UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2011
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-23279
Homeland Security Capital Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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52-2050585 |
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(State or other jurisdiction
of incorporation or
organization)
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(I.R.S. Employer
Identification No.) |
4601 North Fairfax Drive, Suite 1200
Arlington, Virginia 22203
(address of principal executive offices, including zip code)
Registrants telephone number, including area code: (703) 528-7073
Securities Registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, par value $0.001 per share
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OTC Bulletin Board |
Securities Registered under 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 þ
Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No þ
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 past 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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendments to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant, as of December 31, 2010 (the last business day of the registrants most recently
completed second fiscal quarter), was $581,646, based on the closing sale price of $0.017 per share
on the OTC Bulletin Board.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date.
Common Stock, par value $0.001 per share, outstanding as of September 30, 2011, is 51,588,591.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and, in particular, the description of our Business set forth
in Item 1, the Risk Factors set forth in this Item 1A and our Managements Discussion and Analysis
of Financial Condition and Results of Operations set forth in Item 7 contain or incorporate
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act), including statements regarding, among other things, our:
(a) ability to pay our outstanding debt;
(b) projected revenues and profitability;
(c) future financing plans;
(d) ability to implement our business and growth strategies;
(e) ability to effectively compete with our competitors;
(f) anticipated needs for working capital; and
(g) liquidity.
Forward-looking statements, which involve assumptions and describe our future plans,
strategies and expectations are generally identifiable by use of forward-looking terminology, such
as: may, will, should, expect, anticipate, estimate, believe, intend or project
or the negative of these words or other variations on these words or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. Various important risks and
uncertainties may cause our actual results, performance or achievements to differ materially from
the results, performance or achievements, expressed or implied, indicated by these forward-looking
statements. For a further list and description of the risks and uncertainties we face, please refer
to Part I, Item 1A of this Annual Report on Form 10-K. In addition, the forward-looking statements
contained herein represent our estimate only as of the date of this filing and should not be relied
upon as representing our estimate as of any subsequent date. While we may elect to update these
forward-looking statements at some point in the future, we specifically disclaim any obligation to
do so to reflect actual results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
3
PART I
General
Homeland Security Capital Corporation (together with its subsidiaries, shall be referred to as
the Company, we, us and our) was incorporated in Delaware in August 1997 under the name
Celerity Systems, Inc. In 2005, the Company changed its business plan to primarily seek
acquisitions of and joint ventures and, since then, has operated solely as a provider of
specialized technology-based radiological, nuclear, environmental, disaster relief and electronic
security solutions to government and commercial customers. In July 2011, we expanded the scope of
operations to include companies operating in the real estate services industry through our
acquisition of a majority interest in an intermediary holding company that owns, through another
intermediary company, two companies, one engaged in title and escrow services for mortgage
origination refinance, reverse mortgages and deed-in-lieu transactions, and the other in real
estate-owned liquidation services to institutional real estate owned, or REO, customers.
We continue to be engaged in the strategic acquisition, operation, development and
consolidation of companies operating in various industries. We are focused on creating long-term
stockholder value by taking controlling interests in and developing our subsidiary companies
through superior management, operations, marketing and finance. We operate businesses that provide
cutting edge technology, products and services solutions, growing organically and by acquisitions.
We target emerging companies that are generating revenues but face challenges in scaling their
businesses to capitalize on growth opportunities. The Companys Chairman and Chief Executive
Officer is former Congressman C. Thomas McMillen, who served three consecutive terms in the U.S.
House of Representatives representing the 4th Congressional District of Maryland.
Our corporate headquarters is located at 4601 North Fairfax Drive, Suite 1200, Arlington, VA
22203, and our telephone number is (703) 528-7073.
Recent Developments
On September 7, 2011, we entered into the First Amendment to the Forbearance Agreement entered
into by and among YA Global Investments, L.P., as lender (along with its affiliates, will be
referred to herein as YA), Homeland Security Advisory Services, Inc., Celerity Systems, Inc. and
Nexus Technologies Group, Inc., dated July 29, 2011, pursuant to which YA agreed to extend the
Forbearance Period (as defined in the Forbearance Agreement) by amending the definition of
Termination Date to September 14, 2011. Pursuant to the terms and conditions of the Forbearance
Agreement and the First Amendment, the Forbearance Period ended on September 14, 2011.
Consequently, as of September 15, 2011, the Company became subject to foreclosure by YA without
notice. As of September 15, 2011, we had outstanding indebtedness to YA in the aggregate principal
amount of approximately $14,188,923 and, with accrued interest, approximately $18,363,780. YA may
immediately commence enforcing its rights and remedies pursuant to the Forbearance Agreement, the
agreements relating to our outstanding debt and under applicable law. However, YA has not notified
the Company of its intention to foreclose on the assets of the Company, all of which are pledged as
collateral for the debt. We are in discussions with YA to extend the Forbearance Period and/or
renegotiate the terms of the agreements relating to our outstanding debt.
In early 2011, we had announced that we were considering strategic alternatives to retire part
or all of our debt, including the sale of one or all of our current subsidiaries. Accordingly, we
developed a coordinated plan to dispose of our current operations and use the proceeds from the
sale of our subsidiaries to retire our debt to YA. As part of this plan, we hired financial
advisors to assist us in identifying solutions and these advisors identified possible buyers for
Safety & Ecology Holdings, Inc., or Safety, and CSS Management Corp. (formerly, Corporate Security
Solutions, Inc.), or CSS, a wholly-owned subsidiary of NTG Management Corp. (formerly, Nexus
Technologies Group, Inc.), or NTG, a majority-owned subsidiary of the Company.
In continuation of this plan, on August 19, 2011, we entered into an Asset Acquisition
Agreement with NTG, CSS and Halifax Security, Inc., or Halifax, pursuant to which we sold to
Halifax substantially all of CSSs assets for an aggregate purchase price of $2,796,013 in cash,
subject to certain post-closing working capital
adjustments. $300,000 of the purchase price was deposited in an escrow account to satisfy any
claims for indemnity. We used $1,733,917 of the purchase price to satisfy a portion of our
indebtedness to YA.
4
On July 15, 2011, we entered into a Stock Purchase Agreement with Perma-Fix Environmental
Services, Inc. (NASDAQ: PESI), or PESI, and Safety, pursuant to which PESI agreed to purchase 100%
of the outstanding capital stock of Safety for an aggregate purchase price of (i) $22,000,000, in
cash, subject to certain working capital adjustments, and (ii) a three-year unsecured promissory
note in the principal amount of $2,500,000 to be issued by PESI to the order of the Company, or the
Note. The Note shall bear an annual interest rate equal to 6% (except that in the event of an Event
of Default, as defined in the Note, the annual interest rate shall automatically increase to 12% so
long as an Event of Default continues) and may be subject to offset of amounts the Company owes to
PESI for any outstanding indemnification claim, but only after PESI has exhausted its remedies
against the escrow account to be established in connection with the Purchase Agreement. $2,000,000
of the purchase price will be deposited into an escrow account to satisfy any claims for indemnity
under the Stock Purchase Agreement. We have not yet closed the transactions contemplated by the
Stock Purchase Agreement, and there is no assurance that we will consummate such transactions. If
and when we consummate this transaction, the net proceeds will be used to pay all or a substantial
portion of our indebtedness to YA.
On July 29, 2011, we completed the acquisition of all of the issued and outstanding capital
stock of Timios, Inc., or Timios, pursuant to that certain Stock Purchase Agreement, dated as of
May 27, 2011, by and among us, Timios Acquisition Corp., an indirect and majority-owned subsidiary
of the Company, DAL Group, LLC, or DAL and Timios, a wholly-owned subsidiary of DAL. In
consideration for such capital stock, we paid an aggregate purchase price consisting of: (a)
$1,150,000 in cash, subject to certain working capital adjustments, and (b) an aggregate of up to
an additional $1,350,000 in contingent payments, if any, subject to the achievement of specified
net revenue measurement metrics, as set forth in such Stock Purchase Agreement. As of September
30, 2011, we have agreed to a reduction in contingent payments in the amount of approximately
$317,433 representing a working capital shortfall.
On July 5, 2011, we completed the acquisition of all of the assets of Default Servicing, LLC,
or Default, pursuant to that certain Asset Purchase Agreement, dated as of June 22, 2011, by and
among us, Default Servicing USA, Inc., or DSUSA, an indirect and majority-owned subsidiary of the
Company, Default and DAL, the sole member of Default, In consideration for the assets, we paid an
aggregate purchase price of $480,700 in cash. In addition, we may pay up to an additional amount of
approximately $2.9 million in contingent payments, subject to the achievement of specified net
revenue measurement metrics during each calendar month through 2014. As of September 30, 2011, we
have made contingent payments of approximately $675,165.
On July 6, 2011, the Company formed a limited liability company, Fiducia Holdings, LLC, a
Delaware limited liability company, or Holdings, and, on July 29, 2011, in exchange for the payment
of the consideration for the acquisitions of Timios and Default Servicing and certain other
consideration, the Company received 80 Class A membership units of Holdings. In addition, C.
Thomas McMillen, the Chief Executive Officer and Chairman of the Company, and Michael T. Brigante,
the Chief Financial Officer of the Company, received 15 and 5 Class B membership units in Holdings,
respectively, both for nominal amounts, which units entitle them to a 20% carry and a pro rata
participation in any distributions made by Holdings after the repayment of all capital
contributions plus dividends and any loans plus interest to the Company as a Class A member. (For
further information, please refer to Note 16 Related Party Transactions, to our Consolidated
Financial Statements).
On July 29, 2011, in exchange for $1,800,000, Holdings acquired 100% of the common stock, par
value $0.001 per share, and 80% of the Series A Preferred Stock, par value $0.001 per share, or
Series A Preferred, of Fiducia Real Estate Solutions, Inc., or FRES, a holding company formed by us
for the purpose of acquiring companies in the real estate services industry. Six other investors,
who are members of Timios management, or the Minority Stockholders, also invested in the Series A
Preferred of FRES. FRES is now 80% owned by the Company, through its Class A membership interests
in Holdings, and 20% owned by the Minority Stockholders. FRES, in turn, now owns 100% of the
capital stock of each of Timios and DSUSA.
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As part of the July 29th restructuring, we also entered into a services agreement
with each of Timios and Default, pursuant to which we will receive $25,000 per month for providing
certain services, as well as a tax sharing agreement, which agreement sets forth, among other
things, the terms pursuant to which the Company and each of
Timios and Default will utilize the tax attributes (as defined in the Tax Sharing Agreement)
of the Company to offset certain liabilities of the combined group of companies (as defined in the
Tax Sharing Agreement) and to strengthen such subsidiarys balance sheet during the period in which
the Company may consolidate its tax return with such subsidiaries. Holdings controls the board of
directors of FRES and the Company participates in the operational decisions of both companies.
Subject to this control and ownership percentage, the Company will consolidate the results of FRES,
reporting separately the minority interests, if any.
These acquisitions, along with our decision to sell our current subsidiaries that operate in
the homeland security industry, initiated a change in the Companys business strategy by
effectively changing our overall focus to pursuing other lines of business outside of the homeland
security industry sector. Although the Company has not dismissed future acquisitions in the
homeland security industry sector or other industry sectors, our primary focus will be in the real
estate services industry sector.
