2

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Fortress International Group, Inc.

Consolidated Statements of Operations

 

		(Successor)						(Predecessor)
		For the Three Months Ended June 30, 2007			For the Three Months Ended June 30, 2006			For the Three Months Ended  June 30,  2006
Revenue		$	10,862,307		$	—		$	18,445,839
Cost of Revenue			9,424,029			—			15,507,437
Gross Profit			1,438,278			—			2,938,402
Operating costs and expenses
Selling, general and administrative			3,424,040			121,753			1,681,169
Depreciation and amortization			97,245			—
Amortization of intangible assets			567,108			—			—
Total operating costs and expenses			4,088,393			121,753			1,681,169
Operating (loss) income			(2,650,115	)		(121,753	)		1,257,233
Other Income (Expense)
Interest income			423,898			410,904			—
Interest (expense)			(150,431	)		—			(4,733	)
Income (Loss) Before Income Taxes			(2,376,648	)		289,151			1,252,500
Income Tax (Benefit) Expense			182,316			98,312			—
Net (Loss) Income		$	(2,558,964	)	$	190,839		$	1,252,500
Weighted average number of shares outstanding
-basic			12,013,491			9,550,000			—
-diluted			12,013,491			9,550,000			—
Weighted average shares outstanding exclusive of shares
subject to possible redemption
-basic			12,013,491			7,990,800			—
-diluted			12,013,491			7,990,800			—
Basic net income (loss) per share
-Net income		$	(0.21	)	$	0.02		$	—
Diluted net income (loss) per share
-Net income		$	(0.21	)	$	0.02		$	—

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Fortress International Group, Inc.

Consolidated Statements of Operations-Continued

		(Successor)						(Predecessor)
		For the Six Months Ended June 30, 2007			For the Six Months Ended June 30, 2006			For the period from January 1, 2007 through January 19, 2007			For the Six Months Ended June 30, 2006
Revenue		$	19,539,244		$	—		$	1,412,137		$	34,726,161
Cost of Revenue			16,629,595			—			1,108,276			28,719,264
Gross Profit			2,909,649			—			303,861			6,006,897
Operating costs and expenses
Selling, general and administrative			6,061,980			297,955			555,103			3,333,944
Depreciation and amortization			152,676			—			33,660
Amortization of intangible assets			1,007,562			—			—			—
Total operating costs and expenses			7,222,218			297,955			588,763			3,333,944
Operating (loss) income			(4,312,569	)		(297,955	)		(284,902	)		2,672,953
Other Income (Expense)
Interest income			640,069			772,465			4,117			—
Interest (expense)			(267,797	)		—			(368	)		(9,698	)
Income (Loss) Before Income Taxes			(3,940,297	)		474,510			(281,153	)		2,663,255
Income Tax (Benefit) Expense			(349,325	)		161,334			—			—
Net (Loss) Income		$	(3,590,972	)	$	313,176		$	(281,153	)	$	2,663,255
Weighted average number of shares outstanding
-basic			11,592,599			9,550,000			—			—
-diluted			11,592,599			9,550,000			—			—
Weighted average shares outstanding exclusive of shares
subject to possible redemption
-basic			11,592,599			7,990,800			—			—
-diluted			11,592,599			7,990,800			—			—
Basic net income (loss) per share
-Net income		$	(0.31	)	$	0.03		$	—		$	—
Diluted net income (loss) per share
-Net income		$	(0.31	)	$	0.03		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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Fortress International Group, Inc.

Consolidated Statements of Cash Flow

		(Successor)						(Predecessor)
		For the Six Months Ended June 30, 2007			For the Six Months Ended June 30, 2006			For the period from January 1, 2007 through January 19, 2007			For the Six Months Ended June 30, 2006
Cash Flows from Operating Activities
Net income (loss)		$	(3,590,972	)	$	313,176		$	(281,153	)	$	2,663,255
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization			152,676			—			33,660			126,000
Amortization of intangibles			1,210,235			—			—			—
Deferred income taxes			490,675			(156,078	)		—			—
Income tax recoverable			(840,000	)		—			—			—
Stock-based compensation			465,433			—			—			—
Interest income on treasury bills			—			(953,442	)		—			—
Changes in assets and liabilities, net of effects of acquisitions:
Contracts and other receivables			(2,715,688	)		—			3,698,863			(1,162,200	)
Costs and estimated earnings in excess of billings on uncompleted contracts			158,177			—			(1,078,505	)		(128,075	)
Prepaid expenses			(508,619	)		38,915			(108,618	)		(269,893	)
Due from affiliates			—			—			519,923			(22,909	)
Other assets			(307,665	)		—			(42,968	)		—
Accounts payable and accrued expenses			354,887			(62,224	)		(1,861,306	)		2,842,596
Billings in excess of costs and estitmated earnings on uncompleted contracts			(589,807	)		—			419,676			(889,545	)
Income taxes payable			(586,283	)		6,412			—			—
Deferred compensation payable			—			—			(643,571	)		25,500
Interest income attributable to common stock subject to possible redemption			—			190,593			—			—
Net Cash (Used in) Provided by Operating Activities			(6,306,951	)		(622,648	)		656,001			3,184,729
Cash Flows from Investing Activities
Purchase of property and equipment			(172,350	)		—			(127,602	)		(38,427	)
Decrease in Investments held in Trust fund			44,673,994			—			—			—
Purchase of TSS/Vortech, net of cash received			(9,677,683	)		—			—			—
Purchase of Comm Site of South Florida, Inc. net of cash received			(135,000	)		—			—			—
Deferred acquisition costs			(981,357	)		(152,167	)		—			—
Net Cash Provided by (Used in) Investing Activities			33,707,604			(152,167	)		(127,602	)		(38,427	)
Cash Flows from Financing Activities
Payments on notes payable			(32,450	)		—			(6,281	)		(37,156	)
Advances from shareholder			(20,000	)		—			—			—
Member distributions			—			—			(1,561,639	)		(1,918,500	)
Repurchase of common stock			(6,248,574	)		—			—			—
Net Cash (Used in) Provided by Financing Activities			(6,301,024	)		—			(1,567,920	)		(1,955,656	)
Net Increase (Decrease) in Cash			21,099,629			(774,815	)		(1,039,521	)		1,190,646
Cash, beginning of period			7,347			992,547			2,361,838			1,737,075
Cash, end of period		$	21,106,976		$	217,732		$	1,322,317		$	2,927,721

 

The accompanying notes are an integral part of these consolidated financial statements.

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Fortress International Group, Inc.

