The deal that's bringing smoothie king Jamba Juice to Wall Street began with a chance encounter earlier this year at a Las Vegas convention for a company that sells sanitary bathroom technology.

It was at a January convention for Swisher Hygiene that Steven Berrard, the chairman and founder of blank-check company Services Acquisition Corp. ( SVI), learned that Jamba had been considering ways of going public for about a year.

Soon after, talks between Services Acquisition and Jamba Juice heated up. They culminated with the announcement two weeks ago that Services Acquisition, which raised $127 million in an IPO last July, would buy the smoothie chain in a so-called reverse merger.

The details of the negotiations between Services Acquisition and Jamba Juice are spelled out in a merger proxy statement filed Wednesday, which also reveals that Jamba Juice, which has 532 stores in 26 states, is less profitable than many bulls had thought.

In the year ended June 2005, Jamba Juice had operating earnings of $2.84 million, down from $5.18 million in the prior fiscal year. The company's unaudited financial statements originally reported operating income of $8.39 million in 2004.

The reason for the discrepancy in the 2004 year appears to be that Jamba overestimated its franchise revenue by almost $2 million in the unaudited numbers and underestimated expenses by about $1 million.

Net revenue in the 12 months to June 2005 were $209 million, up 21% over the prior fiscal year. The company says the increased sales stemmed primarily from the opening of 58 new stores.

Comparing Jamba's bottom-line performance over the last several years is made complicated by an $11.2 million tax gain the company recorded in 2004 and the cost of expanding its store base. From $651,000 in 2003, earnings jumped to $15.9 million in 2004 because of the gain, then back to $962,000 in 2005. Operating earnings have followed a similar arc over the past three years.

The company's revenue has climbed enviably, from $135 million in 2003 to $173 million in 2004 to $209 million in 2005.

But a revenue line that is more important to some retail investors, same-store sales, has not done as well. Sales in stores open more than a year rose just 0.9% in the most recent fiscal year, after surging 6% in the year before. The average revenue in Jamba's company-owned stores actually fell in 2005, to $752,000, from $754,000 a year ago.

In midday trading Thursday, shares of Services Acquisition were trading lower in light of the updated financial information. The shares were down 89 cents, or 7.5%, to $10.69. Services Acquisition will rename itself Jamba once the deal is approved by the shareholders of the blank-check company.

Services Acquisition was formed for the sole purpose of raising cash in an IPO and using it to buy an existing business. Over the past three years there has been a wave of blank-check offerings, but only a handful have gone on to actually find something to spend their money on.

Berrard, who put Services Acquisition together and played a big role in negotiating the Jamba Juice deal, is a co-founder of AutoNation ( AN), a national used car dealership, and a former CEO of Blockbuster ( BBI), the national video rental chain. Several of the directors of Services Acquisition are former Blockbuster colleagues of Berrard.

In the two weeks since the deal was announced, investors who had been bidding up shares of Services Acquisition by as much as 49% were relying on nearly two-year-old unaudited financial statements to estimate Jamba's earnings potential. Many had been predicting operating earnings of between $13 million and $15 million for the smoothie chain in 2005.

The proxy also shed more light on a $231 million private placement that Services Acquisition is conducting to help finance the deal. Some of the hedge funds snapping up the 31 million new shares being offered for sale include Leon Cooperman's Omega Advisors, George Soros' hedge fund empire and Och-Ziff Capital Management. The Silicon Valley venture capital firm Benchmark Capital is another investor in the so-called PIPE, or private investment in public equity.

The cash raised in the PIPE, coupled with the proceeds from the Services Acquisition IPO, will finance the $265 million acquisition of Jamba Juice. The remaining proceeds will be used as working capital for the new company.

As previously reported on TheStreet.com, investors in the PIPE will have a strong incentive to sell their shares as soon as they are registered, especially in light of what they're paying. Shares in the PIPE will be priced at $7.50 each, a steep discount to their current price.

Until now, Jamba Juice investors have paid little attention to the potential dilution to the company's shares that could come about once the merger is completed. There are currently about 20.4 million shares of Services Acquisition outstanding, but that figure could total 66 million once the PIPE shares are registered for sale and owners of 15 million warrants seek to convert those securities into stock.

A warrant is a special security that gives an owner the right to buy a share at a specified price. In the case of Services Acquisition, a warrant owner is entitled to convert a warrant into a share of stock if he pays the company $6 for each share.

Down the road, investors in Services Acquisition could be looking at even more dilution. In the proxy, shareholders are asked to give Services Acquisition authorization to issue 150 million shares, more than twice the number it's currently authorized to print.

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