Our History
The Company was incorporated in Delaware in August 1997 under the name Celerity Systems,
Inc. On December 30, 2005, the stockholders of the Company voted to amend the Certificate of
Incorporation of the Company to change its name to Homeland Security Capital Corporation, and the
Company changed its business plan to primarily seek acquisitions of and joint ventures with
companies that provide homeland security products and services.
On September 15, 2006, the Company formed Polimatrix, Inc., or PMX, and, on September 18,
2006, entered into a U.S.-based joint venture with Polimaster, Inc., or PMR, a company focused on
radiological detection and isotope identification. At June 30, 2011, the Company owned 51% of PMX
and PMR owned 49%.
On February 7, 2006, the Company organized NTG, and purchased $3,434,000 of NTGs convertible
preferred stock. Simultaneously, NTG acquired 100% of the common stock of CSC, a security
integration firm having operations in the Mid-Atlantic region with a focus on the New York City
market. At June 30, 2011, the Company owned approximately 93% of the outstanding capital stock of
NTG, with the remaining ownership distributed among former management and directors of NTG. On
August 19, 2011, the Company sold substantially all of the assets of CSS, NTG operating
subsidiary, as discussed above.
On March 13, 2008, the Company entered into an Agreement and Plan of Merger and Stock Purchase
Agreement, or the Safety Purchase Agreement, with Safety, and certain persons named therein.
Pursuant to the Safety Purchase Agreement, the Company purchased 10,550,000 shares of Safetys
Series A Convertible Preferred Stock for an aggregate purchase price of $10,550,000. The Company
effectively acquired 100% of Safety, subject to future management equity incentive programs and, at
June 30, 2011, owned 100% of the outstanding capital stock of Safety. On July 15, 2011, we entered
into a Stock Purchase Agreement with PESI, pursuant to which PESI agreed to purchase 100% of the
outstanding capital stock of Safety for an aggregate purchase price of $24,500,000, subject to
adjustment, as discussed above. This transaction has not yet been consummated.
As previously indicated in this Annual Report and as of the date of this filing, the Company
has a single coordinated plan to dispose of Safety, NTG and PMX. The Company has either committed
to sell, sold or transferred its entire interests in these operating subsidiaries related to its
homeland security business segment. As a result of these pending or completed transactions, which
had been previously contemplated, the Company has recorded the full fiscal year operating results
for these subsidiaries as discontinued operations in accordance with US generally accepted
accounting principles, or GAAP, through June 30, 2011. As a result, management believes it is more
informative to the reader of this Annual Report to discuss the Companys new business lines,
strategies and processes in the remaining sections of this annual report, unless otherwise
specifically noted.
6
Business Overview
We are building consolidated enterprises, or platform companies, through the acquisition and
integration of businesses in various industries. The Company is currently focused on entities that
provide real estate services and solutions to banks, mortgage originators and mortgage servicing
companies. Management believes that it can identify rapidly growing, underserved businesses within
many industry sectors. We believe we can create shareholder value by acquiring controlling
interests in companies that provide specialized technology-based
products and service solutions and helping them develop through superior management,
operations and strategic acquisitions. Our strategy is designed to foster significant growth at our
platform companies by providing leadership and counsel, capital support and financial expertise,
strategic guidance and operating discipline, access to best practices and industry knowledge. We
generally target emerging and established companies in many business sectors with a specific focus
on companies that have strong management teams and apply cutting edge technology in delivering
their products and services. These target companies are typically generating revenues from
promising technologies and/or products and services but face challenges in scaling their businesses
to capitalize on growth opportunities.
Our goal is to become a leading consolidator of product and service companies. We believe that
our strong intergovernmental relationships, the operating and acquisition expertise of our
management team, and our ability to address the needs of our subsidiary management teams allow us
to achieve our goal of being a consolidator of choice of acquisition candidates.
In order to achieve our goal, we have focused on:
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identifying acquisition candidates which meet our consolidation
criteria, including the presence of a strong management team as a
platform company; |
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attracting and acquiring companies through implantation of our
decentralized management approach coupled with strong performance
incentives including the use of financially attractive earn-out
arrangements and contingent purchase payments for selling
managers; |
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achieving operating efficiencies and synergies by combining
non-customer related administrative functions, implementing system
and technology improvements and purchasing products and services
in large volumes; and |
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achieving organic growth in our platform companies through
cross-selling, targeted marketing and streamlined management and
acquiring follow-on companies that provide complementary products
or services to our platform companies. |
We offer a range of management and operational services to each of our subsidiaries through a
team of dedicated professionals. Our subsidiaries compensate our holding company for such services.
We engage in an ongoing planning and assessment process through our involvement and engagement in
the development of our platform companies, and our executives, directors and advisors provide
mentoring, advice and guidance to develop the management of these companies.
In general, we expect to hold our ownership interest in our platform companies as long as we
believe that such companies meet our strategic criteria and that we can leverage our resources to
assist them in achieving superior financial performance and value growth. When a platform company
or other subsidiary no longer meets our strategic criteria, we will consider divesting the company
and redeploying the capital realized in other acquisitions and development opportunities. We may
achieve liquidity events through a number of means, including sales of an entire company or sales
of our interest in a company. We may also, in certain cases, take our platform companies public
through a registered spin-off, rights offering or stock dividend distribution by distributing our
subsidiarys stock held by us to our public stockholders and subsequently registering such shares
with the Securities and Exchange Commission, or the Commission.
Our Strategy
We offer the financial, managerial and operational resources to address the challenges facing
our subsidiary companies. We believe that our experience in developing and operating companies
enables us to identify and attract companies with potential for success and to create value for our
stockholders.
7
Management and Operational Strategy
We offer management and operational support to our platform companies. We believe these
services provide our companies with significant competitive advantages in their individual markets.
The resources that we provide our companies in order to accelerate their development include the
following:
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Marketing. The identification of the companys market position and
the development and implementation of effective market
penetration, branding and marketing strategies. |
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Business Development. Providing access to the initial reference
customers and external marketing channels that generate growth
opportunities through strategic partnerships, joint ventures or
acquisitions. |
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Technology. The strategic assessment of technology, market
opportunities and trends; the design, development and
commercialization of proprietary technology solutions; and access
to complementary technologies and strategic partnerships. |
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Operations. Significant management interaction to optimize a
companys business, ranging from the establishment of facilities
and administrative processes to the operations and financial
infrastructure a growing enterprise requires. |
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Legal and Financial. The development of appropriate corporate,
legal and financial structures and the expertise to execute a wide
variety of corporate and financial transactions. |
We engage in an ongoing planning and assessment process through our involvement and engagement
in the development of our companies. Our executive officers, directors and advisors provide
mentoring, advice and guidance to develop the management of our companies. Our executive officers
will generally serve on the boards of directors of our subsidiary companies and work with them to
develop and implement strategic and operating plans. Achievement of these plans is measured and
monitored through reporting of performance measurements and financial results within our segments.
We believe our business model provides us with certain competitive advantages. Our
decentralized management approach allows managers of our acquired companies to benefit from the
economies of a larger organization while simultaneously retaining local operational control,
enabling them to provide flexible and responsive service to customers. Such an approach could,
however, limit possible consolidation efficiencies and integration efforts. In addition, although
our management team has experience in acquiring and consolidating businesses, we may have limited
experience in the specific sectors that we may select for consolidation. We, therefore, expect to
rely in part upon management of acquired companies, our directors or advisors who are experienced
in the sectors that we may pursue for acquisition and consolidation.
Operating Strategy
Capitalize on Cross-Selling Opportunities. We leverage our current client relationships by
cross-selling the range of products and services offered by our various platform companies. For
example, we believe cross-selling opportunities will increase as we acquire businesses in various
business sectors.
Achieve Operating Efficiencies. We achieve operating efficiencies within our various platform
companies. For example, as new businesses are acquired, we believe our existing technology
infrastructure can support additional users. At the corporate level, we also seek to combine
certain administrative functions, such as financial reporting, insurance, employee benefits and
legal support and to realize volume purchasing advantages with respect to travel and other
purchases across our Company.
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Leverage Platform Company Autonomy. We conduct our operations on a decentralized basis whereby
management of each platform company will be responsible for its day-to-day operations, sales and
service relationships and the identification of additional acquisition candidates in their
respective sectors. Our senior management will provide the platform companies with strategic
oversight and guidance with respect to acquisitions, financing, marketing, operations and cross
selling opportunities. We believe that a decentralized management
approach will result in better customer service by allowing management of each platform
company the flexibility to implement policies and make decisions based on the needs of customers.
This management approach is in contrast to the traditional consolidation approach used by other
consolidators in which the owners/operators and their employees are often relieved of management
responsibility as a result of complete centralization of management in the consolidated
enterprises.
Implement Technology. We utilize technology to enhance our efficiency and ability to monitor
our various companies. We believe we will be able to increase the operating margin of combined
acquired companies by using operating and technology systems to improve and enhance the operations
of the combined acquired companies. We believe that many of our acquired companies have not made
material investments in such operating and technology systems because, as independent entities,
they lack the necessary scale to justify the investment. We believe the implantation of such
systems significantly increases the efficiency of our acquired companies.
Management Execution Teams. We utilize the collective experience of all our senior management
disciplines, our directors and advisors to enhance the management efforts of each of our platform
companies. We believe that collectively our solid group of senior management, directors and
advisors with their extensive entrepreneurial experiences, enhances each subsidiary management
group and enables best in class mentoring on marketing, operational, financial and management
functions.
Acquisition Strategy
Identify and Pursue Strategic Consolidation Opportunities. We seek to capitalize upon
consolidation opportunities within various industries by acquiring growing companies that will
benefit from economies of scale having some or all of the following characteristics:
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generating revenues and preferably profits, with established customers; |
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long-term growth prospects for technology-based products and services offered; |
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experienced management team willing to continue managing the enterprise; |
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significant acquisition consideration that is performance-based; and |
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a highly fragmented sector of their industry characterized by significant
potential smaller acquisition targets with few market leaders in the sector. |
We believe that the industry sectors in which we will pursue consolidation opportunities are
fragmented and often headed by owners/operators who desire liquidity and may be unable to gain the
scale necessary to access the capital markets effectively. These owner/operators also may not have
access to the government markets that are characterized by complex and bureaucratic processes,
protracted sales cycles, and diffused procurement between federal, state and local levels.
Acquire Complementary Businesses. We intend to acquire businesses that offer additional
expertise and cross-selling opportunities for our current platform companies operations. We also
believe that adding complementary businesses may offer geographic breadth and expand our target
markets. Increasing our presence within geographic regions will allow us to service our clients
more efficiently and cost effectively. As our customers industries continue to consolidate, we
believe that national coverage and technology capabilities will become increasingly important.
9
Our Former and Current Platform Companies
Listed below are our former and current subsidiary companies and the disposition of each
company as of September 30, 2011. As of the date of this report we conduct our continuing
operations through one majority-owned subsidiary. The following chart provides certain additional
information about our former and current subsidiaries and our joint venture through the date of
this report:
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Name, Address And |
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Place Of |
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Ownership |
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Headquarters |
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Formation |
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Percentage |
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Business |
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Safety & Ecology Holdings
Corporation
2800 Solway Road
Knoxville, TN 37931
www.sec-tn.com
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Nevada, USA
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Definitive
agreement to sell
100% of our
ownership was
signed on July 15,
2011.
