of operations. Additionally, delays in any
such
payments, whether as a result of disputes or for any other reason, would have
a
material adverse effect on our prospective business and results of
operations.
MEDICAL
REVIEWS AND AUDITS BY GOVERNMENTAL AND PRIVATE PAYORS COULD RESULT IN MATERIAL
PAYMENT RECOUPMENTS AND PAYMENT DENIALS, WHICH COULD NEGATIVELY IMPACT OUR
BUSINESS.
Medicare
fiscal intermediaries and other payers may periodically conduct pre-payment
or
post-payment medical reviews or other audits of our prospective products or
services. In order to conduct these reviews, the payer would request
documentation from us and then review that documentation to determine compliance
with applicable rules and regulations, including the documentation of any
products or services that we might provide. We cannot predict whether medical
reviews or similar audits by federal or state agencies or commercial payers
of
such products or services will result in material recipients or denials, which
could have a material adverse effect on our financial condition and results
of
operations.
IF
THE
FDA OR OTHER STATE OR FOREIGN AGENCIES IMPOSE REGULATIONS THAT AFFECT OUR
POTENTIAL PRODUCTS, OUR COSTS WILL INCREASE.
The
development, testing, production and marketing of any of our potential products
that we may manufacture, market or sell following a business combination may
be
subject to regulation by the FDA as "devices" under the 1976 Medical Device
Amendments to the Federal Food, Drug and Cosmetic Act. Before a new medical
device, or a new use of, or claim for, an existing product can be marketed
in
the United States, it must first receive either 510(k) clearance or pre-market
approval from the FDA, unless an exemption applies. Either process can be
expensive and lengthy. The FDA's 510(k) clearance process usually takes from
three to twelve months, but it can take longer and is unpredictable. The process
of obtaining pre-market approval is much more costly and uncertain than the
510(k) clearance process and it generally takes from one to three years, or
even
longer, from the time the application is filed with the FDA.
In
the
United States, medical devices must be:
· |
manufactured
in registered and quality approved establishments by the FDA;
and
|
· |
produced
in accordance with the FDA Quality System Regulation ("QSR") for
medical
devices.
|
As
a
result, we may be required to comply with QSR requirements and if we fail to
comply with these requirements, we may need to find another company to
manufacture any such devices which could delay the shipment of our potential
product to our customers.
The
FDA
requires producers of medical devices to obtain FDA licensing prior to
commercialization in the United States. Testing, preparation of necessary
applications and the processing of those applications by the FDA is expensive
and time consuming. We do not know if the FDA would act favorably or quickly
in
making such reviews, and significant difficulties or costs may potentially
be
encountered by us in any efforts to obtain FDA licenses. The FDA may also place
conditions on licenses that could restrict commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
Delays imposed by the FDA licensing process may materially reduce the period
during which we have the exclusive right to commercialize any potential patented
products. We may make modifications to any potential devices and may make
additional modifications in the future that we may believe do not or will not
require additional clearances or approvals. If the FDA should disagree, and
require new clearances or approvals for the potential modifications, we may
be
required to recall and to stop marketing the potential modified devices. We
also
may be subject to Medical Device Reporting regulations, which would require
us
to report to the FDA if our products were to cause or contribute to a death
or
serious injury, or malfunction in a way that would likely cause or contribute
to
a death or serious injury. We cannot assure you that such problems will not
occur in the future.
Additionally,
our potential products may be subject to regulation by similar agencies in
other
states and foreign countries. Compliance with such laws or regulations,
including any new laws or regulations in connection any potential products
developed by us, might impose additional costs on us or marketing impediments
on
such products which could adversely affect our revenues and increase our
expenses. The FDA and state authorities have broad enforcement powers. Our
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA or state agencies, which may include any of the
following sanctions:
· |
warning
letters, fines, injunctions, consent decrees and civil
penalties;
|
· |
repair,
replacement, refunds, recall or seizure of our
products;
|
· |
operating
restrictions or partial suspension or total shutdown of
production;
|
· |
refusal
of requests for 510(k) clearance or pre-market approval of new products,
new intended uses, or modifications to existing
products;
|
· |
withdrawal
of 510(k) clearance or pre-market approvals previously granted;
and
|
If
any of
these events were to occur, it could harm our business.
THE
FDA
CAN IMPOSE CIVIL AND CRIMINAL ENFORCEMENT ACTIONS AND OTHER PENALTIES ON US
IF
WE WERE TO FAIL TO COMPLY WITH STRINGENT FDA REGULATIONS.
Medical
device manufacturing facilities must maintain records, which are available
for
FDA inspectors documenting that the appropriate manufacturing procedures were
followed. Should we acquire such a facility as a result of a business
combination, the FDA would have authority to conduct inspections of such a
facility. Labeling and promotional activities are also subject to scrutiny
by
the FDA and, in certain instances, by the Federal Trade Commission. Any failure
by us to take satisfactory corrective action in response to an adverse
inspection or to comply with applicable FDA regulations could result in
enforcement action against us, including a public warning letter, a shutdown
of
manufacturing operations, a recall of our products, civil or criminal penalties
or other sanctions. From time to time, the FDA may modify such requirements,
imposing additional or different requirements which could require us to alter
our business methods which could potentially result in increased
expenses.
Government
Regulation
Although
as of December 31, 2006, we had not entered into any agreement to acquire any
operating business, we believe that any prospective business we may acquire
will
be extensively regulated by the federal government and any states in which
we
decide to operate. With respect to the proposed acquisition of PharmAthene,
we
refer you to the preliminary proxy statement filed with the SEC (and final
proxy
statement once it has been approved) for a discussion of the potential laws
and
regulations which will govern our operations, if any, once the PharmAthene
transaction is completed. The government agencies administering these laws
and
regulations have broad latitude to enforce them. These laws and regulations
along with the terms of any government contracts we may enter into would
regulate how we do business, what products and services we could offer, and
how
we would interact with the public. These laws and regulations, and their
interpretations, are subject to frequent change. Changes in existing laws or
regulations, or their interpretations, or the enactment of new laws or
regulations could reduce our revenue, if any, by:
· |
imposing
additional capital requirements;
|
· |
increasing
our liability;
|
· |
increasing
our administrative and other costs;
|
· |
increasing
or decreasing mandated benefits;
|
· |
forcing
us to restructure our relationships with providers;
or
|
· |
requiring
us to implement additional or different programs and
systems.
|
For
example, Congress enacted the Health Insurance Portability and Accountability
Act of 1996 which mandates that health plans enhance privacy protections for
member protected health information. This requires health plans to add, at
significant cost, new administrative, information and security systems to
prevent inappropriate release of protected member health information. Compliance
with this law is uncertain and has affected the revenue streams of entities
subject to it. Similarly, individual states periodically consider adding
operational requirements applicable to health plans, often without identifying
funding for these requirements. California recently required all health plans
to
make available to members independent medical review of their claims. Any
analogous requirements applied to our prospective products or services would
be
costly to implement and could affect our prospective revenues.
We
believe that our business, if any, will be subject to various routine and
non-routine governmental reviews, audits and investigation. Violation of the
laws governing our prospective operations, or changes in interpretations of
those laws, could result in the imposition of civil or criminal penalties,
the
cancellation of any contracts to provide products or services, the suspension
or
revocation of any licenses, and exclusion from participation in government
sponsored health programs, such as Medicaid and the State Children's Health
Insurance Program. If we become subject to material fines or if other sanctions
or other corrective actions were imposed upon us, we might suffer a substantial
reduction in revenue, and might also lose one or more of our government
contracts and as a result lose significant numbers of members and amounts of
revenue.
The
current administration's issuance of new regulations, its review of the existing
Health Insurance Portability and Accountability Act of 1996 rules and other
newly published regulations, the states' ability to promulgate stricter rules,
and uncertainty regarding many aspects of the regulations may make compliance
with any new regulatory landscape difficult. In order to comply with any new
regulatory requirements, any prospective business we acquire may be required
to
employ additional or different programs and systems, the costs of which are
unknown to us at this time. Further, compliance with any such new regulations
may lead to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we would be able to recover our costs of
complying with any new regulations.
In
addition, the development, testing, production and marketing of any products
that we may manufacture, market or sell following a business combination may
be
subject to regulation by the FDA as "devices" under the 1976 Medical Device
Amendments to the Federal Food, Drug and Cosmetic Act, as amended. Before a
new
medical device, or a new use of, or claim for, an existing product can be
marketed in the United States, it must first receive either 510(k) clearance
or
pre-market approval from the FDA, unless an exemption applies. Either process
can be expensive and lengthy. The FDA's 510(k) clearance process usually takes
from three to twelve months, but it can take longer and is unpredictable. The
process of obtaining pre-market approval is much more costly and uncertain
than
the 510(k) clearance process and it generally takes from one to three years,
or
even longer, from the time the application is filed with the FDA.
In
the
United States, medical devices must be:
· |
manufactured
in registered and quality approved establishments by the FDA;
and
|
· |
produced
in accordance with the FDA Quality System Regulation, or QSR, for
medical
devices.
|
As
a
result, we may be required to comply with QSR requirements and if we fail to
comply with these requirements, we may need to find another company to
manufacture any such devices which could delay the shipment of our potential
product to our customers.