Notes to the Consolidated Financial Statements

The consolidated financial statements are for the three and six months ended June 30, 2007 and 2006 for Fortress International Group, Inc. (the “Successor Company”, “Fortress” or the “Company”) and are for the period January 1, 2007 to January 19, 2007 (the acquisition date) and the three and six months ended June 30, 2006 for VTC, L.L.C. t/a Total Site Solutions and Vortech, LLC ( collectively the “Predecessor Company” or “TSS/Vortech”).  The Company has included the results of operations for the acquisition of TSS/Vortech from the acquisition date through June 30, 2007 in its financial statements.

Except for the balance sheets of the Company and TSS/Vortech as of December 31, 2006, which are derived from audited financial statements, the accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair statement of such financial position and results of operations have been included. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year.

The consolidated financial statements and notes are presented as required by Form 10-Q and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The interim financial statements of TSS/Vortech have also been presented in accordance with the requirements of Form 10-Q. Such information should be read in conjunction with the TSS/Vortech financial statements for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for which the provisions of SFAS No. 157 should be applied retrospectively. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is evaluating the effect of this statement, if any, on its financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for accounting periods beginning after November 15, 2007. The Company is currently assessing the impact of adopting SFAS No. 159 on the consolidated financial statements.

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NOTE C - ACQUISITIONS

TSS/VORTECH

On January 19, 2007, the Company acquired all of the outstanding membership interests of TSS/Vortech pursuant to the Second Amended and Restated Membership Interest Purchase Agreement dated July 31, 2006, as amended by the Amendment to the Second Amended and Restated Membership Interest Purchase Agreement dated January 16, 2007 (the “Purchase Agreement”). The closing consideration consisted of (i) $11,000,000 in cash, (ii) the assumption of $154,599 of debt of TSS/Vortech, (iii) 2,602,813 shares of Fortress common stock, of which 2,534,988 shares were issued to the selling members and 67,825 shares were issued to Evergreen Capital LLC as partial payment of certain outstanding consulting fees, and (iv) $10,000,000 in two convertible promissory notes of $5,000,000 each, bearing interest at 6%.

All of the shares issued to the selling members (2,534,988 shares) were placed into escrow accounts as follows: 2,461,728 into the General Indemnity escrow to secure the rights of Fortress under the acquisition and 73,260 shares into the Balance Sheet escrow subject to TSS/Vortech delivering $1,000,000 in working capital. These shares will be released subject to certain conditions under the respective agreements. Based on a determination of net working capital at the acquisition date, the Company has recorded a payable for approximately $200,000, included in accounts payable and accrued expenses in the June 30, 2007 consolidated balance sheet, expected to be paid to the sellers as a purchase price adjustment. The share price was based upon the average closing price for twenty days prior to the public announcement of the purchase.

Shareholders owning 756,100 shares of Fortress common stock voted against the acquisition and requested to receive the pro rata share of cash in the Trust Fund. The Company remitted approximately $4,342,000 in exchange for these shares.

Upon consummation of the merger approximately $28.9 million was released from the trust account to be used by the Company.

Under the purchase method of accounting, the preliminary purchase price has been allocated to the net tangible and intangible assets acquired and liabilities assumed, based upon preliminary estimates, which assume that historical cost approximates fair value of the assets and liabilities of TSS/Vortech. As such, management estimates that a substantial portion of the excess purchase price will be allocated to non-amortizable intangible assets. These estimates are subject to change upon the finalization of the valuation of certain assets and liabilities and may be adjusted in accordance with the provisions of SFAS No. 141, Business Combinations.  Management has preliminarily estimated that the transaction will result in $14.7 million of goodwill that is expected to be deductible for income tax purposes. Additionally, management estimated that approximately $20.4 million of the purchase price is allocable to customer-related intangible assets, which include non-contractual customer relationships, order backlog, and trade name.  Such intangible assets will be amortized over periods ranging from one to fifteen years based upon factors such as customer relationships and contract periods.

We paid a premium (i.e., goodwill) over the fair value of the net tangible and preliminarily identified intangible assets acquired for a number of reasons, including the following:

·

TSS/Vortech has a broad range of experience, contacts and service offerings in the mission critical facility industry. TSS/Vortech has a very experienced and committed management team with strong core competencies. TSS has a significant number of personnel with security clearances which is important in the homeland security industry.

·

Our belief in TSS/Vortech’s business model and potential for growth, increasing demand in its industry and its complete service offering when compared to other similar companies. In addition TSS/Vortech can provide a platform to assist us in managing acquisitions in the future.

·

TSS/Vortech has been building a national business development organization to expand beyond its current regional presence.

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The total purchase price paid, including transaction costs of approximately $1.8 million, has been preliminarily allocated as follows:

Cash		$	11,000,000
Common stock (2,602,813 shares valued per the purchase agreement)			14,211,359
Convertible notes payable to sellers			10,000,000
Transaction costs			1,773,068
Total purchase price			36,984,427
Purchase price allocation:
Current assets			9,377,244
Property and equipment			904,689
Intangible assets			20,395,300
Goodwill			14,713,572
Other assets			64,158
Total assets acquired			45,454,963
Current liabilities			8,391,012
Long-term liabilities			79,524
Total liabilities assumed			8,470,536
Net assets acquired		$	36,984,427

The preliminary estimated value and the weighted-average amortization period of each of the components of intangible assets are as follows:

					Weighted-Average
		Estimated Value			Amortization Period
Non-contractual customer relationships		$	16,100,000			8			years
Order Backlog			456,300			1			years
Trade Name			3,839,000			15			years
Total		$	20,395,300

 

Amortization expense totaling $681,183 and $1,210,235 has been included in the accompanying consolidated statement of operations related to the above intangibles, of which $114,075 and $202,673 is included in cost of revenue, for the three and six months ending June 30, 2007, respectively.

The results of operations for TSS/Vortech have been included in the Consolidated Statements of Operations from the acquisition date through June 30, 2007.

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Unaudited pro forma results of operations are as follows. The amounts are shown as if the TSS acquisition had occurred on January 1, 2007:

		Three months ended June 30,
		2007			2006
Proforma revenue		$	10,862,307		$	18,445,839
Proforma operating (loss) income			(2,650,114	)		454,297
Proforma pretax (loss) income			(2,376,647	)		710,037
Proforma net (loss) income			(2,558,964	)		468,624
Net (loss) income per share (basic )			(0.21	)		0.05
Net (loss) income per share (diluted)			-			0.05

 

		Six months ended June 30,
		2007			2006
Proforma revenue		$	20,951,381		$	34,726,161
Proforma operating (loss) income			(4,597,471	)		1,164,763
Proforma pretax (loss) income			(4,221,450	)		1,661,228
Proforma net (loss) income			(3,872,125	)		1,096,410
Net (loss) income per share (basic )			(0.33	)		0.11
Net (loss) income per share (diluted)			-			0.11

This information is not necessarily indicative of the operational results that would have occurred if the acquisition had been consummated on the dates indicated nor is it necessarily indicative of future operating results of the combined enterprise.