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Safety & Ecology
Holdings
Corporation is an
international
provider of
environmental,
nuclear and
radiological
infrastructure
remediation,
disaster relief
solutions and
advanced
construction
services. |
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NTG Management Corp. (formerly,
Nexus Technologies Group)
7 West Cross Street
Hawthorne, NY 10532
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Delaware, USA
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Sold 100% of our
ownership on August
19, 2011.
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Through its
subsidiary, CSS,
designs, develops
and installs
integrated security
systems for
government and
commercial clients. |
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Polimatrix, Inc.
4601 North Fairfax Drive
Suite 1200
Arlington, VA 22203
www.polimatrix.com
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Virginia, USA
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51% (remaining 49%
owned by Polimaster
Inc.)
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Polimatrix, Inc.
markets, sells and
distributes
proprietary
radiological
detection
equipment. |
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Fiducia Real Estate Solutions, Inc.
4601 North Fairfax Drive
Suite 1200
Arlington, VA 22203
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Delaware, USA
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80% ownership.
20% owned by
management of
Timios.
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Fiducia Real Estate
Solutions, Inc.
provides products
and services
through its two
wholly owned
subsidiaries
Timios, Inc. and
Default Servicing
USA, Inc., which
include title and
escrow services for
mortgage
origination
refinance, reverse
mortgages, real
estate owned,
deed-in-lieu
transactions, and
real estate-owned
liquidation
services to
institutional REO
customers. |
As a result of our ownership percentages and our control of the board of directors of
FRES, we will consolidate the results of operations, excluding minority interests. The results of
operations for Safety, NTG and PMX are included in discontinued operations as of June 30, 2011.
Current Platform Company Businesses, Products and Services
Fiducia Real Estate Solutions, Inc.
FRES was incorporated on June 3, 2011. Through its two wholly-owned subsidiaries, Timios and
DSUSA, FRES provides title and escrow services for mortgage origination refinance, reverse
mortgages, real estate owned, deed-in-lieu transactions, and real estate-owned liquidation services
to institutional REO customers. FRES provides administrative, support, accounting, payroll,
insurance and various other services to its subsidiaries in its capacity as a holding company and
our real estate services platform company. We believe there are numerous acquisition opportunities
in this industry sector and FRES will ultimately be the parent company for any new acquisitions we
make in this business sector.
Timios, Inc.
Timios is a national title and escrow company licensed to conduct business in forty states and
the District of Columbia. The company provides various products and services related to refinance,
reverse mortgage, purchase, short sale, deed in lieu of foreclosure and REO transactions for banks,
direct mortgage companies and mortgage servicing companies. During 2010, Timios offered its
services to government sponsored enterprises, or GSEs, and is in the process of developing this
business channel.
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Timios sales efforts are focused on soliciting business from mid to large sized banks,
mortgage companies and GSEs. Timios differentiates itself by offering an end to end, nationwide
solution, resulting in improved service and increased efficiencies. The company operates in a
completely paperless environment and utilizes automated workflows to facilitate the servicing of
each transaction. Customers are provided access to the real time status of all documents
regarding their transaction. The information is available 24 hours per day, 7 days a week and 365
days a year via the companys website or through direct integration into the clients system. This
unique solution allows Timios to provide improved, guaranteed levels of service to its clients
while realizing operating efficiencies that allow for a competitive cost structure.
Timios management team combines over 50 years of experience in the title insurance and escrow
services business. Prior to starting Timios, the current management team grew a former company from
a start-up venture to $100,000,000 in revenue over 3 years time. In 2008, after leaving their
former company, the management group founded Timios with the goal of delivering similar products
and services with improved technology and operational structures. Through cumulative industry
experience, the management team has developed numerous relationships, providing Timios with a large
core group of loyal customers that are essential to its long term success.
Locations
Timios is headquartered in Westlake Village, California. This location serves as the companys
office for the entire administrative staff and also serves as a service center for customers
operating in the Pacific time zone. The company also has an office in Plano, Texas, which serves as
a service center for customers operating in the Eastern and Central time zones. Additionally, the
company maintains three satellite offices in states that require a physical presence to conduct
title insurance business in those states.
Default Servicing USA, Inc.
DSUSA is an asset management company that offers nationwide services to clients by providing a
full range of services for the REO industry to banks, financial institutions and mortgage
companies. Their services include comprehensive property management and marketing for
non-performing properties through the close of escrow and the conformation of funds. We take
complete control of properties from assignment to closing with our staff of dedicated
professionals. We keep clients informed of our current progress by providing monthly reports that
are customized to meet client specific requirements. Our value proposition and flexibility
consistently meet our customers expectations in the default marketplace.
Our specific services include multiple listing services (MLS), pre-foreclosure valuation and
preservation, property inspections and pricing options, eviction management, negotiation of sales
contracts, complete accounting and reporting, expense management, title and management curative
procedures, title searches, property compliance management, ongoing property preservation, closing
facilitation and contract negotiations. This full suite of services distinguishes us from many of
our peers, who only offer a portion of these services.
We plan to market our services to national and regional banking institutions and mortgage
companies. Additionally we are in contact with investors who have purchased large underperforming
property portfolios to manage the sales of these properties. Finally, it is our intention to offer
our services to government agencies such as the Department of Urban Development, or HUD, the Department of
Agriculture and various other GSEs, such as Freddie Mac and
Fannie Mae who, as a result of the economys effect on housing, have large
portfolios of underperforming or non-performing properties.
DSUSAs management team has over 80 combined years of experience in the REO industry. Prior to
joining DSUSAs the senior management spent most of their careers in the banking industry. We
believe this combination of experience and knowledge gives DSUSA an advantage over many of our
competitors. Further, we believe the management team has the relationships to allow us to attract
specific customers seeking to find a turn-key solution to the asset management needs.
Location
DSUSA is headquartered in Louisville, Kentucky. This location serves as the companys
administrative office for the entire staff and all services offered by DSUSA.
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Investments
The Company holds 692,660 common shares in Vuance, Ltd. (OTCQB: VUNCF). The Company received
these shares as consideration for the sale if its majority interest in Security Holding
Corporation, or SHC, on July 3, 2007. The Company classifies these shares as available-for-sale
for financial reporting purposes and, accordingly, adjusts the carrying value of the shares at the
closing market price on the valuation date by recording an increase or decrease in the carrying
value of this investment and a corresponding increase or decrease in shareholders equity. At June
30, 2010, the Company believed that there was not a liquid market for these shares and accordingly
reduced the carrying value of this investment to zero. The Company reviewed the market conditions
at June 30, 2011 and determined the illiquid market condition still existed and therefore has not
changed the value of these shares. (See Note 5 to the Consolidated Financial Statements).
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc.
(UEI), (OTCBB: ULEIQ.PK; formerly known as Secure America Acquisition Corporation, or SAAC), as a
result of the business combination between SAAC and Ultimate Escapes Holdings, LLC, which was
consummated on October 29, 2009. Through its membership interests in Secure America Acquisition
Holdings, LLC, or SAAH, the initial stockholder of SAAC, the Company is deemed to beneficially own
40,912 shares, or approximately 1.5% of the outstanding capital stock in UEI, at June 30, 2010. On
September 20, 2010, UEI filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court in Wilmington, Delaware. As a result of this bankruptcy filing, the Company reduced the
carrying value of its shares it to zero at June 30, 2010, and at June 30, 2011, no condition
existed to change this carrying value. (See Note 5 to the Consolidated Financial Statements).
The Company measures impairment of its investments on a monthly basis and adjusts the carrying
amounts accordingly.
Significant Customers
Timios
Timios, generates approximately 75% of total revenues from transactions with five customers.
Management believes that as Timios continues to acquire additional customers, there will be no
material concentration of customers contributing to a significant portion of revenue.
DSUSA
DSUSA has been generating 100% of total revenues from an asset management contract with a
major U.S. bank. This contract expired on September 30, 2011, and DSUSA is currently managing
approximately 273 properties that are contract with buyers. If any of these properties do not
close by 11/30/11, they will revert back to the bank. We are currently in discussions with this
bank to extend the date at which the properties will revert back to the bank and to renew the
contract and, if renewed, add additional properties to the contract.
Significant Suppliers
Timios
Timios relies on numerous supplier relationships to provide its services to its customers.
While the critical technology solutions are secured under long term contracts, the remaining
relationships with data and service providers have no contractual arrangements. As a result, we
may be subject to volume capacity restrictions, priority fulfillment or vendor availability. These
suppliers may also experience their own outages, resulting in corresponding delays in our service
delivery times which could prevent us from achieving agreed upon service levels to our customers.
Additionally, Timios utilizes a network of abstractors to obtain property search data in counties
where title plants have not been introduced and a network of notaries to conduct signing throughout
the U.S. Management believes that the company has numerous alternatives should any of these
relationships not continue.
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DSUSA
DSUSA is able to obtain the products or services they require from various suppliers and does
not have a specific concentration of supply from any one supplier.
Patents and Proprietary Rights
Timios and DSUSA do not have any patents. They rely primarily on a combination of trade
secrets, confidentiality procedures and contractual provisions to protect their technology,
intellectual property and proprietary rights. Despite their efforts to protect their rights,
unauthorized parties may attempt to copy aspects of their services or to obtain and use information
that they regard as proprietary. Policing unauthorized use of their technology and services is
difficult. In addition, the laws of many states do not protect their rights in information,
materials and intellectual property that they may regard as proprietary. There can be no assurance
that their means of protecting their rights in proprietary information, processes and technology
will be adequate or that their competitors will not independently develop similar information,
technology or intellectual property. See Risk Factors beginning on page 15.
Competition
Many of our potential competitors are larger and have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors may form partnerships
or alliances with other large real estate servicing companies, with the resulting entity possessing
much greater market strength than we have. Many of the areas in which we either compete or intend
to compete are continually evolving, with new companies often emerging. Competition may develop a
patentable product or process that may prevent us from competing in our intended markets. While we
expect to compete primarily on the basis of performance, technical services, proprietary position
and price, in many cases the first company to introduce a product or service to the market will
obtain at least a temporary competitive advantage over subsequent market entrants. We face
competition in both of our indirect subsidiaries as described below.
Timios. Timios is engaged in highly competitive businesses in which most of the customers
depend on service levels, technology and price. The extent of such competition varies according to
the geographic areas in which we operate. The degree and type of competition we face is also often
influenced by the prior relationships with specific customers. Some of Timios competitors are
larger and possess greater resources and technical abilities than Timios does, which may give them
an advantage with certain customers. Competition also places downward pressure on Timios pricing
strategy and profit margins. Intense competition is expected to continue for title insurance and
escrow services, possibly challenging our ability to maintain strong growth rates and acceptable
profit margins. If Timios is unable to meet these competitive challenges, it could lose market
share and experience an overall reduction in its profits.