The
FDA
requires producers of medical devices to obtain FDA clearance or approval prior
to commercialization in the United States. Testing, preparation of necessary
applications and the processing of those applications by the FDA is expensive
and time consuming. We do not know if the FDA would act favorably or quickly
in
making such reviews, and significant difficulties or costs may potentially
be
encountered by us in any efforts to obtain FDA clearance or approval. The FDA
may also place conditions on clearances and approvals that could restrict
commercial applications of such products. Product approvals may be withdrawn
if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. Delays imposed by the FDA clearance or approval
process may materially reduce the period during which we have the exclusive
right to commercialize any potential patented products. We may make
modifications to any potential devices and may make additional modifications
in
the future that we may believe do not or will not require additional clearances
or approvals. If the FDA should disagree, and require new clearances or
approvals for the potential modifications, we may be required to recall and
to
stop marketing the potential modified devices. We also may be subject to Medical
Device Reporting regulations, which would require us to report to the FDA if
our
products were to cause or contribute to a death or serious injury, or
malfunction in a way that would likely cause or contribute to a death or serious
injury.
The
development, testing, production and marketing of any of our potential products
that we may manufacture, market or sell following a business combination may
be
subject to regulation by the FDA as "drugs." All "new drugs" must be the subject
of an FDA-approved new drug application (NDA) and all new biologics products
must be the subject of a biologics license application (BLA) before they may
be
marketed in the United States. All generic equivalents to previously approved
drugs or new dosage forms of existing drugs must be the subject of an
FDA-approved abbreviated new drug application (ANDA) before they may be marketed
in the United States. In all cases, the FDA has the authority to determine
what
testing procedures are appropriate for a particular product and, in some
instances, has not published or otherwise identified guidelines as to the
appropriate procedures. The FDA has the authority to withdraw existing NDA,
BLA
and ANDA approvals and to review the regulatory status of products marketed
under its enforcement policies. The FDA may require an approved NDA, BLA, or
ANDA for any drug or biologic product marketed to be recalled or withdrawn
under
its enforcement policy if new information reveals questions about the drug
or
biologic's safety or effectiveness. All drugs must be manufactured in conformity
with current good manufacturing practice regulations (GMPs) and drugs and
biologics subject to an approved NDA, BLA, or ANDA must be manufactured,
processed, packaged, held and labeled in accordance with information contained
in those approvals. The required product testing and approval process for new
drugs and biologics ordinarily takes several years and requires the expenditure
of substantial resources. Testing of any product under development may not
result in a commercially-viable product. Even after such time and expenses,
regulatory approval by the FDA may not be obtained for any products developed.
In addition, delays or rejections may be encountered based upon changes in
FDA
policy during the period of product development and FDA review. Any regulatory
approval may impose limitations in the indicated use for the product. Even
if
regulatory approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections. Subsequent discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
Even
if
required FDA approval has been obtained with respect to a new drug or biologic
product, foreign regulatory approval of a product must also be obtained prior
to
marketing the product internationally. Foreign approval procedures vary from
country to country and the time required for approval may delay or prevent
marketing. The clinical testing requirements and the time required to obtain
foreign regulatory approvals may differ from that required for FDA approval.
Although there is now a centralized European Union approval mechanism for new
pharmaceutical products in place, each European Union member state may
nonetheless impose its own procedures and requirements, many of which are time
consuming and expensive, and some European Union member states require price
approval as part of the regulatory approval process. Thus, there can be
substantial delays in obtaining required approval from both the FDA and foreign
regulatory authorities.
Employees
As
of
December 31, 2006, we had three officers, all of whom are also members of our
board of directors, and no other employees. These individuals are not obligated
to contribute any specific number of hours per week and intend to devote only
as
much time as they deem necessary to our affairs. The amount of time they will
devote in any time period will vary based on the availability of suitable target
businesses to investigate, although we expect such individuals to devote an
average of approximately ten hours per week to our business. Our officers have
devoted a significant amount of time to the proposed acquisition with
PharmAthene. We do not intend to have any full time employees prior to the
consummation of a business combination.
Item
1B. Unresolved Staff Comments
Not
applicable as of December 31, 2006.
Item
2. Properties.
We
maintain our executive offices at 2116 Financial Center, 666 Walnut Street,
Des
Moines, Iowa 50309. We have agreed to pay Equity Dynamics, Inc., an affiliated
third party of which Mr. Pappajohn is the President and principal stockholder,
and Mr. Kinley a Senior Vice President, approximately $7,500 per month for
office space (located at our executive offices) and certain additional general
and administrative services, such as an allocable share of receptionist,
secretarial and general office services. These offices consist of approximately
2,570 square feet of office space. A prior arrangement with an affiliate of
our
Chief Executive Officer, Derace Schaffer, M.D., pursuant to which we paid $1,500
a month for office space and certain general and administrative services, as
a
portion of the $7,500, was terminated on December 31, 2005.
We
consider our office space adequate for our current operations.
Item
3. Legal Proceedings.
To
the
knowledge of management, there is no litigation currently pending or
contemplated against us or any of our officers or directors in their capacity
as
such.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal period ended December 31, 2006.
PART
II
Item
5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Since
July 29, 2005, our units, and after their split on October 6, 2005, our shares
of common stock and warrants, have all traded on the American Stock Exchange
under the symbols "HAQ.U", "HAQ," and "HAQ.WT", respectively. On October 6,
2005, our units ceased trading separately. Prior to July 29, 2005, there was
no
established public trading market for our common stock.
The
closing high and low sales prices of our units, common stock, and warrants
as
reported by the American Stock Exchange, for the quarters indicated are as
follows:
|
|
Common
Stock
|
|
Warrants
|
|
Units
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
$
|
8.35
|
|
$
|
7.80
|
|
Fourth
Quarter
|
|
$
|
7.20
|
|
$
|
6.75
|
|
$
|
1.75
|
|
$
|
0.95
|
|
$
|
8.15
|
|
$
|
8.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
9.08
|
|
$
|
6.96
|
|
$
|
2.40
|
|
$
|
1.41
|
|
|
N/A
|
|
|
N/A
|
|
Second
Quarter
|
|
$
|
8.35
|
|
$
|
7.54
|
|
$
|
2.30
|
|
$
|
1.82
|
|
|
N/A
|
|
|
N/A
|
|
Third
Quarter
|
|
$
|
8.35
|
|
$
|
7.17
|
|
$
|
1.95
|
|
$
|
1.06
|
|
|
N/A
|
|
|
N/A
|
|
Fourth
Quarter
|
|
$
|
7.44
|
|
$
|
7.10
|
|
$
|
1.28
|
|
$
|
0.78
|
|
|
N/A
|
|
|
N/A
|
|
As
of
March 26, 2007, there were six stockholders of record of our common stock and
one holder of record of our warrants. Such numbers do not include beneficial
owners holding shares or warrants through nominee names.
We
have
not paid any dividends on our common stock to date and do not intend to pay
dividends prior to the completion of a business combination. The payment of
dividends in the future will be contingent upon our revenues and earnings,
if
any, capital requirements and general financial condition subsequent to
completion of a business combination. The payment of any dividends subsequent
to
a business combination will be within the discretion of our then board of
directors. It is the present intention of our board of directors to retain
all
earnings, if any, for use in our business operations and, accordingly, our
board
does not anticipate declaring any dividends in the foreseeable
future.
Recent
Sales of Unregistered Securities
Since
inception in April 2005, we sold the following shares of common stock without
registration under the Securities Act:
Stockholders
|
|
Number
of Shares
|
|
John
Pappajohn
|
|
|
600,000
|
|
Derace
L. Schaffer, M.D.
|
|
|
600,000
|
|
Matthew
P. Kinley
|
|
|
300,000
|
|
Such
shares were issued on April 25, 2005 in connection with our organization
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act as they were sold to sophisticated, wealthy individuals. The
shares issued to the individuals and entities above were sold for an aggregate
offering price of $25,000 at an average purchase price of approximately $0.0167
per share. No underwriting discounts or commissions were paid with respect
to
such sales. In June 2005, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley
transferred, for an aggregate consideration per share which they paid us and
pro
rata to their ownership of our common stock, an aggregate of 30,000 shares
of
our common stock equally to Mr. Berger and Mr. Schellhammer, two of our
directors. On July 8, 2005, our Board of Directors authorized a stock dividend
of approximately .333333 shares of common stock for each outstanding share
of
common stock, effectively lowering the initial purchase price to approximately
$.0125 per share. Further, on July 22, 2005, our board of directors authorized
a
stock dividend of approximately .125 shares of common stock for each outstanding
share of common stock, effectively lowering the initial purchase price to
approximately $.0111 per share.
Use
of Proceeds from our Initial Public Offering
The
effective date of our registration statement, which was filed on Form S-1 under
the Securities Act of 1933 (File No. 333-124712), and which relates to the
initial public offering of our units, was July 28, 2005. Each unit consisted
of
one share of common stock, $.0001 par value per share, and one warrant to
purchase one share of common stock. A total of 10,350,000 units were registered
at a proposed maximum aggregate offering price of $82,800,000.