Comm Site of South Florida, Inc.

On May 7, 2007 the Company purchased all of the assets of Comm Site of South Florida, Inc. for $150,000 paid in cash. In connection with this purchase, $135,000 has been allocated to Goodwill with the balance to other current assets and property and equipment, based on their historic cost which management believes approximates fair value.

NOTE D - INVESTMENTS HELD IN TRUST

The Company held certain investments in a trust account through January 19, 2007 consisting primarily of short term investments. All such investments have been disposed of as of June 30, 2007.

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NOTE E - INCOME (LOSS) PER SHARE

Successor — Basic and diluted net loss per share information is presented in accordance with SFAS No. 128, Earnings Per Share.  Basic loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average common shares outstanding during the period.  Diluted loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average common shares outstanding which includes common stock equivalents.  The Company’s common stock equivalents consist of outstanding warrants.  For the three and six months ended June 30, 2007, a total of 15,600,000 common stock equivalents, were excluded from the calculation of diluted income per share as their impact would have been anti-dilutive. In addition, any impact from the conversion of our convertible notes payable discussed in Note I are excluded from the computation of earnings per share since their conversion would also be anti-dilutive.

		(Successor)						(Predecessor)
		Three Months Ended June 30,						Three Months Ended June 30,
		2007			2006			2007			2006
Net (loss) income allocable to
common stockholders not subject
to possible redemption		$	(2,558,964	)	$	190,839		$	-		$	1,252,500
Weighted average number of
shares outstanding - basic			12,013,491			9,550,000			-			-
Weighted average number of
shares outstanding - diluted			12,013,491			9,550,000			-			-
Income (loss) per share - basic		$	(0.21	)	$	0.02			-			-
Income (loss) per share -
diluted		$	(0.21	)	$	0.02			-			-

 

		Six Months Ended						January 1, through			Six Months
		June 30,						January 19,			Ended June 30,
		2007			2006			2007			2006
Net (loss) income allocable to
common stockholders not subject
to possible redemption		$	(3,590,972	)	$	313,176		$	(281,153	)	$	2,663,255
Weighted average number of
shares outstanding - basic			11,592,599			9,550,000			-			-
Weighted average number of
shares outstanding - diluted			11,592,599			9,550,000			-			-
Income (loss) per share - basic		$	(0.31	)	$	0.03			-			-
Income (loss) per share -
diluted		$	(0.31	)	$	0.03			-			-

No weighted average common shares or income (loss) per share amounts are shown for the Predecessor since the Predecessor was limited liability company whose capital structure consisted of membership interests. As such, no weighted average number of outstanding shares and earnings per share are presented.

 

NOTE F - EMPLOYEE STOCK-BASED COMPENSATION

On January 17, 2007, the stockholders of the Company approved the Fortress International Group, Inc. 2006 Omnibus Incentive Compensation Plan (the “Plan”). Under the Plan, the Company reserved 2.1 million shares of the Company’s common stock for issuance to employees and directors through incentive stock options, or non-qualified stock options or through restricted stock units. Pursuant to the Plan, on January 19, 2007 the Company issued of 574,000 shares of restricted stock with grant date value of $5.44 per share in connection with the acquisition of TSS.  The restricted stock units have a vesting period of three years.

On May 1, 2007 the Company issued a total of 86,832 shares of restricted stock with a grant date value of $5.43 per share to the non-employee members of the Board of Directors. These shares were issued as follows:

 

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Each non-employee director was granted 10,000 shares which vest over a two year period, one third on the grant date, and each one-half of the remaining balance on the first and second anniversaries of the grant date. A total of 50,000 shares were issued to the non-employee directors under this arrangement.

Each of the two new members of the Board of Directors received a one-time grant of $100,000 worth of restricted stock which vests over a three year period, with each one third of the shares vesting on the first, second and third anniversaries of the grant date. A total of 36,832 shares were issued to the two new non-employee directors under this arrangement.

In addition on May 7, 2007 the Company issue 20,000 shares of restricted stock with a grant date value of $5.53 to an employee, these shares have a vesting period of three years.

We are accounting for these grants of restricted stock in accordance with SFAS No. 123(R), Share Based Payment, which requires that compensation costs related to share-based payment transactions be recognized in financial statements. Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes stock-based compensation based upon the fair value of the stock-based awards taking into account the effects of the employees expected exercise and post-vesting employment termination behavior.  The Company recognized $263,000 ($.02 per basic and diluted share) of stock-based compensation expense for the three months ended June 30, 2007, for the six months ended June 30, 2007 the company recognized $465,000 ($.04 per basic and diluted share). These amounts are recorded as selling, general and administrative expense. 

Company Overview

 

We were formed in Delaware on December 20, 2004 as a special purpose acquisition company formed under the name “Fortress America Acquisition Corporation” for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other business combination, operating businesses in the homeland security industry.

On January 19, 2007, we acquired all of the outstanding membership interests of each of VTC, L.L.C., doing business as Total Site Solutions (“TSS”), and Vortech, L.L.C. (“Vortech” and, together with TSS, “TSS/Vortech”) and simultaneously changed our name to Fortress International Group, Inc. (the “Company”). The closing consideration consisted of (i) $11,000,000 in cash, (ii) the assumption of $154,599 of debt of TSS/Vortech, (iii) 3,176,813 shares of our stock, of which 2,534,988 shares were issued to the selling members, 67,825 shares were issued to Evergreen Capital LLC as partial payment of certain outstanding consulting fees and (iii) $10,000,000 in two convertible, interest-bearing promissory notes of $5,000,000 each.

We provide comprehensive services for the planning, design, and development of mission critical facilities and information infrastructure. We also provide a single source solution for highly technical mission-critical facilities such as data centers, operation centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services include technology consulting, engineering and design management, construction management, system installations, operations management, and facilities management and maintenance.