Timios principal competitors are Fidelity National Title, Inc., First American Corp., Old
Republic International Corp., LandAmerica Financial Group, Inc. and Stewart Information Services
Corp. Management believes that these top five underwriters insure over 90% of the national market,
and most states were dominated by only two or three of these underwriters.
DSUSA. DSUSA is engaged in highly competitive businesses in which most of the customers depend
on service levels, price and reputation. DSUSA has competition both on a regional and national
scale. Regionally DSUSA competes with smaller privately owned companies that seek only to provide
services within a specific region, mostly identifying themselves with local or regional banks and
attorneys. Nationally, DSUSA competes with the nation title insurance companies, who often have
asset management divisions. However, DSUSA believes that their quality of service, aggressive
pricing, excellent reputation and management knowledge gives it a competitive advantage and will
make them the asset management company of choice among many of their competitors.
Supply Availability
Other than then Timios long term contract for technology services, we do not have any written
agreements with our suppliers. Although we attempt to reduce our dependence on our suppliers,
disruption or termination of any of the supply sources could occur, and such disruptions or
terminations could have at least a temporary, materially
adverse effect on our business, financial condition, and results of operations. Moreover, a
prolonged inability to obtain alternative sources of supply could have a materially adverse effect
on our relations with our customers.
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Generally, we find the products and services necessary for our operations to be readily
available, either from the general marketplace or through our current suppliers.
Federal and State Government Regulation
Regulation and standards from federal and state governments is a significant consideration in
delivering our real estate services. In order to conduct business in the title insurance
marketplace, we must be licensed in each state where we intend to act as a title agent.
Additionally, we may be subject to certain working capital restrictions in various states where we
act as an escrow agent. We may be subject to various laws, regulations and requirements relating to
such matters as physical presence in a jurisdiction in which we intend to conduct business. Also,
we are required to maintain a real estate brokers license to conduct transactions in the REO asset
management segment of our business. The regulations potentially material to our business are
summarized below.
Title Insurance. Title insurance is regulated through the Department of Insurance of each
state. A title agent, such as Timios, is often required to pass certain testing requirements that
help provide assurance that the appropriate knowledge is present within the management team.
Additionally, states may also require surety bonds, capital requirements and extensive background
checks on management. Prior to obtaining a license, title agents are also required to obtain an
underwriter appointment, which requires an extensive audit prior to the underwriter entering into
an underwriting contract with the title agent.
Escrow Services. In most states escrow services fall under the Department of Insurance. In
some states escrow licensing falls under a separate government entity, such as the Department of
Financial Institutions. Navigating these licensing requirements is difficult and a great deal of
time and effort is required to assure proper licensing is attained and continually renewed.
These laws and regulations may also become more stringent, or be more stringently enforced, in
the future.
Various local laws and regulations, as well as common law, may impose additional laws and
regulations that we may be required to adhere to. These laws may also impose responsibility without
regard to knowledge of certain local laws or customs.
Product Liability and Insurance
Our business exposes us to product, occupational and other liability risks. These risks are
inherent in the real estate services industry in general and specific to our operations and
delivery of our services. We have, at the subsidiary-level, and will attempt to continue to renew,
liability insurance in order to protect ourselves from potential exposures; however, there can be
no guarantee that, upon expiration of our current coverage, adequate insurance coverage will be
available, or, if available, that the cost will not be prohibitive. Furthermore, a liability or
other claim could materially and adversely affect our business or financial condition. The terms of
our customer agreements provide that liability is limited to our standard warranty for
consequential damages caused by the sub-standard delivery of our services. Nevertheless, one or
more third parties could file suit against us based on errors, omissions or other claims. Specific
clauses in our customer agreements may or may not effectively limit our liability in any such
actions.
Employees
As of September 30, 2011, we had a total of 496 employees, 74 of whom were full-time employees
in our continuing operations. Of the employees in our continuing operations, we had 56 employees
employed by Timios; 16 employees employed by DSUSA; and 2 employees employed in by our corporate
headquarters. We had 422 employees employed by our discontinuing operations.
We consider our relations with our employees to be good.
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In analyzing our Company, you should consider carefully the following risk factors, together
with all of the other information included in this Annual Report on Form 10-K. Factors that could
cause or contribute to differences in our actual results include those discussed in the following
subsection, as well as those discussed in "Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere throughout this Annual Report on Form 10-K. Each
of the following risk factors, either alone or taken together, could adversely affect our business,
operating results and financial condition, as well as adversely affect the value of an investment
in our Company.
General and Economic Risks Related to the Operations of the Company
We are currently in default with respect to our outstanding indebtedness and our assets are subject
to foreclosure by our lender without notice.
As previously disclosed in a Current Report filed with the Securities and Exchange Commission
on September 9, 2011, we entered into the First Amendment (the Amendment) to the Forbearance
Agreement entered into by and among us, YA, and certain of our subsidiaries (the Agreement),
pursuant to which YA agreed to extend the Forbearance Period (as defined in the Agreement) by
amending the definition of Termination Date to September 14, 2011. Pursuant to the terms and
conditions of the Agreement and the Amendment, the Forbearance Period ended on September 14, 2011.
Consequently, as of September 15, 2011, we became subject to foreclosure by YA without notice. As
of September 15, 2011, we had outstanding indebtedness to YA in the aggregate principal amount of
approximately $14,188,923 and, with accrued interest, approximately $18,363,780 (the Debt). YA
may immediately commence enforcing its rights and remedies pursuant to the Agreement, the
agreements relating to the Debt and under applicable law. However, YA has not notified the Company
of its intention to foreclose on the assets of the Company, all of which are pledged as collateral
for the Debt. Although the Company and YA are in discussions with respect to the extension of the
Forbearance Period and/or renegotiation of revised terms to the agreements relating to the Debt,
there is no guarantee that we will reach agreement or that an agreement will be reached on
favorable terms.
We will not be able to repay our outstanding indebtedness to YA, which is currently in default,
unless and until we sell our Safety subsidiary. If we cannot sell our Safety subsidiary, we will
not be able to continue operations as a going concern.
We are currently in default on our indebtedness to YA, and the Forbearance Period, as defined
above, has terminated, which means that YA may foreclose on our assets at any time without any
notice to us. We do not generate sufficient cash flow through our current operations to be able to
pay off all or a substantial portion of such indebtedness. Thus, the only way we will be able to
pay off or at least pay down a substantial portion of our indebtedness to YA would be by selling
our Safety subsidiary. Although we have signed a definitive document for the sale of Safety, there
are no assurances that we will consummate such sale, or that we could enter into another definitive
agreement if we do not consummate the one we have currently entered. In such a case, we would
expect that YA would foreclose on our assets, unless it agrees to amend the terms of our repayment,
and we may not be able to continue as a going concern. The report of our independent registered
public accounting firm on our financial statements for the fiscal year ended June 30, 2011,
included an explanatory paragraph raising substantial doubt about our ability to continue as a
going concern as a result of us being in default on our indebtedness to YA.
Restrictive covenants in our outstanding indebtedness with YA may restrict our ability to pursue
certain business strategies.
Our outstanding indebtedness with YA restricts our ability to, among other things:
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Incur additional indebtedness; |
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Create liens securing debt or other encumbrances on our assets; |
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Make loans or advances; |
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Pay dividends or make distributions to our stockholders; |
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Purchase or redeem our stock; |
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Repay indebtedness that is junior to indebtedness under our credit agreement,
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Acquire the assets of, or merge or consolidate with, other companies; and |
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Sell, lease or otherwise dispose of assets. |
These restrictive covenants may restrict our ability to pursue certain business strategies and
adversely affect our business, financial condition and results of operations.
We have historically had severe working capital shortages, even following significant financing
transactions.
Although we have raised capital totaling approximately $23,250,000 in gross proceeds since
August 2005, we have had working capital shortages in the past. Our consolidated financial
statements for our fiscal year ended June 30, 2011, indicate that we have a working capital deficit
of $9,531,622. Based on the amount of capital we have remaining, we anticipate that we may have
working capital shortages in the future unless we are able to substantially increase our revenue or
reduce our expenses, thereby generating continuous positive cash flow from operations and
(ultimately) operating income.
We are unable to predict whether we will be successful in our efforts to generate continuous
positive cash flow or maintain profitability. If we are not successful, we may not be able to
continue as a going concern. The report of our independent registered public accounting firm on our
financial statements for the fiscal year ended June 30, 2011, included an explanatory paragraph
raising substantial doubt about our ability to continue as a going concern.
We may need to raise additional capital on terms unfavorable to our stockholders.
Based on our current level of operations, if obtain a forbearance of our existing outstanding
debt with YA and we consummate the sale of Safety, we believe that our cash flow from operations
will be adequate to meet our anticipated operating, capital expenditure and debt service
requirements for at least the next 12 months. However, we do not have complete control over our
future performance because it is subject to economic, political, financial, competitive, regulatory
and other factors affecting the industries in which we operate. Further, our acquisition strategy
will likely require additional equity or debt financings. Such financings could also be required to
support our recently acquired operating units. There is no assurance that we will be able to obtain
such financings to fuel our growth strategy and support our newly acquired businesses.
We have raised capital and issued securities at the commencement of our operations, which has
resulted result in dilution (and will result in future dilution upon future warrant exercises or
stock conversions) to our existing stockholders. We will likely issue more securities to raise
additional capital or to obtain other services or assets, which may result in further substantial
dilution to our existing stockholders.
Since August 2005, we have raised gross proceeds in the amount of approximately $23,250,000 to
finance our business operations and acquisitions. We have raised this capital by issuing
convertible debentures, shares of common stock and convertible preferred stock and common stock
warrants to investors, as compensation to investment bankers and upon exercise of previously issued
common stock warrants and stock options. In many cases, these issuances were below the
then-current market prices and can be considered dilutive to our existing stockholders. In
addition, our Series F Preferred Stock (the Series F Stock), our Series H Convertible Preferred
Stock (the Series H Stock) and our Series I Preferred Stock (the Series I Stock and,
collectively, with the Series F and H Stock, the Preferred Stock) have significant restrictions
and penalties on our ability to raise any additional capital. If we raise additional working
capital, we will have to issue additional shares of our common stock and common stock warrants at
prices that will dilute the interests of our existing stockholders, unless the holders of such
Preferred Stock agree to amend or waive such rights.
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The conversion ratio of our Series H Stock has been automatically adjusted and if the majority
holder does not agree to amend or waive the terms of such adjustment and converts its Series H
Stock, our existing stockholders will be substantially diluted.
Each share of Series H Stock is convertible into an initial ratio of 33,334 shares of common
stock, subject to adjustments, including Safety achieving certain earnings milestones for the
calendar years ending December 31, 2009 and 2008. Although Safety achieved the first milestone for
the calendar year ending December 31, 2008, it did not satisfy the second financial milestone,
which entitles the holders of the Series H Stock to an additional 56,300 shares of common stock for
each share of Series H Stock, or approximately a potential additional 230,000,000 shares of our
common stock in the aggregate.
The Company is currently in discussions with the majority holder of the Series H Stock on the
possibility of a waiver or amendment of the adjustment to the Series H Stock conversion ratio.