The
offering was consummated on August 3, 2005, and the sale of a portion of the
overallotment option was consummated on August 16, 2005. The underwriters of
the
offering were Maxim Group LLC, Ramius Securities, LLC, Sunrise Securities Corp.
and Broadband Capital Management, LLC. A total of 9,400,000 units were sold
in
the offering and the overallotment at $8.00 per unit for an aggregate offering
price of $75,200,000. Each of our units commenced trading its component share
of
common stock and warrant separately on October 6, 2005. Our units do not
continue to trade separately from the common stock and warrants.
Our
net
proceeds from our initial public offering are as set forth in the following
table:
USE
OF PROCEEDS
The
net
proceeds of this offering will be as set forth in the following
table:
Gross
proceeds
|
|
$
|
75,200,000
|
|
Offering
expenses
|
|
|
|
|
Underwriting
discount (1) (2)
|
|
$
|
4,512,000
|
|
Underwriting
non-accountable expense
|
|
|
|
|
allowance
(3)
|
|
$
|
720,000
|
|
Legal
fees and expenses (including blue
|
|
|
|
|
sky
services and expenses)
|
|
$
|
200,000
|
|
Miscellaneous
expenses
|
|
$
|
45,251
|
|
Printing
and engraving expenses
|
|
$
|
50,000
|
|
Accounting
fees and expenses
|
|
$
|
25,000
|
|
SEC
registration fee
|
|
$
|
17,981
|
|
NASD
registration fee
|
|
$
|
15,778
|
|
AMEX
Listing Fees
|
|
$
|
75,000
|
|
Initial
trustee’s fee
|
|
$
|
1,000
|
|
D&O
Insurance
|
|
$
|
70,000
|
|
|
|
|
|
|
Net
Proceeds
|
|
|
|
|
Held
in trust (2)
|
|
$
|
67,928,000
|
|
Not
held in trust
|
|
$
|
1,540,000
|
|
Total
net proceeds
|
|
$
|
69,468,000
|
|
|
|
|
|
|
Use
of new proceeds not held in trust
|
|
|
|
|
Legal,
accounting and other expenses attendant to the due
|
|
|
|
|
diligence
investigation, structuring and negotiation
|
|
|
|
|
of
a business combination
|
|
$
|
200,000
|
|
|
|
|
|
|
Payment
of administrative services and support ($7,500 per month
|
|
|
|
|
for
24 months)
|
|
$
|
180,000
|
|
Due
diligence of prospective target business
|
|
$
|
600,000
|
|
Legal
and accounting fees relating to SEC reporting obligations
|
|
$
|
50,000
|
|
Working
capital and services
|
|
$
|
510,000
|
|
Total
|
|
$
|
1,540,000
|
|
(1) |
Consists
of an underwriting discount of 6% of the gross proceeds of our initial
public offering (including any units sold to cover
overallotments).
|
(2) |
Upon
consummation of a business combination, Maxim Group LLC will be paid
an
additional underwriting discount in the amount of 1% of the gross
proceeds
of our initial public offering (including any units sold to cover
overallotments) out of the funds held in trust, for an aggregate
of
$752,000.
|
(3) |
The
1% non-accountable expense allowance was not payable with respect
to the
units sold upon exercise of the underwriters' over-allotment
option.
|
$67,928,000
of the net proceeds of our initial public offering and the overallotment, or
approximately $7.23 per share, were placed in a trust account at JP Morgan
Chase
NY Bank maintained by Continental Stock Transfer & Trust Company, New York,
New York, as trustee. The proceeds will not be released from the trust fund
until the earlier of the completion of a business combination or our
liquidation. The proceeds held in the trust fund may be used as consideration
to
pay the sellers of a target business with which we ultimately complete a
business combination. Any amounts not paid as consideration to the sellers
of
the target business may be used to finance operations of the target business
or
to effect other acquisitions, as determined by our board of directors at that
time.
We
have
agreed to pay Equity Dynamics, Inc., an affiliated third party of which Mr.
Pappajohn is the President and principal stockholder, and Mr. Kinley a Senior
Vice President, approximately $7,500 per month for office space and certain
additional general and administrative services. A prior arrangement with an
affiliate of our Chief Executive Officer, Derace Schaffer, M.D., pursuant to
which we paid $1,500 a month for office space and certain general and
administrative services, as a portion of the $7,500, was terminated on December
31, 2005. As of December 31, 2006, approximately $127,500 was paid pursuant
to
these arrangements.
In
accordance with their agreement with the representative of the underwriters
in
our initial public offering, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley
purchased, pursuant to the guidelines set forth in SEC Rule 10b5-1 in connection
with Rule 10b5-1 plans, an aggregate of 354,900 of our warrants, for aggregate
consideration of $386,070, on the open market at prices up to $1.20 per warrant.
The Rule 10b5-1 plans terminated on January 6, 2006, and no further purchases
are planned.
Prior
to
the closing of a business combination, we have agreed to obtain keyman life
insurance in the amount of $3,000,000 in the aggregate on the lives of certain
members of our management for a three year period. Based on current estimates,
the premium for such life insurance policies, of which we will be the sole
beneficiary, is expected to be approximately $5,000 per year. Effective January
of 2006, keyman life insurance was obtained for Matt Kinley and Derace Schaffer
in the amount of $1,500,000 each.
We
intend
to use the excess working capital (approximately $510,000) being held in reserve
in the event due diligence, legal, accounting and other expenses of structuring
and negotiating business combinations exceed our estimates, as well as for
reimbursement of any out-of-pocket expenses incurred by persons who were
stockholders prior to our initial public offering in connection with activities
on our behalf as described below. We expect that due diligence of prospective
target businesses will be performed by some or all of our officers and directors
and may include engaging market research firms and/or third party consultants.
Our officers and directors do not receive any compensation for their due
diligence of prospective target businesses, but are reimbursed for any
out-of-pocket expenses (such as travel expenses) incurred in connection with
such due diligence activities. As of December 31, 2006, we have reimbursed
an
aggregate of $158,323 to such persons. We believe that the excess working
capital will be sufficient to cover the foregoing expenses and reimbursement
costs.
Mr.
Pappajohn, Dr. Schaffer and Mr. Kinley loaned us a total of $250,000 which
was
used to pay a portion of the expenses of the initial public offering, such
as
SEC registration fees, NASD registration fees, AMEX listing fees and legal
and
accounting fees and expenses. These loans were repaid out of the net proceeds
of
our initial public offering not placed in trust.
The
net
proceeds of the initial public offering not held in the trust fund and not
immediately required for the purposes set forth above may only be invested
by
the trust agent in "government securities" with specific maturity dates, or
in
money market funds meeting specific requirements under the Investment Company
Act of 1940, in each case in such a manner that we are not deemed to be an
investment company under the Investment Company Act. As of December 31, 2006,
there was $70,887,371 held in the trust fund, including interest earned on
the
initial deposit.
Other
than the $7,500 aggregate per month general and administrative service fees
described above, no compensation of any kind (including finder's and consulting
fees) will be paid to any persons who were stockholders prior to our initial
public offering, or any of their affiliates, for services rendered to us prior
to or in connection with the consummation of the business combination. However,
such stockholders will receive reimbursement for any out-of-pocket expenses
incurred by them in connection with activities on our behalf, such as
identifying potential target businesses and performing due diligence on suitable
business combinations. After the consummation of a business combination, if
any,
to the extent our management remains as officers of the resulting business,
we
anticipate that they may enter into employment agreements, the terms of which
shall be negotiated and which we expect to be comparable to employment
agreements with other similarly-situated companies in the healthcare industry.
Further, after the consummation of a business combination, if any, to the extent
our directors remain as directors of the resulting business, we anticipate
that
they will receive compensation comparable to directors at other
similarly-situated companies in the healthcare industry.
Item
6. Selected Financial Data.
The
following tables should be read in conjunction with our financial statements
and
the notes thereto appearing elsewhere in this Annual Report on Form 10-K. The
selected financial data has been derived from our financial statements, which
have been audited by LWBJ, LLP, independent registered public accounting firm,
as indicated in their report included elsewhere herein.
|
|
For
the Year Ended December 31, 2006
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
|
Income
Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(644,378
|
)
|
$
|
(260,779
|
)
|
$
|
(905,157
|
)
|
Investment
income
|
|
|
1,847,712
|
|
|
586,074
|
|
|
2,433,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
1,203,334
|
|
|
325,295
|
|
|
1,528,629
|
|
Provision
for income taxes
|
|
|
187,000
|
|
|
48,000
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,016,334
|
|
$
|
277,295
|
|
$
|
1,293,629
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.09
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.07
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
11,650,000
|
|
|
7,869,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares oustanding
|
|
|
13,634,353
|
|
|
8,323,201
|
|
|
|
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
675,305
|
|
$
|
1,398,181
|
|
Investments
held in trust
|
|
|
70,887,371
|
|
|
68,636,069
|
|
Other
current assets
|
|
|
176,068
|
|
|
52,500
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
71,738,744
|
|
$
|
70,086,750
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,046,195
|
|
|
410,535
|
|
Common
stock, subject to possible redemption
|
|
|
13,578,807
|
|
|
13,578,807
|
|
Total
stockholders' equity
|
|
|
57,113,742
|
|
|
56,097,408
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
71,738,744
|
|
$
|
70,086,750
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with our financial statements
and footnotes thereto contained in this report.