During the past three years, our revenue growth has been driven mainly by government spending on homeland security initiatives spurred by the events of September 11, 2001. These events have also affected businesses, which are increasing spending on data security and privacy. These homeland security initiatives include projects that require the hardening, relocation, renovation and upgrade of mission-critical facilities to protect critical government information networks and data processing centers against attacks. In addition to these factors there are other drivers that cause our market to remain robust. Legislation such as Sarbanes Oxley compliance for publicly traded companies, HIPPA laws regarding protection and availability of data for healthcare organizations and the government’s critical infrastructure protection program for industries that are vital to our economy have resulted in such companies having the need to invest to protect their networks, the reliability of those networks, and maintain their ability to perform transactions that are financial or informational in nature. With respect to these critical infrastructure systems, the companies focus on physical security, network security, redundancies for uninterruptible power supply systems, electrical switch gear, stand-by power generators, heat rejection and cooling systems, fire protection systems, monitoring and control systems, and security systems, as well as the physical environment that houses critical operations. We help our customers plan for, prevent or mitigate against the consequences of attacks, power outages and natural disasters. We provide our services, directly and indirectly, to both government customers and private sector customers.

 

TSS has obtained a facility clearance from the United States Department of Defense. This clearance enables the companies to access and service restricted government projects. In addition to the facility clearance, TSS has successfully cleared over one-third of its employees, allowing them individual access to restricted projects and facilities. Several additional employees are currently in the process for clearance.

 

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In the future, we expect to use enhanced resources to expand geographically through internal growth initiatives, as well as through potential acquisitions of specialized mission critical engineering or IT services firms (primarily in the United States).

 

Our customers include United States government and homeland defense agencies and private sector businesses that in some cases are the end user of the facility or in other cases, such as our major real estate investment trust, or REIT, customer, Corporate Office Properties Trust, are providing a facility to a government end user. We categorize contracts where a government agency is the ultimate end user of the facility as government-related contracts.

 

Our revenues are derived from fees for our professional services as well as revenues earned under construction management contracts and facility management contracts with varying terms.

 

We believe there are high barriers to entry in our sector for new competitors due to our specialized technology service offerings we deliver for our customers, our top secret clearances, and our turnkey suite of deliverables offered. We compete for business based upon our reputation, past experience, and our technical engineering knowledge of mission critical facilities and their infrastructure. We are developing and creating long term relationships with our customers because of our excellent reputation in the industry and will continue to create facility management relationships with our customers that we expect will provide us with steadier revenue streams to improve the value of our business.

 

Contract Backlog

We believe a strong indicator of our future performance is our backlog of uncompleted projects in process or recently awarded. Our backlog represents contracts that have been awarded that we believe will result in revenue in the future. We have broken our backlog into the following three categories: (i) technology consulting, which represents the value of future revenue under existing contacts for professional services related to consulting and/or engineering design contracts; (ii) construction management, which represents the value of future revenues for construction projects; and (iii) facility management, which represents the value of future revenues for providing recurring maintenance services on our customers’ mission critical facilities, networks and communication systems.

At June 30, 2007, our backlog was approximately $55.4 million, compared to approximately $20.6 million at December 31, 2006. We believe that most of the backlog at June 30, 2007 will be recognized during the remainder of 2007. The following table reflects the value of our backlog in the above three categories as of June 30, 2007 and as of December 31, 2006, respectively.

 

		(Successor)			(Predecessor)
		June 30, 2007			December 31, 2006
Technology consulting		$	2,666,000		$	1,266,000
Construction management			37,376,000			11,757,000
Facilities management			15,336,000			7,585,000
		$	55,378,000		$	20,608,000

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The tables below include pro-forma information to assist in the analysis of the results of operations:

FORTRESS INTERNATIONAL GROUP, INC.

Pro Forma Consolidated Statements of Operations

		(Successor)			(Successor)			(Predecessor)			(Proforma)
		For the Three Months Ended June 30, 2007			For the Three Months Ended June 30, 2006			For the Three Months Ended June 30, 2006			For the Three Months Ended June 30, 2006
Revenue		$	10,862,307		$	—		$	18,445,839		$	18,445,839
Cost of Revenue			9,424,029			114,075			15,507,437			15,621,512
Gross Profit			1,438,278			(114,075	)		2,938,402			2,824,327
Operating costs and expenses
Selling, general and administrative			3,424,040			121,753			1,598,894			1,720,647
Depreciation and amortization			97,245			—			82,275			82,275
Amortization of intangible assets			567,108			567,108			—			567,108
Total operating costs and expenses			4,088,393			688,861			1,681,169			2,370,030
Operating income			(2,650,115	)		(802,936	)		1,257,233			454,297
Other Income (Expense)
Interest income			423,898			410,904			—			410,904
Interest (expense)			(150,431	)		(150,431	)		(4,733	)		(155,164	)
Income (Loss) Before Income Taxes			(2,376,648	)		(542,463	)		1,252,500			710,037
As a Percentage of Revenue
Revenue			100.0	%		—			100.0	%		100.0	%
Cost of Revenue			86.8	%		—			84.1	%		84.7	%
Gross Profit			13.2	%		—			15.9	%		15.3	%
Operating costs and expenses
Selling, general and administrative			31.5	%		—			8.7	%		9.3	%
Depreciation and amortization			0.9	%		—			0.4	%		0.4	%
Amortization of intangible assets			5.2	%		—			0.0	%		3.1	%
Total operating costs and expenses			37.6	%		0.0	%		9.1	%		12.8	%
Operating income			-24.4	%		0.0	%		6.8	%		2.5	%
Other Income (Expense)
Interest income			3.9	%		100.0	%		0.0	%		2.2	%
Interest (expense)			-1.4	%		-36.6	%		0.0	%		-0.8	%
Income (Loss) Before Income Taxes			-21.9	%		-132.0	%		6.8	%		3.8	%

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FORTRESS INTERNATIONAL GROUP, INC.