However there can be no assurances that such holder will waive or amend the adjustment, if any, to
the Series H Stock conversion ratio. YA has not exercised any of its conversion rights pertaining
to the adjusted conversion ratio as of the date of this filing.
Outstanding Preferred Stock, options and warrants may make it difficult for us to obtain additional
capital on reasonable terms.
As of June 30, 2011, we had Preferred Stock outstanding that is convertible into approximately
a minimum of 449,973,266 shares of common stock and approximately a maximum of 677,313,700 shares
of common stock, depending on certain negotiations currently underway concerning the Additional
Shares. The holders rights to convert the Series F Stock, Series H Stock, including the Additional
Shares and Series I Stock and related warrants are, however, subject to certain share issuance
limitations. In addition, we have outstanding options and warrants for the purchase of up to
11,690,000 shares of common stock and 99,525,485 shares of common stock, respectively, at exercise
prices of between $0.03 and $1.00 per share respectively. If all of the outstanding options,
Preferred Stock, Additional Shares and common stock warrants were to be converted, they would
represent approximately 95% of our outstanding common stock on a fully diluted basis. Future
investors will likely recognize that the holders of the options and warrants will only exercise
their rights to acquire our common stock when it is to their economic advantage to do so.
Therefore, even with lower current market prices for our common stock, the market overhang of such
a large number of warrants, options, and convertible preferred stock, including the Additional
Shares may adversely impact our ability to obtain additional capital because any new investors will
perceive that the securities offer a risk of substantial potential future dilution.
We are a holding company and depend on distributions from our subsidiaries for cash.
We are a holding company whose primary assets are the securities of our operating
subsidiaries. Our ability to pay interest on our outstanding debt and our other obligations and to
pay dividends is dependent on the ability of our subsidiaries to pay dividends or make other
distributions or payments to us. If our operating subsidiaries are not able to pay dividends to us,
we may not be able to meet our financial obligations. In addition, our title insurance subsidiary,
Timios, must comply with state laws which require it to maintain minimum amounts of working
capital, surplus and reserves, and place restrictions on the amount of dividends that it can
distribute to us. Compliance with these laws will limit the amounts that subsidiary can dividend to
us.
Our common stock is vulnerable to pricing and purchasing actions that are beyond our control and,
therefore, persons acquiring or holding our shares may be unable to resell their shares at a profit
as a result of this volatility.
The trading price of our securities has been subject to wide fluctuations in response to
quarter-to-quarter variations in our operating results, our announcements of new contracts or
products by us or our competitors, and other events and factors. The securities markets themselves
have from time to time and recently experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. Announcements of delays in our
work schedules, new contracts or products by us or our competitors and developments or disputes
concerning patents or proprietary rights could have a significant and adverse impact on such market
prices. Regulatory developments in the United States and foreign countries, public concern as to
the safety of products containing radioactive compounds, and economic and other external factors
all affect the market price of our securities.
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If we fail to effect and maintain registration of the common stock issued or issuable pursuant to
conversion of our Preferred Stock, the Additional Shares or certain of our outstanding common stock
warrants, we may be obligated to pay the investors of those securities liquidated damages.
We have an obligation to file upon request of holders of our preferred stock and obtain the
effectiveness of a registration statement which would include certain outstanding common stock and
common stock underlying outstanding Preferred Stock, the Additional Shares and warrants. Once
effective, the prospectus contained within a registration statement can only be used for a period
of time as specified by statute without there being a post-effective amendment filed that has
become effective under the Securities Act of 1933. If we are unable to meet these filing
obligations (or effectiveness obligations), we would be obligated to pay the holder of these
securities liquidated damages for each 30 day period after the applicable date as the case may be.
The liquidated damages may be paid in cash or shares of our common stock if registered, at the
holders option. We cannot offer any assurances that we will be able to maintain the required
current information contained in a prospectus or to obtain the effectiveness of any registration
statement or post-effective amendments that we may file.
We have a limited operating history, especially in the real estate services industry, which makes
it difficult to evaluate our current business and future prospects and may cause our revenues to
decline.
The Company consolidated companies in the homeland security and now intends to consolidate
companies in the real estate service industries. Until its acquisition of NTG (formerly known as
Nexus) in 2006, its joint venture with Polimaster in 2006 and its acquisition of Safety in March
2008, the Company had not generated any revenues since 2002, other than interest income on its
cash. In addition, the Company intends to exit the homeland security industry and, over the course
of the last two quarters, has entered into the real estate services industry through its
acquisition of Timios and Default. The Companys ability to generate revenues and earnings (if any)
will be directly dependent upon the operating results of such acquired businesses and any
additional acquisitions, and the successful integration and consolidation of those businesses. No
assurances can be given that we will be successful in generating revenues and earnings based on our
business model.
Failure to achieve and maintain internal controls in accordance with Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business.
We reported in this Annual Report on Form 10-K a material weakness for the year ended June 30,
2011 with respect to contract accounting for loss contracts. If we fail to maintain our internal
controls or fail to implement required new or improved controls, as such control standards are
modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing
basis that we have effective internal controls over financial reporting. Effective internal
controls are necessary for us to produce reliable financial reports and are important in the
prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud,
our business and operating results could be harmed, investors may lose confidence in our reported
financial information, and there could be a material adverse effect on our business.
We are dependent upon key personnel who would be difficult to replace and whose loss could impede
our development.
The Company believes that its success depends principally upon the experience of C. Thomas
McMillen, its Chairman and Chief Executive Officer, and Michael T. Brigante, its Chief Financial
Officer, as well as the senior management and directors of its operating subsidiaries. Although
Messrs. McMillen and Brigante have substantial experience in acquiring and consolidating
businesses, our acquired companies personnel do not have significant experience in managing
companies formed for the specific purpose of consolidating one or more companies. Additionally,
Messrs. McMillen and Brigante did not have experience in managing companies in the various sectors
of the homeland security and real estate service industries. As a result, the Company likely will
rely significantly on the senior management of the businesses it acquires. Such acquired senior
management may not be suitable to the Companys business model or combined operations. If the
Company loses the services of one or more of its current executives, the Companys business could
be adversely affected. The Company may not successfully recruit additional personnel and any
additional personnel that are recruited may not have the requisite skills, knowledge or experience
necessary or desirable to enhance the incumbent management. Further, although we have employment
agreements with Messrs. McMillen and Brigante, there can be no assurance that the entire term of
their employment agreements will be served or that the employment agreements will be renewed upon
expiration.
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Because our operating results may fluctuate significantly and may be below the expectations of
analysts and investors, the market price for our stock may be volatile.
Our operating results are difficult to predict and may fluctuate significantly in the future.
As a result, our stock price may be volatile. The following factors, many of which are outside our
control, can cause fluctuations in our operating results and volatility in our stock price:
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expenses incurred in pursuing and closing acquisitions and in follow-up
integration efforts; |
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changes in customers budgets and procurement policies and priorities, and
funding delays, particularly with respect to government contracts; |
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new competitors and the introduction of enhanced products from new or
existing competitors; |
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unforeseen legal expenses, including litigation and bid protest costs; |
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unanticipated delays or problems in releasing new products and services; and |
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the amount and timing of our investments in research and development
activities and manufacturing improvements. |
The deferral or loss of one or more significant contracts could also materially adversely
affect our operating results, particularly if there are significant sales and marketing expenses
associated with the deferred or lost contracts. Additionally, we base our current and future
expense levels on our internal operating plans and sales forecasts, and our operating costs are to
a large extent fixed. As a result, we may not be able to sufficiently reduce our costs to
compensate for an unexpected near-term shortfall in revenues, with such shortfalls resulting in
fluctuations in our operating results which could cause our stock price to decline.
Our common stock is deemed to be penny stock, which may make it more difficult for investors to
sell their shares due to suitability requirements.
Our common stock is deemed to be penny stock as that term is defined in Rule 3a51-1
promulgated under the Securities Exchange Act of 1934, as amended. Penny stocks are stock:
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with a price of less than $5.00 per share; |
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that are not traded on a recognized national exchange; |
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whose price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than
$5.00 per share); or |
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stock in issuers with net tangible assets less than $2,000,000 (if
the issuer has been in continuous operation for at least three
years) or $5,000,000 (if in continuous operation for less than
three years), or with average revenues of less than $6,000,000 for
the last three years. |
In addition to the penny stock rules promulgated by the Commission, the Financial Industry
Regulatory Authority, Inc., or FINRA, has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain
information about the customers financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock.
19
Stockholders should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of
the market for the security by one or a few broker-dealers that are often related to the promoter
or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving high-pressure sales
tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired degree. The Companys management is aware of the abuses that have occurred
historically in the penny stock market. Although the Company does not expect to be in a position to
dictate the behavior of the market or of broker-dealers who participate in the market, management
will strive within the confines of practical limitations to prevent the described patterns from
being established with respect to our securities.
If persons engage in short sales of our common stock, including sales of shares to be issued upon
exercise of our outstanding warrants, the price of our common stock may decline.
Selling short is a technique used by a stockholder to take advantage of an anticipated decline
in the price of a security. In addition, holders of options and warrants will sometimes sell short
knowing they can, in effect, cover through the exercise of an option or warrant, thus locking in a
profit. A significant number of short sales or a large volume of other sales within a relatively
short period of time can create downward pressure on the market price of a security. Further sales
of common stock issued upon exercise of our outstanding warrants could cause even greater declines
in the price of our common stock due to the number of additional shares available in the market
upon such exercise, which could encourage short sales that could further undermine the value of our
common stock. You could, therefore, experience a decline in the value of your investment as a
result of short sales of our common stock.
The current economic conditions and financial market turmoil could adversely affect our business
and results of operations.
Economic conditions remain difficult with the continuing uncertainty in the global credit
markets, the financial services industry and the United States capital markets and with the United
States economy as a whole experiencing a period of substantial turmoil and uncertainty
characterized by unprecedented intervention by the United States federal government and the
failure, bankruptcy, or sale of various financial and other institutions. We believe the current
economic conditions and financial market turmoil could adversely affect our operations, business
and prospects, as well as our ability to obtain funds. If these circumstances persist or continue
to worsen, our future operating results could be adversely affected, particularly relative to our
current expectations.
We do not expect to pay dividends with respect to our common stock which may hinder our ability to
attract additional capital.
The Company has not paid any dividends on its common stock to date. The terms of our
outstanding indebtedness restrict our ability to pay dividends. Assuming we were permitted to pay
dividends, the payment of any dividends is within the discretion of the Companys Board of
Directors. The Board of Directors expects to retain all earnings, if any, for use in the Companys
business operations and, accordingly, the Board of Directors does not anticipate declaring any
dividends on our common stock in the foreseeable future.
Appropriate acquisitions may not be available, which may adversely affect our growth.