We
were
formed on April 25, 2005, to serve as a vehicle to acquire, through a merger,
capital stock exchange, asset acquisition or other similar business combination,
one or more domestic or international assets or an operating business in the
healthcare industry. Our initial business combination must be with a target
business or businesses whose fair market value is at least equal to 80% of
net
assets at the time of such acquisition. We intend to utilize cash derived from
the proceeds of our recently completed public offering, our capital stock,
debt
or a combination of cash, capital stock and debt, in effecting a business
combination.
On
August
3, 2005, we consummated our initial public offering of 9,000,000 units. On
August 16, 2005, we consummated the closing of an additional 400,000 units
that
were subject to the underwriters’ over-allotment option. Each unit consists of
one share of common stock and one redeemable common stock purchase warrant.
Each
warrant entitles the holder to purchase from us one share of our common stock
at
an exercise price of $6.00.
Our
net
proceeds from the sale of our units, including amounts from exercise of the
underwriters' over-allotment option, after deducting certain offering expenses
of approximately $1,220,000, including $720,000 evidencing the underwriters'
non-accountable expense allowance of 1% of the gross proceeds (excluding the
proceeds from the underwriters' over-allotment), and underwriting discounts
of
approximately $4,512,000, were approximately $69,468,000. Of this amount,
$67,928,000 is being held in trust and the remaining funds are being held
outside of the trust. The remaining proceeds are available to be used by us
to
provide for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. We will use
substantially all of the net proceeds of this offering to acquire a target
business, including identifying and evaluating prospective acquisition
candidates, selecting the target business, and structuring, negotiating and
consummating the business combination. To the extent that our capital stock
is
used in whole or in part as consideration to effect a business combination,
the
proceeds held in the trust fund as well as any other net proceeds not expended
will be used to finance the operations of the target business. We believe we
will have sufficient available funds outside of the trust fund to operate
through August 2007, assuming that a business combination is not consummated
during that time. We do not believe we will need to raise additional funds
in
order to meet the expenditures required for operating our business.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices, and other market-driven rates or
prices. We are not presently engaged in, and if a suitable business target
is
not identified by us prior to the prescribed liquidation of the trust account
we
may not engage in, any substantive commercial business. Accordingly, the risks
associated with foreign exchange rates, commodity prices, and equity prices
are
not significant.
Item
8. Financial Statements and Supplementary Data.
Reference
is made to pages F-1 through F-14 comprising a portion of this Annual Report
on
Form 10-K.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and Procedures.
Our
management carried out an evaluation, with the participation of Derace L.
Schaffer, M.D., our principal executive officer, and Matthew P. Kinley, our
principal financial officer, of the effectiveness of our disclosure controls
and
procedures as of December 31, 2006. Based upon that evaluation, Dr. Schaffer
and
Mr. Kinley concluded that our disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission.
There
has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act
that occurred during the three months ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item
9B. Other Information.
Not
applicable.
PART
III
Item
10. Directors and Executive Officers of the Registrant.
Our
directors and executive officers as of December 31, 2006, were as
follows:
NAME
|
|
AGE
|
|
POSITION
|
John
Pappajohn
|
|
78
|
|
Chairman
of the Board and Secretary
|
|
|
|
|
|
Derace
L. Schaffer, M.D
|
|
58
|
|
Vice
Chairman and Chief Executive Officer
|
|
|
|
|
|
Matthew
P. Kinley
|
|
39
|
|
President,
Treasurer and Director
|
|
|
|
|
|
Edward
B. Berger
|
|
77
|
|
Director
|
|
|
|
|
|
Wayne
A. Schellhammer
|
|
54
|
|
Director
|
JOHN
PAPPAJOHN has served as our chairman and secretary since April 2005. Since
1969,
Mr. Pappajohn has been the President and principal stockholder of Equity
Dynamics, Inc., a financial consulting firm, and the sole owner of Pappajohn
Capital Resources, a venture capital firm. He also serves as a director of
the
following public companies: Allion Healthcare, Inc., American CareSource
Holdings, Inc., MC Informatics, Inc., Conmed Healthcare Management, Inc. and
Patient Infosystems, Inc. Mr. Pappajohn has been an active private equity
investor in healthcare companies for more than 30 years and has served as a
director of more than 40 public companies. Mr. Pappajohn has been a founder
in
several public healthcare companies such as Caremark Rx, Inc., Quantum Health
Resources, and Radiologix, Inc. Mr. Pappajohn and Dr. Schaffer have worked
together for more than fifteen years on a variety of healthcare companies,
and
they have co-founded Allion Healthcare, Inc., Patient Infosystems, Inc., and
Radiologix, Inc., all of which are public companies. In addition, Mr. Pappajohn
and Dr. Schaffer have worked together on many private healthcare companies,
such
as Logisticare, Inc. and Source Medical Inc. Mr. Pappajohn received his B.S.C.
from the University of Iowa.
DERACE
L.
SCHAFFER, M.D. has served as our vice chairman and chief executive officer
since
April 2005. Dr. Schaffer is the founder and CEO of The Lan Group, a venture
capital firm specializing in healthcare and high technology investments. He
also
serves as a director of the following public companies: Allion Healthcare,
Inc.,
American CareSource Holdings, Inc., and Patient Infosystems, Inc. He has served
as chairman of several healthcare companies including, Radiologix, Inc when
it
was private. He has been an active co-investor with Mr. Pappajohn for more
than
fifteen years on a variety of healthcare companies, and they have co-founded
Allion Healthcare, Patient Infosystems and Radiologix, all of which are public
companies. In addition, Mr. Pappajohn and Dr. Schaffer have worked together
on
many private healthcare companies, such as Logisticare, Inc. and Source Medical
Inc. Dr. Schaffer served as chief executive officer and chairman of the board
of
Ide Imaging Group, P.C. from 1980 to 2001. Dr. Schaffer has served as a director
on many healthcare boards of directors including several health systems and
more
than ten healthcare services and technology companies. Dr. Schaffer received
his
postgraduate radiology training at Harvard Medical School and Massachusetts
General Hospital, where he served as Chief Resident. Dr. Schaffer is currently
also a Clinical Professor of Radiology at Weill Cornell Medical
College.
MATTHEW
P. KINLEY has served as our president, treasurer and a director since April
2005. Since 1995, he has served as Senior Vice President of Equity Dynamics,
Inc., a financial consulting firm, and Pappajohn Capital Resources, a venture
capital firm, both owned by John Pappajohn. Mr. Kinley has been involved in
the
financing and development of more than 20 companies with Mr. Pappajohn in the
past twelve years. Mr. Kinley has worked with Dr. Schaffer for more than twelve
years on healthcare services and technology companies. From 1990 through 1995,
Mr. Kinley was manager and held various positions at KPMG Peat Marwick, working
on tax, audit and merger and acquisition issues. Mr. Kinley received his B.A.
in
Business, with highest honors, from the University of Northern Iowa in May
1990.
EDWARD
B.
BERGER has served as a director since April 2005. Mr. Berger is the Chief
Executive Officer and director of CardSystems Solutions Inc. He is a director
of
Compass Bank of Tucson, Arizona. Mr. Berger is Chairman of the Board of the
board of directors and a member of the audit committee of American CareSource
Holdings and a director and a member of the audit committee of Conmed Healthcare
Management, Inc. both public companies. Mr. Berger has extensive healthcare
experience: past President and CEO of Palo Verde Hospital; past President and
member of the Board of Trustees of Kino Community Hospital; past member of
the
Long Range Planning Committee of Tucson Medical Center, all in Tucson, AZ.
Mr.
Berger is currently an Adjunct Professor in Political Science at Pima Community
College and is the Chairman of the MBA Advisory Council, Eller Graduate School
of Management at the University of Arizona. He has been admitted to practice
law
before the U.S. Supreme Court, U.S. Court of Appeals for the 9th Circuit and
the
U.S. District Court-Arizona. He is admitted to the New York Bar, the Arizona
Bar
and the District of Columbia Bar. Mr. Berger received his Juris Doctor degree
from New York Law School. Mr. Berger is a member of both our Audit Committee
and
our Nominating Committee.
WAYNE
A.
SCHELLHAMMER has served as a director since June 2005. Mr. Schellhammer is
Chairman and Chief Executive Officer of American Care Source Holdings, Inc.,
a
public company, a position he has held since October of 2004. He served as
President and CEO of Iowa Health Physicians, an affiliate of the Iowa Health
System, for five years, as President and CEO of InTrust for five years and
as
Vice President of Physician Services and Payer Contracting for the Iowa Health
System, a hospital and physician integrated health system, for five years.
Mr.
Schellhammer has also held senior executive positions with KPMG Consulting
(now
BearingPoint) for two years, Wellcare of New York, a subsidiary of a public
company, Wellcare Health Plans, Inc., for five years, as well as a national
cardiac consulting firm. He has spent a total of 30 years in the healthcare
industry and is a graduate of the University of Minnesota. Mr. Schellhammer
is a
member of both our Audit Committee and our Nominating Committee.
Our
board
of directors is divided into two classes with only one class of directors being
elected in each year and each class serving a two-year term. The term of office
of the first class of directors, consisting of Mr. Berger and Mr. Schellhammer,
will expire at our first annual meeting of stockholders. The term of office
of
the second class of directors, consisting of Mr. Pappajohn, Dr. Schaffer and
Mr.
Kinley, will expire at the second annual meeting.