Pro Forma Consolidated Statements of Operations

		(Successor)			(Predecessor)			Proforma			(Successor)			(Predecessor)			Proforma
		For the Six Months Ended June 30, 2007			For the period from January 1, 2007 through January 19, 2007			combined For the Six Months Ended June 30, 2007			For the Six Months Ended June 30, 2006			For the Six Months Ended June 30, 2006			combined For the Six Months Ended June 30, 2006
Revenue		$	19,539,244			1,412,137			20,951,381		$	—		$	34,726,161		$	34,726,161
Cost of Revenue			16,629,595			1,108,276			17,737,871			202,673			28,719,264			28,921,937
Gross Profit			2,909,649			303,861			3,213,510			(202,673	)		6,006,897			5,804,224
Operating costs and expenses
Selling, general and administrative			6,061,980			555,103			6,617,083			297,955			3,207,944			3,505,899
Depreciation and amortization			152,676			33,660			186,336			—			126,000			126,000
Amortization of intangible assets			1,007,562			—			1,007,562			1,007,562			—			1,007,562
Total operating costs and expenses			7,222,218			588,763			7,810,981			1,305,517			3,333,944			4,639,461
Operating income			(4,312,569	)		(284,902	)		(4,597,471	)		(1,508,190	)		2,672,953			1,164,763
Other Income (Expense)
Interest income			640,069			4,117			644,186			772,465			—			772,465
Interest (expense)			(267,797	)		(368	)		(268,165	)		(266,302	)		(9,698	)		(276,000	)
Income (Loss) Before Income Taxes			(3,940,297	)		(281,153	)		(4,221,450	)		(1,002,027	)		2,663,255			1,661,228
As a Percentage of Revenue
Revenue			100.0	%		100.0	%		100.0	%		—			100.0	%		100.0	%
Cost of Revenue			85.1	%		78.5	%		84.7	%		—			82.7	%		83.3	%
Gross Profit			14.9	%		21.5	%		15.3	%					17.3	%		16.7	%
Operating costs and expenses
Selling, general and administrative			31.0	%		39.3	%		31.6	%					9.2	%		10.1	%
Depreciation and amortization			0.8	%		2.4	%		0.9	%					0.4	%		0.4	%
Amortization of intangible assets			5.2	%		0.0	%		4.8	%					0.0	%		2.9	%
Total operating costs and expenses			37.0	%		41.7	%		37.3	%					9.6	%		13.4	%
Operating income			-22.1	%		-20.2	%		-21.9	%		0.0	%		7.7	%		3.4	%
Other Income (Expense)
Interest income			3.3	%		0.3	%		3.1	%		100.0	%		0.0	%		2.2	%
Interest (expense)			-1.4	%		0.0	%		-1.3	%		-34.5	%		0.0	%		-0.8	%
Income (Loss) Before Income Taxes			-20.2	%		-19.9	%		-20.1	%		-129.7	%		7.7	%		4.8	%

 

The pro forma results of operations shown above are not necessarily indicative of the results of operations that may have actually occurred had the acquisition taken place on the dates noted, or the future financial position or operating results of us or TSS/Vortech.

Critical Accounting Policies

Revenue Recognition

 

Revenues from contracts other than time and material contracts are recognized on the percentage of completion method, measured by the percentage of total costs incurred to date to estimated total costs for each contract. This method is used because management considers cost incurred and costs to complete to be the best available measure of progress in the contracts. Revenues from time and materials contracts are recognized as work is performed.

 

Contract costs include all direct materials, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, payroll taxes and supplies. General and administrative expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which losses are determined.

 

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The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represented billings in excess of revenue recognized. As these long-term contracts extend over one or more years, revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts which require the revisions are determined.

Goodwill and Other Intangible Assets

Management has preliminarily estimated that the acquisition of TSS/Vortech will result in $14.7 million of goodwill that is expected to be deductible for income tax purposes. Additionally, management has estimated that approximately $20.4 million of the purchase price is allocable to customer-related intangible assets, which include non-contractual customer relationships, order backlog, and trade name. 

Goodwill arising from our acquisition of TSS/Vortech is not amortized but instead will be tested for impairment at the reporting unit level at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. We plan to perform an impairment assessment annually. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the period over which cash flows will occur, and determination of the weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

 

We amortize other intangible assets over their estimated useful lives and review the long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable and at least annually. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available

Allowance for Doubtful Accounts

 

We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. Estimates used in determining accounts receivable allowances are based on specific customer account reviews and historical experience of credit losses. We also apply judgment including assessments about changes in economic conditions, concentration of receivables among customers and industries, recent write-off trends, rates of bankruptcy, and credit quality of specific customers. Unanticipated changes in the financial condition of customers, the resolution of various disputes, or significant changes in the economy could impact the reserves required.

Income Taxes

 

We make judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. The deferred tax assets were evaluated under the guidelines of SFAS No. 109, Accounting for Income Taxes, and a determination of the basis of objective factors was made that the net assets will be realized through future years’ table income. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required.

 

Results of Operations for the Successor Company

Three months ended June 30, 2007 compared with the three months ended June 30, 2006

The following analysis of the Company provides comprehensive information as to the results of our operations since our acquisition of TSS/Vortech compared to our operations prior to this acquisition when we operated as a special purpose acquisition company. Following this analysis, we also present a comparison of our current results to pro forma results as though the acquisition had occurred on January 1, 2006.

Revenue and cost of revenue. We had no revenue or cost of revenue during the three months ended June 30, 2006. For the three months ended June 30, 2007 we had $10.9 million of revenue and $9.4 million of cost of revenue (including $114,000 of amortization of order backlog).

 

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Gross margin decreased during the three months ended June 30, 2007 due to margin erosion of $0.3 million which occurred on contracts with our major customer as these contracts were completed.

The revenue and cost of revenue for the three months ended June 30, 2007 were due to our acquisition of TSS/Vortech during the first quarter of 2007.

Selling, general and administrative expenses. For the three months ended June 30, 2007, we incurred $3.4 million of selling, general and administrative expenses related to operations of TSS/Vortech which were acquired on January 19, 2007. Our selling, general and administrative expenses were $122,000 for the three months ended June 30, 2006 related primarily to the pursuit of acquisition candidates.

We granted employees 574,000 shares of common stock which had a grant date value of $5.44 share on January 19, 2007. These shares cliff-vest on January 19, 2010. In addition, on May 1, 2007 we granted 106,832 shares of common stock to our non-employee directors and one employee with a grant date value of $5.43 which vest over the next three years. We recorded approximately $263,000 of compensation expense related to these shares in the three months ended June 30, 2007, respectively.

 

Depreciation and amortization of intangible assets. During the three months ended June 30, 2007, we incurred depreciation and amortization expense of $664,000 related to assets purchased in our acquisition of TSS/Vortech.

Prior to our acquisition of TSS/Vortech, we did not incur any depreciation or amortization expense.

Interest income. Our interest income was $424,000 earned during the three months ended June 30, 2007 in comparison to $411,000 for the three months ended June 30, 2006.

Interest expense. For the three months ended June 30, 2007, interest expense was $150,000. We did not incur any interest expense during the three months ended June 30, 2006. This interest expense is attributable to the debt acquired with the acquisition of TSS/Vortech which consists of notes payable due to the sellers of $10,000,000 that have an interest rate of 6% per annum.

Income tax benefit (expense). We recorded an income tax expense of $182,000 for the three months ended June 30, 2007. For the three months ended June 30, 2006 we recorded an income tax expense of $98,000.

The amount above for the three months ended June 30, 2007 reflect the value of a potential loss carryback to prior periods at the effective federal tax rate of 34% net of a valuation allowance recorded on the deferred tax assets. The Company’s effective tax rates are based upon the effective tax to be applicable to the full fiscal year.