The results of the Companys planned operations are dependent upon the Companys ability to
identify, attract and acquire additional desirable acquisition candidates, which may take
considerable time. Our acquisition strategy is important to the success of our business because it
supports our strategy of selling a broad platform of integrated offerings to customers who we
believe prefer to buy multiple products and service offerings from fewer vendors. The Company may
not be successful in identifying, attracting or acquiring additional acquisition candidates, in
integrating such candidates into the Company or in realizing profits from any of its acquired
companies. Other companies also pursue acquisitions of companies in the real estate service
marketplace and we expect competition for acquisition candidates in our industry to increase, which
may mean fewer suitable acquisition opportunities for us, as well as higher acquisition prices. In
addition, even if we are successful in acquiring target companies, we may have difficulty
integrating the acquired companies product and service offerings with our existing offerings and
sales channels, which would reduce the benefits to us of the acquisitions and limit the
effectiveness of our strategy. The failure to complete additional acquisitions or to operate the
acquired companies profitably would have a material adverse effect on the Companys business,
financial condition and results of operations.
20
If our consolidation strategy is not successful, our operations and financial condition will be
adversely affected.
One of the Companys strategies is to increase its revenues, the range of products and
services that it offers and the markets that it serves through the acquisition of additional real
estate services businesses. Investors have no basis on which to evaluate the possible merits or
risks of any future acquisition candidates operations and prospects that management may identify.
Although management of the Company will endeavor to evaluate the risks inherent in any particular
acquisition candidate, the Company may not properly ascertain all of such risks. Additionally,
management of the Company has significant flexibility in identifying and selecting prospective
acquisition candidates. Management may not succeed in selecting acquisition candidates that will be
profitable or that can be integrated successfully. Although the Company intends to scrutinize
closely the management of a prospective acquisition candidate in connection with evaluating the
desirability of effecting a business combination, the Companys assessment of management may not
prove to be correct. The Company may enlist the assistance of other persons to assess the
management of acquisition candidates. Finally, the Company will seek to improve the profitability
and increase the revenues of acquired businesses by various means, including combining
administrative functions, eliminating redundant facilities, implementing system and technology
improvements, purchasing products and services in large quantities and cross-selling products and
services. The Companys ability to increase revenues will be affected by various factors, including
the Companys ability to expand the products and services offered to the customers of acquired
companies, develop national accounts and attract and retain a sufficient number of employees to
perform the Companys services. There can be no assurance that the Companys internal growth
strategies will be successful.
Competition and industry consolidation may limit our ability to implement our business strategies.
The Company expects to face significant competition to acquire businesses in the real estate
services industry from larger companies that currently pursue, or are expected to pursue,
acquisitions as part of their growth strategies and as the industry undergoes continuing
consolidation. Such competition could lead to higher prices being paid for acquired companies. The
Company believes that the real estate services industry will undergo considerable consolidation
during the next several years. The Company expects that, in response to such consolidation and in
light of the Companys financial resources, it will consider from time to time additional
strategies to enhance stockholder value. These include, among others, strategic alliances and joint
ventures; purchase, sale and merger transactions with other large companies; and other similar
transactions. In considering any of these strategies, the Company will evaluate the consequences of
such strategies, including, among other things, the potential for leverage that would result from
such a transaction, the tax effects of the transaction, and the accounting consequences of the
transaction. In addition, such strategies could have various other significant consequences,
including changes in management, control or operational or acquisition strategies of the Company.
There can be no assurance that any one of these strategies will be undertaken, or that, if
undertaken, any such strategy will be completed successfully.
Failure to qualify for Investment Company Act exemptions could adversely affect our growth and
financial condition.
The regulatory scope of the Investment Company Act of 1940, as amended, or the Investment
Company Act, extends generally to companies engaged primarily in the business of investing,
reinvesting, owning, holding or trading in securities. The Investment Company Act also may apply to
a company which does not intend to be characterized as an investment company but which,
nevertheless, engages in activities that bring it within the Investment Company Acts definition of
an investment company. The Company believes that its principal activities, which involve acquiring
control of operating companies and providing managerial and consulting services, will not subject
the Company to registration and regulation under the Investment Company Act. The Company intends to
remain exempt from investment company regulation either by not engaging in investment company
activities or by qualifying for the exemption from investment company regulation available to any
company that has no more than 45% of its total assets invested in, and no more than 45% of its
income derived from, investment securities, as defined in the Investment Company Act.
21
There can be no assurance that the Company will be able to avoid registration and regulation
as an investment company. In the event the Company is unable to avail itself of an exemption or
safe harbor from the Investment Company Act, the Company may become subject to certain restrictions
relating to the Companys activities, as noted below, and contracts entered into by the Company at
such time that it was an unregistered investment company may be unenforceable. The Investment
Company Act imposes substantial requirements on registered investment companies including
limitations on capital structure, restrictions on certain investments, prohibitions on transactions
with affiliates and compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations. Registration as an investment company could have a material adverse effect
on the Company.
Potential tax consequences of our acquisitions may adversely affect our financial conditions.
As a general rule, federal and state tax laws and regulations have a significant impact upon
the structuring of business combinations. The Company will evaluate the possible tax consequences
of any prospective business combination and will endeavor to structure the business combination so
as to achieve the most favorable tax treatment to the Company, the acquisition candidate and their
respective stockholders. Nonetheless, the Internal Revenue Service, or the IRS, or appropriate
state tax authorities may not ultimately agree with the Companys tax treatment of a consummated
business combination. To the extent that the IRS or state tax authorities ultimately prevail in
re-characterizing the tax treatment of a business combination, there may be adverse tax
consequences to the Company, the acquisition candidate and/or their respective stockholders.
Our financial condition could be harmed if businesses we acquire failed to comply with applicable
laws or have other undisclosed liabilities.
Any business that we acquire may have been subject to many of the same laws and regulations to
which our business is subject and possibly to others, including laws and regulations impacting
companies that do business with federal, state and local governments. If any business that we
acquire has not conducted its business in compliance with applicable laws and regulations, we may
be held accountable or otherwise suffer adverse consequences, such as significant fines or
unexpected termination of contracts. Businesses we acquire may have other undisclosed liabilities
we do not discover during the acquisition process that could result in liability to us or other
unanticipated problems, such as product liability claims. Unexpected liabilities such as these
could materially adversely affect our business, financial condition and results of operations.
Risks Related to the Homeland Security Industry
As a government contractor, we are subject to extensive government regulation, and our failure to
comply with applicable regulations could subject us to penalties that may restrict our ability to
conduct our business.
Our government contracts are a significant part of our business. Allowable costs under U.S.
government contracts are subject to audit by the U.S. government. Similarly, some U.K. contracts
are subject to audit by U.K. regulatory authorities. These audits could result in the disallowance
of certain fees and costs, if, the auditing agency asserts, in its discretion, that certain costs
and expenses were not warranted or were excessive. Disallowance of costs and expenses, if pervasive
or significant, could have a material adverse effect on our business.
Government contracts are often subject to specific procurement regulations, contract
provisions and a variety of other requirements relating to the formation, administration,
performance and accounting of these contracts. Many of these contracts include express or implied
certifications of compliance with applicable regulations and contractual provisions. For example,
we must comply with the Federal Acquisition Regulation, the Truth in Negotiations Act, the Cost
Accounting Standards, the Service Contract Act and Department of Defense security regulations. We
may be subject to qui tam litigation brought by private individuals on behalf of the government
under the Federal Civil False Claims Act, which could include claims for up to treble damages.
Additionally, we may be subject to the Truth in Negotiations Act, which requires certification and
disclosure of all factual costs and pricing data in connection with contract negotiations. If we
fail to comply with any regulations, requirements or statutes, our existing government contracts
could be terminated or we could be suspended from government contracting or subcontracting. If one
or more of our government contracts are terminated for any reason, or if we are suspended or
debarred from government work, we could suffer a significant reduction in expected
revenues and profits. Furthermore, as a result of our government contracting, claims for civil or
criminal fraud may be brought by the government for violations of these regulations, requirements
or statutes.
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Economic downturns or reductions or diversions in government funding could have a negative impact
on our business.
Demand for our services has been, and we expect that demand will continue to be, subject to
significant fluctuations due to a variety of factors beyond our control, including economic
conditions. During economic downturns, the ability of private and government entities to make
expenditures on radiological, security and environmental services may decline significantly. We
cannot be certain that economic or political conditions will be generally favorable or that there
will not be significant fluctuations adversely affecting the homeland security industry as a whole.
In addition, our operations in the homeland security industry depend, in part, upon government
funding, and more recently funding under the American Recovery and Reinvestment Act, particularly
within the funding levels of the environmental programs at the Department of Energy, or the DOE,
and Department of Defense, or DOD. Significant changes in the level of government funding or
specifically mandated levels for different programs that are important to our homeland security
business could have an unfavorable impact on that segment of our business, financial position,
results of operations and cash flows.
We and our customers in the homeland security industry operate in a regulated industry that
requires us and them to obtain, and to comply with, national, state and local government licenses,
permits and approvals.
We and our customers operate in a highly regulated environment. Our projects are often
required to obtain, and to comply with, national, state and local government licenses, permits and
approvals. Any of these may be subject to denial, revocation or modification under various
circumstances. Failure to obtain or comply with the conditions of a license, permit or approval may
adversely affect our operations by temporarily suspending our activities or curtailing our work and
may subject us to penalties and other sanctions. Although existing licenses are routinely renewed
by various regulators, renewal could be denied or jeopardized by various factors, including:
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failure to provide adequate financial assurance for decommissioning or closure; |
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failure to comply with environmental and safety laws and regulations or permit conditions; |
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local community, political or other opposition; |
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executive action; and |
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legislative action. |
In addition, if new environmental or other legislation or regulations are enacted or existing
legislation or regulations are amended or are interpreted or enforced differently, we or our
customers may be required to obtain additional operating permits or approvals. Changes in
requirements imposed by our environmental or other permits may lead us to incur additional expenses
by requiring us to change or improve our waste management technologies and services to achieve and
maintain compliance. There can be no assurance that we will be able to meet all potential
regulatory changes.
We and our customers operate in a politically sensitive environment, and the public perception of
radioactive materials can affect us and our customers.
We and our customers operate in a politically sensitive environment. The risks associated with
radioactive materials and the public perception of those risks can affect our business. Public
criticisms of our business resulting from political activism could harm our reputation. Opposition
by third parties to particular projects can delay or prohibit the handling, transportation, and
disposal of radioactive materials. Adverse public reaction to developments in the use of nuclear
power or the disposal of radioactive materials, including any high profile incident involving the
discharge of radioactive materials, could directly affect our customers and indirectly affect our
homeland security business. Adverse public reaction also could lead to increased regulation or
outright prohibition, limitations on the
activities of our customers, more onerous operating requirements or other conditions that could
have a material adverse impact on our customers and our business in the homeland security
industry.
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The elimination or any modification of the Price-Anderson Acts indemnification authority could
have adverse consequents for our business.
The Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates the
manufacture, use and storage of radioactive materials. Section 170 of the AEA, which is known as
the Price-Anderson Act, supports the nuclear services industry by offering broad indemnification to
commercial nuclear power plant operators and DOE contractors for liabilities arising out of nuclear
incidents at power plants licensed by the Nuclear Regulatory Commission, or the NRC, and at DOE
nuclear facilities. That indemnification protects not only the NRC licensee or DOE prime
contractor, but also companies like us that work under contract or subcontract at a DOE facility
under a DOE prime contract or transporting radioactive material to or from a site. The
indemnification authority of the NRC and DOE under the Price-Anderson Act was extended through 2025
by the Energy Policy Act of 2005.