These
individuals have played a key role in identifying and evaluating prospective
acquisition candidates, selecting the target business, and structuring,
negotiating and consummating its acquisition. None of these individuals has
been
a principal of or affiliated with a public company or blank check company that
executed a business plan similar to our business plan and none of these
individuals is currently affiliated with such an entity. However, we believe
that the skills and expertise of these individuals, their collective access
to
acquisition opportunities and ideas, their contacts, and their transaction
expertise should enable them to identify and effect an acquisition although
we
cannot assure you that they will, in fact, be able to do so.
Dr.
Schaffer, Mr. Pappajohn and Mr. Kinley may be deemed to be our “parents” and are
deemed our “promoters,” as these terms are defined under the Federal securities
laws.
Director
Independence
Our
board
of directors has determined that Mr. Berger and Mr. Schellhammer are
“independent directors” as defined in the American Stock Exchange listing
standards and Rule 10A-3 of the Exchange Act. After the proposed merger with
PharmAthene, our board of directors will consist of up to seven members, and
it
is anticipated that a majority of which will be considered “independent.” We
expect the Board members to be John Pappajohn, Derace M. Schaffer, M.D., James
Cavanaugh, Ph.D., Steven St. Peter, M.D. Elizabeth Czerepak, Joel McCleary
and
David Wright. Their biographies are set forth in the preliminary proxy statement
filed with the SEC, which we urge you to review carefully.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
directors and persons who beneficially own more than ten percent of our common
stock to file reports of ownership and changes in ownership with the SEC. These
reporting persons are also required to furnish us with copies of all Section
16(a) forms they file. Except for the Form 5 of Mr. Berger filed on February
20,
2007, all of these reports were filed in a timely manner.
Board
Committees
Our
board
of directors established an audit committee and a nominating committee. Our
board of directors adopted charters for these committees, as well as a code
of
conduct and ethics that governs the conduct of our directors, officers and
employees.
We
do not
currently have a compensation committee but we expect to establish a
compensation committee as soon as practicable after the consummation of the
merger. Pursuant to Section 805 of the AMEX Company Guide, compensation of
our Chief Executive Officer, if any, will be determined, or recommended to
the
Board for determination, by a majority of the independent directors on our
board
of directors. The Chief Executive Officer will not be present during voting
or
deliberations. Compensation for all other officers, if any, will be determined,
or recommended to the Board for determination, by a majority of the independent
directors on our board of directors. None of our officers currently receive
compensation. We do not expect to pay any compensation to any of our officers
until following the consummation of the merger with PharmAthene.
Under
the terms of the merger, we have agreed that
the holders of the 8% notes to be issued in the merger with PharmAthene shall
have the right to have two persons out of the three persons on the compensation
committee for as long as at least 30% of the original principal amount of the
8%
notes remains outstanding.
Audit
Committee
Our
audit
committee currently consists of Mr. Berger and Mr. Schellhammer. The independent
directors we appoint to our audit committee will each be an independent member
of our board of directors, as defined by the rules of the American Stock
Exchange and the SEC. Each member of our audit committee will be financially
literate under the current listing standards of the American Stock Exchange,
and
our board of directors has determined that Mr. Berger qualifies as an "audit
committee financial expert," as such term is defined by SEC rules. We intend
to
locate and appoint at least one additional independent director on our audit
committee after the consummation of the Acquisition.
The
audit
committee reviews the professional services and independence of our independent
registered public accounting firm and our accounts, procedures and internal
controls. The audit committee also recommends the firm selected to be our
independent registered public accounting firm, reviews and approves the scope
of
the annual audit, review and evaluates with the independent public accounting
firm our annual audit and annual consolidated financial statements, reviews
with
management the status of internal accounting controls, evaluates problem areas
having a potential financial impact on us that may be brought to the committee's
attention by management, the independent registered public accounting firm
or
the board of directors, and evaluates all of our public financial reporting
documents.
Under
the
terms of the merger, we have agreed that the holders of the 8% notes to be
issued in the merger with PharmAthene shall have the right to have two persons
out of the three persons on the audit committee for as long as at least 30%
of
the original principal amount of the 8% notes remains outstanding.
Nominating
Committee
We
have
established a nominating committee of the board of directors, which consists
of
Mr. Berger and Mr. Schellhammer, each of whom is an independent director as
defined by the rules of the American Stock Exchange and the SEC. The nominating
committee is responsible for overseeing the selection of persons to be nominated
to serve on our board of directors. The nominating committee considers persons
identified by its members, management, stockholders, investment bankers and
others. We intend to locate and appoint at least one additional independent
director on our nominating committee after the consummation of the
Acquisition.
The
guidelines for selecting nominees, which are specified in the nominating
committee charter, generally provide that persons to be nominated should be
actively engaged in business endeavors, have an understanding of financial
statements, corporate budgeting and capital structure, be familiar with the
requirements of a publicly traded company, be familiar with industries relevant
to our business endeavors, be willing to devote significant time to the
oversight duties of the board of directors of a public company, and be able
to
promote a diversity of views based on the person's education, experience and
professional employment. The nominating committee evaluates each individual
in
the context of the board as a whole, with the objective of recommending a group
of persons that can best implement our business plan, perpetuate our business
and represent shareholder interests. The nominating committee may require
certain skills or attributes, such as financial or accounting experience, to
meet specific board needs that arise from time to time. The nominating committee
does not distinguish among nominees recommended by stockholders and other
persons.
Under
the
terms of the merger, we have agreed that the holders of the 8% notes to be
issued in the merger with PharmAthene shall have the right to have two persons
out of the three persons on the nominating committee for as long as at least
30%
of the original principal amount of the 8% notes remains
outstanding.
Code
of Conduct and Ethics
We
have
adopted a code of conduct and ethics applicable to our directors, officers
and
employees in accordance with applicable federal securities laws and the rules
of
the American Stock Exchange. You can review this document by accessing our
public filings at the SEC's web site at www.sec.gov. In addition, a copy of
the
code of conduct and ethics will be provided without charge upon request to
us.
We intend to disclose any amendments to or waivers of certain provisions of
our
code of ethics within 5 business days of such amendment or waiver or as
otherwise required by the SEC.
Conflicts
of Interest
Potential
investors should be aware of the following potential conflicts of
interest:
· |
None
of our officers and directors are required to commit their full time
to
our affairs and, accordingly, they will have conflicts of interest
in
allocating management time among various business
activities.
|
· |
In
the course of their other business activities, our officers and directors
may become aware of investment and business opportunities which may
be
appropriate for presentation to our company as well as the other
entities
with which they are affiliated. They may have conflicts of interest
in
determining to which entity a particular business opportunity should
be
presented.
|
· |
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 our
company.
|
· |
Since
our directors beneficially own shares of our common stock which will
be
released from escrow only in certain limited situations, our board
may
have a conflict of interest in determining whether a particular target
business is appropriate to effect a business combination. The personal
and
financial interests of our directors and officers may influence their
motivation in identifying and selecting a target business, completing
a
business combination timely and securing the release of their
stock.
|
· |
In
the event we elect to make a substantial down payment, or otherwise
incur
significant expenses, in connection with a potential business combination,
our expenses could exceed the remaining proceeds not held in trust.
Our
officers and directors may have a conflict of interest with respect
to
evaluating a particular business combination if we incur such excess
expenses. Specifically, our officers and directors may tend to favor
potential business combinations with target businesses that offer
to
reimburse any expenses in excess of our available proceeds not held
in
trust.
|
· |
Our
officers and directors may have a conflict of interest with respect
to
evaluating a particular business combination if the retention or
resignation of any such officers and directors were included by a
target
business as a condition to any agreement with respect to a business
combination.
|
In
general, officers and directors of a corporation incorporated under the laws
of
the State of Delaware are required to present business opportunities to a
corporation if:
· |
the
corporation could financially undertake the
opportunity;
|
· |
the
opportunity is within the corporation's line of business;
and
|
· |
it
would not be fair to the corporation and its stockholders for the
opportunity not to be brought to the attention of the
corporation.
|
Accordingly,
as a result of multiple business affiliations, our officers and directors may
have similar legal obligations relating to presenting business opportunities
meeting the above-listed criteria to multiple entities. In addition, conflicts
of interest may arise when our board evaluates a particular business opportunity
with respect to the above-listed criteria. We cannot assure you that any of
the
above mentioned conflicts will be resolved in our favor.
In
order
to minimize potential conflicts of interest which may arise from multiple
corporate affiliations, each of our officers and directors has agreed in
principle, until the earlier of a business combination, our liquidation or
such
time as he ceases to be an officer or director, to present to us for our
consideration, prior to presentation to any other entity, any business
opportunity which may reasonably be required to be presented to us under
Delaware law, subject to any pre-existing fiduciary obligations they might
have.
Each
of
our directors has, or may come to have, to a certain degree, other fiduciary
obligations. In addition all of our officers and directors have fiduciary
obligations to those companies on whose board of directors they
sit.
To
the
extent that they identify business opportunities that may be suitable for the
entities to which they owe a fiduciary obligation, our officers and directors
will honor those fiduciary obligations. Accordingly, they may not present
opportunities to us that otherwise may be attractive to us unless the entities
to which they owe a fiduciary obligation and any successors to such entities
have declined to accept such opportunities. Additionally, certain of our
directors and officers are directors of companies, both public and private,
which may perform business activities in the healthcare industry similar to
those which we may perform after consummating a business combination. Mr.