Six months ended June 30, 2007 compared with the six months ended June 30, 2006

Revenue and cost of revenue. We had no revenue or cost of revenue during the six months ended June 30, 2006. For the six months ended June 30, 2007, we had $19.5 million of revenue and $16.6 million of cost of revenue (including $203,000 of amortization of order backlog).

The increase in revenue and cost of revenue for the six months ended June 30, 2007 were due to our acquisition of TSS/Vortech during the first quarter of 2007.

Selling, general and administrative expenses. For the six months ended June 30, 2007, we incurred $6.1 million of selling, general and administrative expenses related to operations of TSS/Vortech. Our selling, general and administrative expenses were $298,000 for the six months ended June 30, 2006 related primarily to the pursuit of acquisition candidates.

We granted employees 574,000 shares of common stock which had a grant date value of $5.44 share on January 19, 2007. These shares cliff-vest on January 19, 2010. In addition, on May 1, 2007 we granted 106,832 shares of common stock to our non-employee directors and one employee with a grant date value of $5.43 which vest over the next three years. We recorded approximately $465,000 of compensation expense related to these shares in the six months ended June 30, 2007.

 

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Depreciation and amortization of intangible assets. During the six months ended June 30, 2007, we incurred depreciation and amortization expense of $1,160,000 related to assets purchased in our acquisition of TSS/Vortech. Prior to our acquisition of TSS/Vortech, we did not incur any depreciation or amortization expense.

Interest income. For the six months ended June 30, 2007, interest income was $640,000 in comparison to $772,000 for the six months ended June 30, 2006. Interest income decreased on a year to date basis because of the decrease in cash invested due to the purchase of TSS/Vortech and the related transaction costs.

Interest expense. For the six months ended June 30, 2007, interest expense was $268,000. We did not incur any interest expense during the six months ended June 30, 2006. This interest expense is attributable to the debt acquired with the acquisition of TSS/Vortech which consists of notes payable due to the sellers of $10,000,000 that have an interest rate of 6% per annum.

Income tax benefit (expense). For the six months ended June 30, 2007, we had an income tax benefit of $349,000 and for the six months ended June 30, 2006, income tax expense was $161,000.

The amounts above for the six months ended June 30, 2007 reflect the value of a potential loss carryback to prior periods at the effective federal tax rate of 34% net of a valuation allowance recorded on the deferred tax assets. The Company’s effective tax rates are based upon the effective tax to be applicable to the full fiscal year.

Results of Operations on a Pro Forma Combined Basis for the Successor Company

The acquisition of TSS/Vortech was our first business combination and accordingly, we do not believe a comparison of the results of operations for the three and six months ended June 30, 2007 and June 30, 2006 is very beneficial to our investors. In order to assist investors in better understanding the changes in our business between the three and six months ended June 30, 2007 and June 30, 2006, we are presenting in the discussion below pro forma results of operations for the Company and TSS/Vortech for the three and six months ended June 30, 2007 and June 30, 2006 as if the acquisition of TSS/Vortech occurred on January 1, 2007 and January 1, 2006, respectively. We derived the pro forma results of operations from (i) the unaudited consolidated financial statements of TSS/Vortech for the period from December 31, 2006 to January 19, 2007 (the date of the acquisition) and the six months ended June 30, 2006, and (ii) our unaudited consolidated financial statements for the six months ended June 30, 2007 and June 30, 2006.

 

The pro forma results of operations are not necessarily indicative of the results of operations that may have actually occurred had the acquisition taken place on the dates noted, or the future financial position or operating results of us or TSS/Vortech. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable.

Three months ended June 30, 2007 compared with the three months ended June 30, 2006

Revenue and cost of revenue. We had $10.9 million of revenues and $9.4 million of cost of revenue earned in the three months ended June 30, 2007 compared to $18.4 million of revenue and $15.6 million of cost of revenue earned in the three months ended June 30, 2006.

The decrease in revenue was primarily due to a reduction in construction management revenue earned on projects for the three months ended June 30, 2007as compared to the same six month period in 2006.

Management believes that the decline in revenue when comparing the three months ended June 30, 2007 to June 30, 2006 results from the fact that we relied heavily in its first three years of operations on a few long-term contracts from one major customer. Starting in the last quarter of 2005 and continuing through all of 2006 and 2007, we are implementing a strategy to replace these contracts with new revenue from a broader base of customers in both the public and the private sectors. In order to continue a revenue level equal or higher to the revenue recognized in the first six months of 2006, the Company needed to replace its backlog at December 31, 2005 of $39.7 million with new sales as the backlog diminished. New backlog additions for the year 2006 were approximately $41.0 million and our backlog at December 31, 2006 was $20.6 million. As a result, our revenue on a quarter to quarter basis for the first six months of 2007 has declined.

 

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Backlog additions were only $8.0 million in the third quarter and $13.2 million for the fourth quarter of 2006, which affected revenue in our first and second quarters of 2007. New backlog additions increased to $15.2 million in the first quarter and $44.1 million in the second quarter of 2007. Backlog increased again in the second quarter of 2007 by $30.7 million. If we are able to sustain this increasing trend of closing new business, our revenue per quarter should increase correspondingly. We believe backlog takes an average of six months to be recognized proportionately as revenue on projects utilizing the percentage of completion method. Delays in project mobilization may also cause some inconsistencies in our revenue recognition from quarter to quarter. Our total backlog at June 30, 2007 was $55.4 million of which a majority of it should be recognized as revenue in the third and forth quarters of 2007.

 

The cost of revenues decreased in relation to our reduction in revenue for the three months ended June 30, 2007 and 2006. Cost of revenue decreased to $9.4 million with a gross profit margin of 13.2% for the three months ended June 30, 2007 compared to $15.6 million with a gross profit margin of 15.3% for the three months ended June 30, 2006.

Gross profit margin decreased because there are fixed costs included in cost of revenue which were spread over less revenue. In addition, there was margin erosion of $0.3 million which occurred on contracts with our major customer as these contracts were completed.

Revenue from our largest customer (in 2006) was only $1.1 million for the three months ended June 30, 2007 compared to $12.3 million for the three months ended June 30, 2006.

The reduction of revenue from this customer has been replaced with revenue from new customers as stated in our diversification strategy. Approximately 10% of our revenue during the quarter came from this customer compared to 67% in the three months ended June 30, 2006. Our strategy is to continue to diversify our customer base and become less reliant on this single customer.

Selling, general and administrative expenses. Selling, general and administrative expenses were $3.4 million for the three months ended June 30, 2007 compared to $1.7 million for the three months ended June 30, 2006. The increase as a percentage of revenue increased to 31.5% of revenue from 9.3% of revenue for the three months ended June 30, 2007 and 2006.  