We are subject to liability under environmental laws and regulation.
When we perform our services through our Safety subsidiary, our personnel and equipment may be
exposed to radioactive and hazardous materials and conditions. We may be subject to liability
claims by employees, customers and third parties as a result of such exposure. In addition, we may
be subject to fines, penalties or other liabilities arising under environmental or safety laws.
Although to date we have been able to obtain liability insurance for the operation of our business,
there can be no assurance that our existing liability insurance is adequate or that it will be able
to be maintained or that all possible claims that may be asserted against us will be covered by
insurance. A partially or completely uninsured claim, if successful and of sufficient magnitude,
could have a material adverse effect on our results of operations and financial condition.
Construction sites and maintenance sites are inherently dangerous workplaces. If we fail to
maintain safe work sites, we can be exposed to significant financial losses as well as civil and
criminal proceedings.
Construction sites and maintenance sites are inherently dangerous workplaces. Construction and
maintenance projects often require putting our employees in close proximity with large pieces of
mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly-regulated
materials. On those projects where we are responsible for site safety, we are obligated to
implement procedures to ensure that workers are not injured. In the event we either fail to
implement such procedures or if the procedures we implement are ineffective, our employees and
others may become injured, and we could incur significant financial losses. In addition, the
Company could be found liable for failing to comply with government regulations dealing with
occupational health and safety. Regulations dealing with occupational health and safety are
continually evolving. We maintain functional groups within the Company whose primary purpose is to
ensure that effective health, safety, and environmental, or HSE, work procedures are implemented
throughout our organization, including construction sites and maintenance sites. In spite of these
efforts, the Company could suffer losses relating to safety issues at our construction and
maintenance sites, or fail to comply with all HSE regulations applicable to our business.
Our failure to maintain our safety record could have an adverse effect on our business.
Our safety record is critical to our reputation. In addition, many of our government and
commercial customers require that we maintain certain specified safety record guidelines to be
eligible to bid for contracts with these customers. Furthermore, contract terms may provide for
automatic termination in the event that our safety record does not comply with agreed standards
during the performance of the contract. A failure to maintain our safety record could have a
material adverse effect on our business, financial condition and results of operation.
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The homeland security industry is highly competitive and we must typically bid against other
competitors to obtain major contracts.
The homeland security industry is highly competitive, and most of our government contracts and
some of our commercial contracts are awarded through competitive bidding processes. The extent of
such competition varies according to the industries and markets in which our clients operate as
well as the geographic areas in which we
operate. The degree and type of competition we face is also often influenced by the type of
projects for which we compete. Some of our competitors are larger and may possess greater resources
than we do, which may give them an advantage when bidding for certain projects. Competition also
places downward pressure on our contract prices and profit margins. Intense competition is expected
to continue for government environmental service contracts, challenging our ability to maintain
strong growth rates and acceptable profit margins. If we are unable to meet these competitive
challenges, we could lose market share and experience an overall reduction in our profits. Part of
our business strategy includes bidding on government contracts as a lead prime contractor in a
consortium. In the past, we have operated as a subcontractor or in a minority position on a prime
contractor team. In pursuing a lead prime contractor role, we will be competing directly with a
number of large national and regional services firms that may possess or develop technologies
superior to our technologies and have greater financial, management and marketing resources than we
do. Many of these companies also have long-established customer relationships and reputations. We
must be successful in the competitive process with our government and commercial customers to
replace revenues from projects that are nearing completion and to increase our revenues. Our
business and operating results can be adversely affected by the size and timing of a single
material contract.
As a result of the acquisition of Timios, our business no longer qualifies as a small business and,
as a result, we are unable to take advantage of opportunities available to small businesses.
Having a small business status provides a company with certain competitive advantages,
including allowing such companies to compete for certain government set asides for which larger
businesses are ineligible. For instance, even if we are qualified to work on a new government
contract, we might not be awarded the contract because of existing government policies designed to
protect small businesses and underrepresented minority contractors. Until such time as we again
attain our small business status, we will have to compete with a larger pool of companies for
government contracts, which may also have more resources at their disposal. Thus, the failure to
qualify as a small business could have an adverse effect on our financial position and results from
operations.
If our teaming members or partners fail to perform their contractual obligations on a project or if
we fail to coordinate effectively with our partners or subcontractors, we could be exposed to legal
liability, loss of reputation and reduced profit on a project.
We often work jointly with contractual partners or with subcontractors to perform certain
projects. Success on these projects depends in part on whether our partners fulfill their
contractual obligations satisfactorily. If any of our partners or subcontractors fails to perform
their contractual obligations satisfactorily, we may be required to make additional investments and
provide additional services in order to compensate for that partners failure. If we are unable to
adequately address our partners performance issues, then our customer may exercise its right to
terminate a joint project, exposing us to legal liability, loss of reputation and reduced profit.
Our collaborative arrangements also involve risks that participating parties may disagree on
business decisions and strategies. These disagreements could result in delays, additional costs and
risks of litigation. Our inability to successfully maintain existing collaborative relationships or
enter into new collaborative arrangements could have a material adverse effect on our results of
operations.
Our operating results are difficult to predict and may fluctuate significantly in the future.
The following factors, many of which are outside our control, can cause fluctuations in our
operating results:
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the seasonality of the spending cycle of our government customers and the
spending patterns of our commercial customers; |
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the number and significance of projects commenced and completed during a quarter; |
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unanticipated changes in contract performance, particularly with contracts that
have funding limits; |
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the timing of resolutions of change orders, requests for equitable adjustments
and other contract adjustments; |
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decisions by customers to terminate our contracts; |
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seasonal variations in shipments of radioactive materials; |
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weather conditions that delay work at project sites; |
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staff levels and utilization rates; |
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changes in the prices of services offered by our competitors; and |
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general economic or political conditions. |
The deferral or loss of one or more significant contracts could materially adversely affect
our operating results, particularly if there are significant sales and marketing expenses
associated with the deferred or lost contracts. Additionally, we base our current and future
expense levels on our internal operating plans and sales forecasts, and our operating costs are to
a large extent fixed. As a result, we may not be able to sufficiently reduce our costs to
compensate for an unexpected near-term shortfall in revenues.
The contracts in our backlog may be adjusted, cancelled or suspended by our clients. Additionally,
even if fully performed, our backlog may not be a good indicator of our future gross margins.
Our backlog is subject to changes in the scope of services to be provided as well as
adjustments to the costs relating to the contracts. Accordingly, there is no assurance that the
amount of backlog in-hand at any one time will actually be realized as revenues. Gross margins
(i.e., contract revenue less direct costs of contracts) can vary considerably between contracts.
One aspect of our business that can have a significant effect on the gross margins we realize on
our contracts and projects is the amount of pass-through costs incurred. Since pass-through costs
typically do not bring significant margins with them, it is not unusual for us to experience an
increase or decrease in revenues without experiencing a corresponding change in our gross margins.
Additionally, the way we perform on our individual contracts can affect greatly our gross
margins and, hence, future profitability. In some of the homeland security markets we serve, there
is an increasing trend towards costreimbursable contracts with incentive-fee arrangements.
Typically, our incentive fees are based on such things as achievement of target completion dates or
target costs; overall safety performance; overall client satisfaction; and/or other performance
criteria. If we fail to meet such targets or achieve the expected performance standards, we may
receive a lower, or even zero, incentive fee, resulting in lower gross margins. Accordingly, there
is no assurance that the contracts in backlog, assuming they produce the revenues currently
expected, will generate gross margins at the rates we have realized in the past.
The loss of one or a few of Safetys customers could have an adverse effect on us.
One or a few government and commercial customers have in the past, and may in the future,
account for a significant portion of our revenues in any one year or over a period of several
consecutive years. Because customers generally contract with us for specific projects, we may lose
significant customers from year to year as their projects with us are completed. Our inability to
replace such business with other projects could have an adverse effect on our business and results
of operations.
We bear the risk of cost overruns in fixed-price contracts. We may experience reduced profits or,
in some cases, losses under these contracts, if costs increase above our estimates.
A percentage of our revenues are earned under contracts that are fixed-price in nature.
Fixed-price contracts expose us to a number of risks not inherent in cost-reimbursable contracts.
Under fixed price and guaranteed maximum-price contracts, contract prices are established in part
on cost and scheduling estimates, which are based on a number of assumptions, including assumptions
about future economic conditions, prices and availability of labor, equipment and materials, and
other exigencies. If these estimates prove inaccurate, or if circumstances change, such as
unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local
laws or labor conditions, weather delays, cost of raw materials or our suppliers or
subcontractors inability to
perform, cost overruns may occur and we could experience reduced profits or, in some cases, a loss
for that project. Errors or ambiguities as to contract specifications can also lead to
cost-overruns.
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Our use of level of effort or percent complete performance accounting could result in reduction or
elimination of previously reported profits.
A significant portion of our revenues are recognized using the level of effort or percent
complete performance method of accounting. Generally, the performance accounting practices we use
result in recognizing contract revenues and earnings based on output measures, where estimable, or
on other measures, such as the proportion of costs incurred to total estimated contract costs. For
some of our long-term contracts, completion is measured on estimated physical completion or units
of production. The cumulative effect of revisions to contract revenues and estimated completion
costs, including incentive awards, penalties, change orders, claims and anticipated losses, is
recorded in the accounting period in which the amounts are known or can be reasonably estimated.
Due to uncertainties inherent in the estimation process, it is possible that actual completion
costs may vary from estimates, and such variances could be material to our operating results.
The outcome of pending and future claims and litigation could have a material adverse effect on our
business.
The nature of our business occasionally results in clients, subcontractors and vendors
presenting claims against us for recovery of costs they incurred in excess of what they expected to
incur, or for which they believe they are not contractually responsible. Similarly, and in the
normal course of business, we may present claims and change orders to our clients for costs we have
incurred for which we believe we are not contractually responsible or for services provided that
were either requested by the client or were otherwise required by the nature of the project. If we
fail to document properly the nature of our claims and change orders or are otherwise unsuccessful
in negotiating reasonable settlements with our clients, subcontractors, and vendors, we could incur
cost overruns and experience reduced profits or, in some cases, suffer a loss for that project.
Additionally, irrespective of how well we document the nature of our claims and change-orders, the
cost to prosecute and defend claims and change-orders can be significant. In the normal course of
business, we are subject to certain contractual guarantees and litigation. Litigation in which we
could be involved in as a defendant includes, but is not limited to, workers compensation,
personal injury, environmental, employment/labor, professional liability and other similar
lawsuits. We maintain insurance coverage for various aspects of our business and operations.
However, we have elected to retain a portion of losses that may occur through the use of various
deductibles, limits and retentions under our insurance programs, which may subject us to some
future liability for which we are only partially insured, or completely uninsured.
Adequate bonding is necessary for us to win certain types of new work.