Pappajohn is a director of the following such public companies: Patient
Infosystems, Inc., Allion Healthcare, Inc., Conmed Healthcare Management, Inc.
and American CareSource Holdings, Inc. Mr. Pappajohn is a director of the
following private company: Partners Imaging LLC. Dr. Schaffer is a director
of
the following such public companies: Patient Infosystems, Inc., Allion
Healthcare, Inc., and American CareSource Holdings, Inc., as well as the
following such private companies: Partners Imaging LLC and Source Medical Inc.
Mr. Berger is a director of the following public companies: American CareSource
Holdings, Inc. and Conmed Healthcare Management, Inc. Mr. Schellhammer is
Chairman and Chief Executive Officer of American Care Source Holdings, Inc.
In
connection with the vote required for any business combination, all of our
stockholders prior to our initial public offering, including all of our officers
and directors, have agreed to vote their respective shares of common stock
which
were owned prior to our initial public offering in accordance with the vote
of
the public stockholders owning a majority of the shares of our common stock
sold
in our initial public offering. Any shares of common stock acquired by such
stockholders in the open market will be considered as part of the holdings
of
public stockholders and will have the same rights as other public stockholders,
including voting and conversion rights with respect to a potential business
combination, and persons who were stockholders prior to our initial public
offering may thus vote against a proposed business combination with respect
to
such shares. Accordingly, they may vote on a proposed business combination
with
respect to shares acquired in the open market any way they so choose. In
addition, they have agreed to waive their respective rights to participate
in
any liquidation distribution occurring upon our failure to consummate a business
combination but only with respect to those shares of common stock acquired
by
them prior to our initial public offering and not with respect to any shares
acquired in the open market.
To
further minimize potential conflicts of interest, we have agreed not to
consummate a business combination with an entity which is affiliated with any
of
such stockholders 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. We expect that any such opinion will be included in
our
proxy solicitation materials, furnished to stockholders in connection with
their
vote on such a business combination.
Item
11. Executive Compensation.
None
of
our executive officers or directors has received any cash compensation for
services rendered. Commencing on the effective date of our initial public
offering through the acquisition of a target business, we have agreed to pay
Equity Dynamics, Inc., an affiliated third party of which Mr. Pappajohn (our
Chairman and Secretary) is the President and principal stockholder, and Mr.
Kinley (our President and Treasurer) is a Senior Vice President, approximately
$7,500 per month for office space and certain additional general and
administrative services. A prior arrangement with an affiliate of our Chief
Executive Officer, Derace Schaffer, M.D., pursuant to which we paid $1,500
a
month for office space and certain general and administrative services, as
a
portion of the $7,500, was terminated on December 31, 2005. During 2006,
approximately $90,000 was incurred under these arrangements. This agreement
is
for our benefit and is not intended to provide Mr. Pappajohn compensation in
lieu of a salary. We believe that such fees are at least as favorable as we
could have obtained from an unaffiliated third party. Other than this $7,500
per-month fee, no compensation of any kind, including finder's and consulting
fees, will be paid to any of our initial stockholders, including our officers
and directors, or any of their respective affiliates, for services rendered
prior to or in connection with a business combination. However, persons who
were
stockholders prior to our initial public offering, including our officers and
directors, will receive reimbursement for any out-of-pocket expenses incurred
by
them in connection with activities on our behalf, such as identifying potential
target businesses and performing due diligence on suitable business
combinations. After the consummation of a business combination, if any, to
the
extent our management remains as officers of the resulting business, we
anticipate that they may enter into employment agreements, the terms of which
shall be negotiated and which we expect to be comparable to employment
agreements with other similarly-situated companies in the healthcare industry.
Further, after the consummation of a business combination, if any, to the extent
our directors remain as directors of the resulting business, we anticipate
that
they will receive compensation comparable to directors at other similarly-
situated companies in the healthcare industry. We urge you to review carefully
the preliminary proxy statement filed with the SEC for more information in
this
regard.
Compensation
Discussion and Analysis
Summary
Compensation Table
The
following table shows the compensation paid or accrued during the fiscal year
ended December 31, 2006 to (1) our Chief Executive Officer,
(2) our Chairman and Secretary, and (3) our President. As of December 31,
2006, we had no other executive officers.
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
John
Pappajohn (1)
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Chairman
& Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derace
L. Schaffer (2)
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Chief
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
P. Kinley (3)
|
|
|
2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
John
Pappajohn does not receive any compensation for services provided as
Chairman.
(2)
Derace L. Schaffer also serves as director of the Company but does not receive
any compensation for services provided as a director.
(3)
Matthew P. Kinley also serves as director of the Company but does not receive
any compensation for services provided as a director.
2006
Grants of Plan-Based Awards
The
following table shows information regarding grants of equity awards during
the
fiscal year ended December 31, 2006 to the executive officers named in the
Summary Compensation Table above.
Name
|
|
Grant Date
|
|
Board
of
Date (if Different
than Grant Date)
|
|
All Option
Awards: Number
Securities
Options (#)
|
|
Exercise Base Price
of Option Awards
($/Sh)
|
|
Grant
Fair
Value
Stock
and
Option Awards
|
|
John
Pappajohn (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
& Secretary
|
|
|
N/A
|
|
|
N/A
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derace
L. Schaffer (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive
|
|
|
N/A
|
|
|
N/A
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
P. Kinley (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
|
N/A
|
|
|
N/A
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment
Agreement
As
of
December 31, 2006, the Company was not a party to any formal employment
agreements.
Fiscal
Year 2006 Stock Option Awards
The
Company did not award any stock options in 2006.
Compensation
Actions in 2007
The
Company has not made any bonus or salary awards for performance during 2006,
nor
has it approved any stock option awards for 2006 performance.
Outstanding
Equity Awards at Fiscal 2006 Year-End
The
following table shows grants of stock options outstanding on December 31,
2006, the last day of the fiscal year, held by each of the executive officers
named in the Summary Compensation Table above.
|
|
Option
Awards
|
|
|
|
Number
of
|
|
Number
of
|
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
|
Options
(#)
|
|
Options
(#)
|
|
Exercise
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
($)
|
|
Date
|
|
John
Pappajohn (1)
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
Chairman
& Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derace
L. Schaffer (2)
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
P. Kinley (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
2006
Option Exercises and Stock Vested
The
following table shows information regarding exercises of options to purchase
our
common stock by the executive officers named in the Summary Compensation Table
above during the fiscal year ended December 31, 2006.
|
|
Option
Awards
|
|
|
|
Number
of
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Acquired
on
|
|
Value
Realized
|
|
Name
|
|
Exercise
(#)
|
|
on
Exercise ($)(1)
|
|
John
Pappajohn (1)
|
|
|
—
|
|
|
—
|
|
Chairman
& Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derace
L. Schaffer (2)
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Matthew
P. Kinley (3)
|
|
|
—
|
|
|
—
|
|
President
|
|
|
|
|
|
|
|
Pension
Benefits
As
of
December 31, 2006, the Company did not have any qualified or non-qualified
defined benefit plans.
Nonqualified
Deferred Compensation
As
of
December 31, 2006, the Company did not have any non-qualified defined
contribution plans or other deferred compensation plans.
Potential
Payments Upon Termination or Change in Control
As
of
December 31, 2006, the Company was not party to any agreements, employment
or
otherwise, the terms of which obligate the Company to make payments and provide
benefits to the Company’s executive officers in the event of a termination of
employment.
2006 Director
Compensation
The
following table sets forth a summary of the compensation earned by our
non-employee directors in 2006:
|
|
Fees
Earned
|
|
|
|
|
|
|
|
or
Paid in
|
|
Option
|
|
|
|
Name
|
|
Cash
($)
|
|
Awards
($)
|
|
Total
($)
|
|
Edward
B. Berger
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Wayne
Schellhammer
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Director
Compensation Policy
The
Company does not currently pay any fees to our directors, nor do we pay
directors’ expenses in attending board meetings.
Performance
Graph
We
have
not included the performance graph index as we became a reporting company on
July 28, 2005 and have not conducted any operations except to locate an
acquisition candidate. We do not expect that our securities will trade at prices
much different than the amounts paid for such securities in our initial public
offering until such time that we complete a business combination, if we are
able
to do so.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth information as of March 31, 2007 based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of our common stock by (i) each person known by us to be the owner
of
more than 5% of our outstanding shares of common stock, (ii) each director
and
(iii) all officers and directors as a group. Except as indicated in the
footnotes to the table, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
Name
and Address of Beneficial Owner (1)
|
|
Amount
and nature of beneficial ownership
|
|
Percent
of class
|
|
John
Pappajohn (2)
|
|
|
882,000
|
|
|
7.6
|
%
|
Derace
L. Schaffer, M.D. (3)
|
|
|
882,000
|
|
|
7.6
|
%
|
Matthew
P. Kinley (4)
|
|
|
441,000
|
|
|
3.8
|
%
|
Edward
B. Berger (5)
|
|
|
22,500
|
|
|
*
|
|
Wayne
A. Schellhammer
|
|
|
22,500
|
|
|
*
|
|
Amaranth
LLC, Amaranth Advisors LLC and Nicholas M. Maounis (6)
|
|
|
470,200
|
|
|
4.0
|
%
|
Sapling,
LLC (7)
|
|
|
697,715
|
|
|
6.0
|
%
|
Fir
Tree Recovery Master Fund, LP (7)
|
|
|
325,115
|
|
|
2.8
|
%
|
All
directors and executive officers as group (5 persons)
|
|
|
2,250,000
|
|
|
19.3
|
%
|
*
Represents beneficial ownership of less than 1%.