The increase in these costs is attributable to (i) an increase in the number of sales and marketing personnel added to the Company to implement our strategic plan, (ii) marketing expenses to get into the private industry marketplace, (iii) non cash compensation of restricted stock awards given to key employees, (iv) the costs associated with being a public company and (v) increased rent and occupancy costs as we increased our office space for the technology consulting group and other support personnel and opened offices in other locations. These increased additional costs versus the prior year period ending June 30 are:

					Three months			Six months
·			Sales salaries and expenses		$	511,000		$	942,000
·			Marketing expenses			95,000			325,000
·			Non cash compensation for restricted stock			263,000			465,000
·			Public company costs			431,000			841,000
·			Rent and occupancy costs			223,000			401,000

 

Depreciation and amortization of intangible assets. Depreciation and amortization of intangible assets expense was $664,000 for the three months ended June 30, 2007 compared to $649,000 for the three months ended June 30, 2006. Our depreciation expense increased $15,000 due to the increase in property and equipment purchased related to the new office space leased in the fourth quarter of 2006.

Interest income. Interest income was $424,000 for the three months ended June 30, 2007 compared to $411,000 for the three months ended June 30, 2006.

Interest expense. Interest expense was $150,000 for the three months ended June 30, 2007 compared to $4,700 for the three months ended June 30, 2006.

Six months ended June 30, 2007 compared with the six months ended June 30, 2006

Revenue and cost of revenue. We had $19.5 million of revenues and $16.6 million of cost of revenue earned in the six months ended June 30, 2007 compared to $34.7 million of revenue and $28.9 million of cost of revenue earned in the six months ended June 30, 2006. The decrease in revenue was primarily due to a reduction in construction management revenue earned on projects for the six months ended June 30, 2007 compared to the same six month period in 2006.

 

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Management believes that the decline in revenue when comparing the six months ended June 30, 2007 to June 30, 2006 results from the fact that the Company relied heavily in its first three years of operations on a few long-term contracts from one major customer. Starting in the last quarter of 2005 and continuing through all of 2006 and 2007 the Company is implementing a strategy to replace these contracts with new revenue from a broader base of customers in both the public and the private sectors. In order to continue a revenue level equal or higher to the revenue recognized in the first six months of 2006, we needed to replace its backlog at December 31, 2005 of $39.7 million with new sales as the backlog diminished. New backlog additions for the year 2006 were approximately $41.0 million and our backlog at December 31, 2006 was $20.6 million. As a result, our revenue on a quarter to quarter basis for the first six months of 2007 has declined.

Backlog additions were only $8.0 million in the third quarter and $13.2 million for the fourth quarter of 2006, which affected revenue in our first and second quarters of 2007. New backlog additions increased to $15.2 million in the first quarter and $44.1 million in the second quarter of 2007. Backlog increased again in the second quarter of 2007 by $30.7 million. If the Company is able to sustain this increasing trend of closing new business, its revenue per quarter should increase correspondingly. We believe backlog takes an average of six months to be recognized proportionately as revenue on projects utilizing the percentage of completion method. Delays in project mobilization may also cause some inconsistencies in our revenue recognition from quarter to quarter. Our total backlog at June 30, 2007 was $55.4 million of which a majority of it should be recognized as revenue in the third and forth quarters of 2007.

 

The cost of revenues decreased in relation to our reduction in revenue for the six months ended June 30, 2007 and 2006.

Cost of revenue decreased to $17.7 million with a gross profit margin of 15.3% for the six months ended June 30, 2007 compared to $28.9 million with a gross profit margin of 16.7% for the six months ended June 30, 2006.

Gross profit margin decreased because there are fixed costs included in cost of revenue which were spread over less revenue. In addition, there was margin erosion of $0.3 million which occurred on contracts with our major customer as these contracts were completed.

Revenue from our largest customer for the six months ended June 30, 2007 was $6.1 million compared to $23.1 million for the six months ended June 30, 2006.

The reduction of revenue from this customer has been replaced with revenue from new customers as stated in our diversification strategy. Approximately 29% and 67% of our revenue came from this customer in the six months ended June 30, 2007 and 2006, respectively. Our strategy is to continue to diversify our customer base and become less reliant on this single customer.

Selling, general and administrative expenses. Selling, general and administrative expenses were $6.6 million for the six months ended June 30, 2007 compared to $3.5 million for the six months ended June 30, 2006. The increase as a percentage of revenue to 31.6% from 10.5% of revenue for the six months ended June 30, 2007 and 2006. 

The increase in these costs is attributable to (i) an increase in the number of sales and marketing personnel added to the Company to implement our strategic plan, (ii) marketing expenses to get into the private industry marketplace, (iii) non cash compensation of restricted stock awards given to key employees, (iv) the costs associated with being a public company and (v) increased rent and occupancy costs as we increased our office space for the technology consulting group and other support personnel and opened offices in other locations. These increased additional costs versus the prior year period ending June 30 are:

					Three months			Six months
·			Sales salaries and expenses		$	511,000		$	942,000
·			Marketing expenses			95,000			325,000
·			Non cash compensation for restricted stock			263,000			465,000
·			Public company costs			431,000			841,000
·			Rent and occupancy costs			223,000			401,000

 

Depreciation and amortization of intangible assets. Depreciation and amortization of intangible assets expense was $1,194,000 for the six months ended June 30, 2007 compared to $1,134,000 for the six months ended June 30, 2006. Our depreciation expense increased $60,000 due to the increase in property and equipment purchased related to the new office space leased in the fourth quarter of 2006.

 

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Interest income. For the six months ended June 30, 2007, interest income was $644,000 compared to $772,000 for six months ending June 30, 2006. Interest income decreased for the six month period because of the decrease in cash invested due to the purchase of TSS/Vortech and the related transaction costs.

Interest expense. Interest expense was $268,000 for the six months ended June 30, 2007 compared to $276,000 for the six months ended June 30, 2006.

Financial Condition, Liquidity and Capital Resources

Financial Condition

Total assets increased $22.5 million to $68.5 million as of June 30, 2007 compared to $46.0 million as of December 31, 2006, due to our acquisition of TSS/Vortech during the first quarter of 2007. At June 30, 2007, we no longer had $44.7 million in short term investments, as we did at December 31, 2006 as a portion of those funds were used to acquire TSS/Vortech and the remainder was available to us and recorded as cash. At June 30, 2007 we had $33.1 million in current assets of which $21.1 million was cash, $9.0 million in contract accounts receivable and $3.0 million in other current assets.

 

Our total liabilities increased to $19.1 million as of June 30, 2007 from $1.5 million as of December 31, 2006, primarily due to the acquisition noted above. Accordingly our current liabilities increased to $9.0 million at June 30, 2007 from $1.5 million at December 31, 2006.