(1) |
Does
not include shares of common stock issuable upon exercise of warrants
which are beneficially owned by certain of the persons named in the
above
table but which are not exercisable until the later of (i) July 28,
2006
or (ii) the consummation by us of a business combination. Unless
otherwise
indicated, the business address of each of the individuals is 2116
Financial Center, 666 Walnut Street, Des Moines, Iowa
50309.
|
(2) |
Does
not include 141,960 warrants purchased on behalf of such person pursuant
to the guidelines set forth in SEC Rule 10b5-1 in connection with
a Rule
10b5-1 Plan. See footnote 1, above.
|
(3) |
Does
not include 141,960 warrants purchased on behalf of such person pursuant
to the guidelines set forth in SEC Rule 10b5-1 in connection with
a Rule
10b5-1 Plan. See footnote 1, above.
|
(4) |
Does
not include 70,980 warrants purchased on behalf of such person pursuant
to
the guidelines set forth in SEC Rule 10b5-1 in connection with a
Rule
10b5-1 Plan. See footnote 1, above.
|
(5) |
Does
not include 12,000 warrants purchased by such person on the open
market,
based on information contained in a Form 5. See footnote 1,
above.
|
(6) |
Based
on information contained in a Schedule 13G/A filed by Amaranth LLC,
Amaranth Advisors LLC and Nicholas M. Maounis in July 2006. Amaranth
LLC,
Amaranth Advisors LLC and Nicholas M. Maounis have shared power to
vote or
to direct the vote, and shared power to dispose or direct the disposition,
of 470,200 shares of our common stock. The address for each of Amaranth
LLC, Amaranth Advisors LLC and Nicholas M. Maounis is One American
Lane,
Greenwich CT 06831
|
(7) |
Based
on information contained in a Schedule 13G filed by Sapling LLC in
February 2007. Sapling may direct the vote and disposition of the
697,715
shares of Common Stock, and Fir Tree Recovery may direct the vote
and
disposition of 325,115 shares of Common Stock. The address of both
Sapling
LLC and Fir Tree Recovery is 535 Fifth Avenue, 31st Floor New York,
New
York 10017
|
All
of
the shares of our common stock outstanding prior to our initial public were
placed in escrow with Continental Stock Transfer & Trust Company, as escrow
agent, until the earliest of:
· |
the
consummation of a liquidation, merger, stock exchange or other similar
transaction which results in all of our stockholders having the right
to
exchange their shares of common stock for cash, securities or other
property subsequent to our consummating a business combination with
a
target business.
|
During
the escrow period, the holders of these shares are not be able to sell or
transfer their securities except to their spouses and children or trusts
established for their benefit, but will retain all other rights as our
stockholders, including, without limitation, the right to vote their shares
of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will also
be
placed in escrow. If we are unable to effect a business combination and
liquidate, none of these stockholders will receive any portion of the
liquidation proceeds with respect to common stock owned by them prior to our
initial public offering.
Item
13. Certain Relationships and Related Transactions.
In
April
2005, we issued 1,500,000 shares of our common stock to the individuals set
forth below for an aggregate amount of $25,000 in cash, at an average purchase
price of approximately $0.0167 per share, as follows:
Name
|
|
Number
of Shares
|
|
Relationship
to Us
|
John
Pappajohn
|
|
600,000
|
|
Chairman
and Secretary
|
Derace
L. Schaffer, M.D.
|
|
600,000
|
|
Vice-Chairman
and CEO
|
Matthew
P. Kinley
|
|
300,000
|
|
President,
Treasurer and Director
|
Further,
in June 2005, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley transferred, for an
aggregate consideration per share which they paid us and pro rata to their
ownership of our common stock, an aggregate of 30,000 shares of our common
stock
equally to Mr. Berger and Mr. Schellhammer.
On
July
8, 2005, our board of directors authorized a stock dividend of approximately
.333333 shares of common stock for each outstanding share of common stock,
effectively lowering the initial purchase price to approximately $.0125 per
share.
On
July
22, 2005, our board of directors authorized a stock dividend of approximately
.125 shares of common stock for each outstanding share of common stock,
effectively lowering the initial purchase price to approximately $.0111 per
share.
The
holders of the majority of these shares will be entitled to require us, on
up to
two occasions, to register these shares. The holders of the majority of these
shares may elect to exercise these registration rights at any time after the
date on which these shares of common stock are released from escrow. In
addition, these stockholders have certain "piggy-back” registration rights on
registration statements filed subsequent to the date on which these shares
of
common stock are released from escrow. We will bear the expenses incurred in
connection with the filing of any such registration statements.
In
connection with our initial public offering, Mr. Pappajohn, Dr. Schaffer and
Mr.
Kinley loaned us a total of $250,000 which was used to pay a portion of the
expenses of our initial public offering, such as SEC registration fees, NASD
registration fees, AMEX listing fees and legal and accounting fees and expenses.
These loans were repaid out of the net proceeds of our initial public offering
not placed in trust.
In
accordance with their agreement with the representative of the underwriters
in
our initial public offering, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley
purchased, pursuant to the guidelines set forth in SEC Rule 10b5-1 in connection
with Rule 10b5-1 plans, an aggregate of 354,900 of our warrants, for aggregate
consideration of $386,070, on the open market at prices up to $1.20 per warrant.
The Rule 10b5-1 plans terminated on January 6, 2006, and no further purchases
are planned.
We
agreed
to pay Equity Dynamics, Inc., an affiliated third party of which Mr. Pappajohn
is the President and principal stockholder, and Mr. Kinley a Senior Vice
President, approximately $7,500 per month for office space and certain
additional general and administrative services. A prior arrangement with an
affiliate of our Chief Executive Officer, Derace Schaffer, M.D., pursuant to
which we paid $1,500 a month for office space and certain general and
administrative services, as a portion of the $7,500, was terminated on December
31, 2005. As of December 31, 2006, we have paid approximately $127,500 under
these arrangements.
We
will
reimburse our officers and directors for any reasonable out-of-pocket business
expenses incurred by them in connection with certain activities on our behalf
such as identifying and investigating possible target businesses and business
combinations. There is no limit on the amount of accountable out-of-pocket
expenses reimbursable by us, which will be reviewed only by our board or a
court
of competent jurisdiction if such reimbursement is challenged. As of December
31, 2006, we have reimbursed such persons an aggregate of $118,423 in connection
with these activities
Persons
who were stockholders prior to our initial public offering, including our
officers and directors, will not receive reimbursement for any out-of- pocket
expenses incurred by them to the extent that such expenses exceed the amount
in
the trust fund unless the business combination is consummated and there are
sufficient funds available for reimbursement after such consummation. The
financial interest of such persons could influence their motivation in selecting
a target business and thus, there may be a conflict of interest when determining
whether a particular business combination is in the stockholders’ best
interest.
Other
than the reimbursable out-of-pocket expenses payable to our officers and
directors, no compensation or fees of any kind, including finders and consulting
fees, will be paid to any persons who were stockholders prior to our initial
public offering, officers or directors who owned our common stock prior to
our
initial public offering, or to any of their respective affiliates for services
rendered to us prior to or with respect to the business
combination.
After
the
consummation of a business combination, if any, to the extent our management
remains as officers of the resulting business, we anticipate that our officers
and directors may enter into employment agreements, the terms of which shall
be
negotiated and which we expect to be comparable to employment agreements with
other similarly-situated companies in the healthcare industry. Further, after
the consummation of a business combination, if any, to the extent our directors
remain as directors of the resulting business, we anticipate that they will
receive compensation comparable to directors at other similarly-situated
companies in the healthcare industry.
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available
from
unaffiliated third parties and such transactions or loans, including any
forgiveness of loans, will require prior approval in each instance by a majority
of our uninterested "independent" directors (to the extent we have any) or
the
members of our board who do not have an interest in the transaction, in either
case who had access, at our expense, to our attorneys or independent legal
counsel.
Item
14. Principal Accounting Fees and Services
Description
of Professional Services
Audit
Fees.
The
aggregate fees for professional services rendered by LWBJ, LLP (LWBJ) for the
audit of the Company's financial statements for fiscal year 2006, which includes
fees related to the initial public offering and related audits, review of
financial statements included in our quarterly reports on Form 10-Q, and the
2006 year end audit were approximately $26,000.
Audit-Related
Fees.
Audit-related fees are for assurance and related services including, among
others, consultation concerning financial accounting and reporting standards.
There were no aggregate fees billed for audit-related services rendered by
LWBJ.
Tax
Fees.
Fees
for professional services rendered by LWBJ for tax compliance, tax planning
and
tax advice for the fiscal year ended December 31, 2006 were approximately
$1,500.
All
Other Fees.
Fees
paid to LWBJ for services other than audit services and audit-related services
rendered by LWBJ for the fiscal year ended December 31, 2006 were approximately
$4,000.