Liquidity and Capital Resources

During the six months ended June 30, 2007 net cash used in operating activities for the period was $6.3 million. Cash used by operating activities is primarily driven by the net loss adjusted for working capital changes which were primarily changes in accounts receivable, other current assets, accounts payable and work in process adjustments.

Net cash provided by investing activities was $33.7 million for the six months ended June 30, 2007. During the six months ended June 30, 2007, we had $44.7 million from the sale of short-term securities, while we invested $11 million toward the purchase of TSS/Vortech and used $1.3 million used for deferred acquisition costs and fixed assets. Net cash used by financing activities was $6.3 million for the six months ended June 30, 2007. This was principally used to repurchase shares of our common stock associated with the buyout of the dissenting shareholders and the previously announced share repurchase program.

We expect to retain future earnings if any for use in possible expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Historically, we have funded our business activities with cash flow from operations and borrowings under credit facilities.

Our primary liquidity needs are to finance the costs of operations, acquire capital assets and to make selective strategic acquisitions.  We expect to meet our short-term requirements through funds generated from operations. We also intend on pursuing a credit facility in the future.  Our strategic acquisition cash requirements will also be funded by cash generated from operations and the aforementioned credit facility.

Off Balance Sheet Arrangements 

As of the six months ended June 30, 2007, we do not have any off balance sheet arrangements.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), Fair Value Measurements.  SFAS No. 157 provides a new single authoritative definition of fair value and enhanced guidance for measuring the fair value of assets and liabilities.  It requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  We are currently evaluating what effect, if any, the adoption of SFAS No. 157 will have on our financial position, results of operations, or cash flows.

 

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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for accounting periods beginning after November 15, 2007. The Company will adopt SFAS No. 159 for the fiscal year beginning January 1, 2008 and is currently assessing the impact of adopting SFAS No. 159 on the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for a complete discussion of our market risk. There have been no material changes to the market risk information included in the Annual Report 10-K for the year December 31, 2006.

Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) who is also currently the Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2007. Based upon that evaluation, our Chief Executive Officer has concluded that as of June 30, 2007, our disclosure controls and procedures were ineffective.

Changes in Internal Control Over Financial Reporting

Through December 31, 2006, we had no operations, no full-time personnel and very few personnel of any kind. Our activities from inception in late 2005 and into 2006 focused on completing our initial public offering, identifying acquisition candidates and then completing the acquisition of TSS/Vortech. As of December 31, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were effective at that time for the purpose of ensuring that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

 

In January 2007 we acquired TSS/Vortech and re-evaluated our internal control process during the first quarter of 2007. As a result of this re-evaluation, we have determined that our internal control over financial reporting is ineffective. We had neither the resources, nor the personnel, to provide for an adequate internal control environment. The following material weaknesses in our internal control over financial reporting were noted at March 31, 2007: (i) we did not have the ability to segregate duties; (ii) we lacked the formal documentation of policies and procedures that were in place; and (iii) we lacked adequate financial personnel. 

We have begun to address the internal control weaknesses summarized above beginning in the first quarter of 2007, with the goal of eliminating such deficiencies by the end of 2007. We are working with a certified public accounting firm to serve as our internal auditors to further enhance our internal control environment and have hired a Chief Financial Officer expected to start on August 20, 2007. The acquisition of TSS/Vortech will require the development of more robust disclosure controls and procedures, which we are currently developing. Management will continue to monitor, evaluate and test the operating effectiveness of these controls during the remainder of 2007.  

There were no other changes in our internal control over financial reporting for the first six months of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

 

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Item 1A. Risk Factors.

There are no material updates to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

		Purchases of Equity Securities by Issuer
								Total Number of			Maximum Number
								Shares Purchased as			of Shares (or Units)
								Part of Publicly			that May Yet Be
		Total Number of			Average Price Paid			Announced Plans			Purchased Under the
Period		Shares Purchased			per Share			or Programs			Plans or Programs
January 1-31, 2007			116,000		$	5.49			116,000			384,000
February 1-28, 2007			94,500		$	5.60			210,500			289,500
March 1-31, 2007			10,500		$	5.33			221,000			279,000			(1	)
April 1-30, 2007			0			---------			221,000			279,000
May 1-31, 2007			29,300		$	5.21			250,300			249,700
June 1-30, 2007			104,475		$	5.11			354,775			145,225
January 1-31, 2007			756,100		$	5.38			1,110,875			0			(2	)
Total			1,110,875		$	5.38			1,110,875

(1) On January 12, 2007 the company announced a stock repurchase program of up to 3,000,000 shares of the Company’s common stock, from time to time, subject to market conditions. The Board of Directors has authorized repurchases of up to 500,000 shares under this program and the repurchase program will continue until completion or termination by the Board of Directors.

(2) The Company repurchased the shares of those shareholders that voted against the acquisition of TSS/Vortech and requested that their shares be redeemed at the then per share trust value. This program was completed in January 2007.

Recent Sales of Unregistered Securities

During May 2007, we issued 106,832 shares of restricted stock to our non-employee directors and one employee. Such shares of restricted stock were issued in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

At the annual meeting of stockholders held on June 19, 2007, the stockholders elected three Class II directors to serve on our Board of Director for a three-year term expiring in 2010 and voted upon additional two Board proposals contained within our Proxy Statement dated May 22, 2007.

The three Class II nominees were elected with the following vote:

 

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	For	Withheld
Harvey L. Weiss	10,857,851	155,191
Donald L. Nickles	11,012,042	1,000
William L. Jews	11,012,042	1,000

The Board proposals were approved with the following vote:

Proposal		For		Against		Abstention (other than Broker Non-Votes)		Broker Non-Votes
Approval of amendment to the certificate of incorporation to increase the number of authorized shares of common stock to 100,000,000 shares of common stock		10,627,196		385,846		0		0
Ratify the selection of Grant Thornton LLP, as registered public accounting firm for the year ending December 31, 2007		11,012,042		1,000		0		0

Item 5. Other Information.

On August 1, 2007, our common stock, warrants and units commenced trading on the NASDAQ Capital Market under the symbols FIGI, FIGIW and FIGIU, respectively.

Item 6. Exhibits.

 

31.1	Section 302 Certification by Principal Executive Officer
31.2	Section 302 Certification by Principal Financial Officer
32.1	Section 906 Certification by Principal Executive Officer and Principal Financial Officer

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		FORTRESS INTERNATIONAL GROUP, INC.
Date: August 14, 2007			By:		/s/ Thomas P. Rosato
					Thomas P. Rosato
					Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)

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