Pre-Approval
Policies
The
Audit
Committee is responsible for appointing, setting compensation, and overseeing
the work of the independent auditor. The Audit Committee has established a
policy regarding pre-approval of all audit and permissible non-audit services
provided by the independent auditor. A centralized service request function
is
used to provide an initial assessment of requests for services by the
independent auditor. The request must be specific as to the particular services
to be provided. Requests approved during the initial assessment are aggregated
and submitted to the Audit committee for final approval. The independent auditor
may not perform services, whether associated with audit or non-audit functions,
unless the services have been approved prior to their performance by the
Company’s Audit Committee. Each fiscal year, the Audit Committee negotiates and
pre-approves the fee for the annual audit of the Company’s Consolidated
Financial Statements. Each fiscal year, the Audit Committee may also
specifically pre-approve certain audit services, audit-related services, tax
services and other services. At the present time, the Audit Committee has not
delegated any authority for approval of any services. All audit and permissible
non-audit services provided by the independent auditor have been approved by
the
Audit Committee.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Financial
Statements
December
31, 2006
Contents
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Audited
Financial Statements
|
|
Balance
Sheets
|
F-2
|
Statements
of Income
|
F-3
|
Statements
of Stockholders' Equity
|
F-4
|
Statements
of Cash Flows
|
F-5
|
Notes
to Financial Statements
|
F-6
to F-14
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Healthcare
Acquisition Corp.
We
have
audited the accompanying balance sheets of Healthcare Acquisition Corp. (a
corporation in the development stage) as of December 31, 2006 and 2005, and
the
related statements of income, stockholders' equity, and cash flows for the
year
ended December 31, 2006 and the period from April 25, 2005 (inception) to
December 31, 2005, and the period from April 25, 2005 (inception) to December
31, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Healthcare Acquisition Corp. (a
corporation in the development stage) as of December 31, 2006 and 2005, and
the
results of its operations and its cash flows for the year ended December 31,
2006, the period from April 25, 2005 (inception) to December 31, 2005, and
the
period from April 25, 2005 (inception) to December 31, 2006, in conformity
with
accounting principles generally accepted in the United States of
America.
/s/
LWBJ,
LLP
LWBJ,
LLP
West
Des
Moines, Iowa
March
12,
2007
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Balance
Sheets
December
31, 2006 and 2005
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
675,305
|
|
$
|
1,398,181
|
|
Cash
held in Trust Fund
|
|
|
70,887,371
|
|
|
68,636,069
|
|
Prepaid
expense
|
|
|
54,115
|
|
|
52,500
|
|
Deferred
legal fees
|
|
|
121,953
|
|
|
-
|
|
Total
current assets
|
|
|
71,738,744
|
|
|
70,086,750
|
|
Total
assets
|
|
$
|
71,738,744
|
|
$
|
70,086,750
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
160,514
|
|
$
|
6,996
|
|
Accrued
expenses
|
|
|
90,996
|
|
|
98,996
|
|
State
income tax payable
|
|
|
139,034
|
|
|
48,000
|
|
Capital
based taxes payable
|
|
|
64,072
|
|
|
115,000
|
|
Deferred
revenue
|
|
|
591,579
|
|
|
141,543
|
|
Total
current liabilities
|
|
|
1,046,195
|
|
|
410,535
|
|
|
|
|
|
|
|
|
|
Common
stock, subject to possible redemption
|
|
|
|
|
|
|
|
1,879,060
shares, at conversion value
|
|
|
13,578,807
|
|
|
13,578,807
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, $.0001 par value, 1,000,000 shares authorized; none
|
|
|
|
|
|
|
|
issued
and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.0001 par value, 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
11,650,000
shares issued and outstanding (which includes 1,879,060
|
|
|
|
|
|
|
|
subject
to possible conversion)
|
|
|
1,165
|
|
|
1,165
|
|
Common
stock warrants (9,400,000 outstanding)
|
|
|
-
|
|
|
-
|
|
Paid-in
capital in excess of par
|
|
|
55,818,948
|
|
|
55,818,948
|
|
Equity
accumulated during the development stage
|
|
|
1,293,629
|
|
|
277,295
|
|
Total
stockholders' equity
|
|
|
57,113,742
|
|
|
56,097,408
|
|
Total
liabilities and stockholders' equity
|
|
$
|
71,738,744
|
|
$
|
70,086,750
|
|
See
accompanying notes to the financial statements
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Income
|
|
For
the Year Ended December 31, 2006
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
46,446
|
|
$
|
19,548
|
|
$
|
65,994
|
|
Interest
and dividend income from Trust Fund
|
|
|
1,801,266
|
|
|
566,526
|
|
|
2,367,792
|
|
Total
revenues
|
|
|
1,847,712
|
|
|
586,074
|
|
|
2,433,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
Capital
based taxes
|
|
|
153,285
|
|
|
115,000
|
|
|
268,285
|
|
Management
fees
|
|
|
90,000
|
|
|
37,986
|
|
|
127,986
|
|
Insurance
|
|
|
95,815
|
|
|
37,500
|
|
|
133,315
|
|
Professional
fees
|
|
|
156,391
|
|
|
31,036
|
|
|
187,427
|
|
Travel
|
|
|
100,719
|
|
|
27,741
|
|
|
128,460
|
|
General
and administrative
|
|
|
48,168
|
|
|
9,016
|
|
|
57,184
|
|
Formation
costs
|
|
|
0
|
|
|
2,500
|
|
|
2,500
|
|
Total
expenses
|
|
|
644,378
|
|
|
260,779
|
|
|
905,157
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
1,203,334
|
|
|
325,295
|
|
|
1,528,629
|
|
Provision
for income taxes
|
|
|
187,000
|
|
|
48,000
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,016,334
|
|
$
|
277,295
|
|
$
|
1,293,629
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.09
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.07
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
11,650,000
|
|
|
7,869,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
13,634,353
|
|
|
8,323,201
|
|
|
|
|
See
accompanying notes to the financial statements
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Stockholders’ Equity
For
the
years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Common
|
|
Common
|
|
Common
|
|
Additional
|
|
During
the
|
|
|
|
|
|
Stock
|
|
Par
|
|
Stock
|
|
Paid
in
|
|
Development
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Warrants
|
|
Capital
|
|
Stage
|
|
Equity
|
|
Common
shares issued to initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
at $.0111 per share
|
|
|
2,250,000
|
|
$
|
150
|
|
|
-
|
|
$
|
24,850
|
|
$
|
-
|
|
$
|
25,000
|
|
Stock
dividend - July 8, 2005
|
|
|
-
|
|
|
50
|
|
|
-
|
|
|
(50
|
)
|
|
-
|
|
|
-
|
|
Stock
dividend - July 22, 2005
|
|
|
-
|
|
|
25
|
|
|
-
|
|
|
(25
|
)
|
|
-
|
|
|
-
|
|
Sale
of 9,000,000 units, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underwriters'
discount and offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
(includes 1,799,100 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subject
to possible conversion)
|
|
|
9,000,000
|
|
|
900
|
|
|
-
|
|
|
66,364,920
|
|
|
-
|
|
|
66,365,820
|
|
Proceeds
of exercise of underwriters'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
over-allotment
option for 400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
units,
net of commissions. (includes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,960
shares subject to possible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion).
|
|
|
400,000
|
|
|
40
|
|
|
-
|
|
|
3,007,960
|
|
|
-
|
|
|
3,008,000
|
|
Proceeds
subject to possible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
of 1,879,060 shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,578,807
|
)
|
|
-
|
|
|
(13,578,807
|
)
|
Proceeds
from issuance of unit options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100
|
|
|
-
|
|
|
100
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
277,295
|
|
|
277,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
11,650,000
|
|
$
|
1,165
|
|
|
-
|
|
$
|
55,818,948
|
|
$
|
277,295
|
|
$
|
56,097,408
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,016,334
|
|
|
1,016,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
11,650,000
|
|
$
|
1,165
|
|
|
-
|
|
$
|
55,818,948
|
|
$
|
1,293,629
|
|
$
|
57,113,742
|
|
See
accompanying notes to the financial statements
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Cash Flows
|
|
For
the Year Ended December 31, 2006
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,016,334
|
|
$
|
277,295
|
|
$
|
1,293,629
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Increase
in prepaid expenses
|
|
|
(1,615
|
)
|
|
(52,500
|
)
|
|
(54,115
|
)
|
Increase
in deferred legal fees
|
|
|
(121,953
|
)
|
|
|
|
|
(121,953
|
)
|
Increase
in accounts payable
|
|
|
|
|
|
|
|
|
|
|
and
accrued expenses
|
|
|
145,518
|
|
|
24,996
|
|
|
170,514
|
|
Increase
in deferred revenue
|
|
|
450,036
|
|
|
141,543
|
|
|
591,579
|
|
Increase
in income tax payable
|
|
|
91,034
|
|
|
48,000
|
|
|
139,034
|
|
Increase
(decrease) in capital based
|
|
|
|
|
|
|
|
|
|
|
taxes
payable
|
|
|
(50,928
|
)
|
|
115,000
|
|
|
64,072
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,528,426
|
|
|
554,334
|
|
|
2,082,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash held in Trust Fund
|
|
|
(2,251,302
|
)
|
|
(68,636,069
|
)
|
|
(70,887,371
|
|