We are often required to provide performance bonds or other financial assurances to customers
under fixed-price contracts. These surety instruments indemnify the customer if we fail to perform
our obligations under the contract. If a bond is required for a particular project and we are
unable to obtain it due to insufficient liquidity or other reasons, we will not be able to pursue
that project. We currently have a bonding facility but, as is typically the case, the issuance of
bonds under that facility is at the suretys sole discretion. Moreover, due to events that affect
the insurance and bonding markets generally, bonding may be more difficult to obtain in the future
or may only be available at significant additional cost. There can be no assurance that bonds will
continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and,
as a result, to bid on new work could have a material adverse effect on our business, financial
condition and results of operations. As of June 30, 2011, we had approximately $10.9 million of
bonds or surety contracts outstanding.
We have substantial financial assurance and insurance requirements, and increases in the costs of
obtaining adequate financial assurance, or the inadequacy of our insurance coverage, could
negatively impact our liquidity and increase our liabilities.
The amount of insurance we are required to maintain for environmental liability is governed by
statutory requirements. We believe that the cost for such insurance is high relative to the
coverage it would provide, and therefore, our coverage is generally maintained at the minimum
statutorily required levels. We face the risk of incurring liabilities for environmental damage if
our insurance coverage is ultimately inadequate to cover those damages. We also carry a broad range
of insurance coverage that is customary for a company our size. We use these programs to mitigate
risk of loss, thereby allowing us to manage our self-insurance
27
exposure associated with claims. To the extent our insurers were unable to meet their obligations, or our own obligations for claims
were more than we estimated, there could be a material adverse effect to our financial results. In
addition, to fulfill our financial assurance obligations with respect to environmental closure and
post-closure liabilities, we generally obtain letters of credit or surety bonds; rely on insurance,
including captive insurance, or fund trust and escrow accounts. We currently have in place all
financial assurance instruments necessary for our operations. We do not anticipate any unmanageable
difficulty in obtaining financial assurance instruments in the future. However, in the event we are
unable to obtain sufficient surety bonding, letters of credit or third-party insurance coverage at
reasonable cost, or one or more states cease to view captive insurance as adequate coverage, we
would need to rely on other forms of financial assurance. These types of financial assurance could
be more expensive to obtain, which could negatively impact our liquidity and capital resources and
our ability to meet our obligations as they become due.
Armed hostilities could constrain our ability to conduct business internationally and could also
disrupt our U.S. operations.
The current world unrest, or the responses of the United States, may lead to further acts of
terrorism and civil disturbances in the United States or elsewhere, which may further contribute to
the economic instability in the United States. These attacks or armed conflicts may affect our
physical facilities or those of our suppliers or customers and could have an impact on our domestic
and international sales, our supply chain, our production capability, our insurance premiums or the
ability to purchase insurance and our ability to deliver our products to our customers. The
consequences of these risks are unpredictable, and their long-term effect upon us is uncertain.
A substantial portion of our revenues depends on sales to the U.S. government and could be affected
by changes in federal funding levels.
Agencies and departments of the U.S. government account for a substantial portion of our
revenues from product sales and substantially all of our revenues from research and development
contracts. We and other U.S. defense contractors have benefited from an upward trend in overall
U.S. defense spending in the last few years and are counting on significant revenues from U.S.
government contracts for the foreseeable future. This trend continued with the former Presidents
budget request for fiscal year 2009, which reflected the continued commitment to modernize the
Armed Forces and sustain current capabilities while prosecuting the war on terrorism.
However, U.S. government programs are limited by budgetary constraints and are subject to
uncertain future funding levels that could result in the termination of programs. Future defense
budgets and appropriations for our programs and contracts may be affected by differing priorities
of the new Administration, including budgeting constraints stemming from the economic recovery and
stimulus plans. A decline in security-related government spending, or a shift away from our
offerings or programs that we address, could hurt our sales, put pressure on our prices and reduce
our revenues and margins.
We may not realize anticipated benefits from global stimulus packages.
Many governments around the world, including the U.S. federal government, have enacted various
stimulus packages that are intended to increase investment and business activity, and in particular
to provide funding for life science research, equipment and facilities. Although we believe there
is opportunity for the Company to benefit from these economic stimulus spending programs, including
the American Recovery and Reinvestment Act of 2009, there is no assurance that any of these
programs will have a material positive impact on our revenues and profits. The magnitude and timing
of any benefits that we might realize from stimulus funding initiatives are uncertain and are
subject to a number of factors beyond our control, including government appropriations processes in
various countries in which we and our customers do business, governmental determinations regarding
the allocation of stimulus funds to the academic institutions, not-for-profit research
organizations and businesses that may utilize our products and technologies, the success of our
customers in obtaining stimulus grants, and our customers decisions to use any stimulus funds they
receive to purchase products from us. It is not possible to predict whether or when we will realize
benefits from stimulus packages enacted in the U.S. or elsewhere, or what impact, if any, stimulus
packages will have on our business, results of operations or financial condition or the trading
price of our common stock.
28
Our operating results may be adversely impacted by worldwide political and economic uncertainties
and specific conditions in the markets we address.
General worldwide economic conditions have recently experienced a downturn due to the lack of
available credit, slower economic activity, concerns about inflation and deflation, increased
energy costs, decreased consumer confidence, reduced corporate profits and capital spending, and
adverse business conditions. These conditions make it extremely difficult for our customers, our
vendors and us to accurately forecast and plan future business activities and could cause
businesses to slow spending on services. We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery worldwide or in our industry. If the economy or
markets in which we operate continue at the level experienced in fiscal 2010, our business,
financial condition and results of operations may be materially and adversely affected.
We derive a majority of our revenue from government agencies, and any disruption in government
funding or in our relationship with those agencies could adversely affect our business.
In fiscal 2011, we generated a majority of our revenue, net of subcontractor costs, from
contracts with federal, state and local government agencies. U.S. federal government agencies are
among our most significant clients. A significant amount of this revenue is derived under
multi-year contracts, many of which are appropriated on an annual basis. As a result, at the
beginning of a project, the related contract may be only partially funded, and additional funding
is normally committed only as appropriations are made in each subsequent year. These
appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous
factors as noted below. Our backlog includes only the projects that have funding appropriated.
The demand for our government-related services is generally driven by the level of government
program funding. Accordingly, the success and further development of our business depends, in large
part, upon the these programs. There are several factors that could materially affect our
government contracting business, including the following:
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Changes in and delays or cancellations of government programs, requirements or
appropriations; |
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Budget constraints or policy changes resulting in delay or curtailment of
expenditures related to the services we provide; |
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Re-competes of government contracts; |
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The timing and amount of tax revenue received by federal, state and local
governments, and the overall level of government expenditures; |
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Curtailment of the use of government contracting firms; |
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Delays associated with a lack of a sufficient number of government staff to
oversee contracts; |
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The increasing preference by government agencies for contracting with small and
disadvantaged businesses; |
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Competing political priorities and changes in the political climate with regard
to the funding or operation of the services we provide; |
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The adoption of new laws or regulations affecting our contracting relationships
with the federal, state or local governments; |
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Unsatisfactory performance on government contracts by us or one of our
subcontractors, negative government audits, or other events that may impair our
relationship with the federal, state or local governments; |
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A dispute with or improper activity by any of our subcontractors; and |
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General economic or political conditions. |
29
These and other factors could cause government agencies to delay or cancel programs, to reduce
their orders under existing contracts, to exercise their rights to terminate contracts or not to
exercise contract options for renewals or extensions. Any of these actions could have a material
adverse effect on our revenue or timing of contract payments from these agencies.
A delay in the completion of the budget process of the U.S. government could delay procurement of
our services and have an adverse effect on our future revenues.
When the U.S. government does not complete its budget process before its fiscal year-end on
September 30, government operations are typically funded by means of a continuing resolution that
authorizes agencies of the U.S. government to continue to operate, but does not authorize new
spending initiatives. When the U.S. government operates under a continuing resolution, government
agencies may delay the procurement of services, which could reduce our future revenues.
Our failure to win new contracts and renew existing contracts with private and public sector
clients could adversely affect our profitability.
Our business depends on our ability to win new contracts and renew existing contracts with
private and public sector clients. Contract proposals and negotiations are complex and frequently
involve a lengthy bidding and selection process that is affected by a number of factors. These
factors include market conditions, financing arrangements and required governmental approvals. For
example, a client may require us to provide a bond or letter of credit to protect the client should
we fail to perform under the terms of the contract. If negative market conditions arise, or if we
fail to secure adequate financial arrangements or the required governmental approval, we may not be
able to pursue particular projects, which could adversely affect our profitability.
Restrictive covenants in our revolving credit agreement may restrict our ability to pursue certain
business strategies, and if we do not have access to this revolving credit facility, our business,
financial condition and results of operations may be materially and adversely affected.
Our revolving credit agreement restricts our ability to, among other things:
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Incur additional indebtedness; |
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Create liens securing debt or other encumbrances on our assets; |
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Make loans or advances; |
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Pay dividends or make distributions to our stockholders; |
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Purchase or redeem our stock; |
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Repay indebtedness that is junior to indebtedness under our credit agreement; |
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Acquire the assets of, or merge or consolidate with, other companies; and |
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Sell, lease or otherwise dispose of assets. |
Our revolving credit agreement also requires that we maintain certain financial ratios each
fiscal quarter, which we may not be able to achieve. If we do not have access to this revolving
credit facility or a comparable credit facility, our business, financial condition and results of
operations may be materially and adversely affected.
30
Risks Related to the Real Estates Services and Asset Management Industry
If adverse changes in the levels of real estate activity occur, the revenues of our Default and
Timios subsidiaries may decline.
Title insurance and asset management revenue is closely related to the level of real estate
activity, which includes, among other things, sales, mortgage financing and mortgage refinancing.
The levels of real estate activity are primarily affected by the average price of real estate
sales, the availability of funds to finance purchases and mortgage interest rates. Both the volume
and the average price of residential real estate transactions have experienced declines in many
parts of the country over the past four years, and these trends appear likely to continue.
We have found that residential real estate activity generally decreases in the following
situations:
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when mortgage interest rates are high or increasing; |
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when the mortgage funding supply is limited; and |
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when the United States economy is weak, including high unemployment levels. |
Declines in the level of real estate activity or the average price of real estate sales are
likely to adversely affect our title insurance and asset management revenues. In 2010 and
continuing into 2011, the continued mortgage delinquency and default rates caused negative
operating results at a number of banks and financial institutions and, as a result, continued to
suppress the level of lending activity. Our revenues in future periods will continue to be subject
to these and other factors which are beyond our control and, as a result, are likely to fluctuate.
If financial institutions at which we hold escrow funds fail, it could have a material adverse
impact on our company.
We hold customers assets in escrow at various financial institutions, pending completion of
real estate transactions. These assets are maintained in segregated bank accounts. Failure of one
or more of these financial institutions may lead us to become liable for the funds owed to third
parties. and there is no guarantee that we would recover the funds deposited, whether through
Federal Deposit Insurance Corporation coverage or otherwise.
If we experience changes in the rate or severity of title insurance or asset management claims, it
may be necessary for us to record additional charges to our claim loss reserve. This may result in
lower net earnings and the potential for earnings volatility.
By their nature, claims are often complex, vary greatly in dollar amounts and are affected by
economic and market conditions and the legal environment existing at the time of settlement of the
claims. Estimating future title or asset management loss payments is difficult because of the
complex nature of title claims, the long periods of time over which claims are paid, significantly
varying dollar amounts of individual claims and other factors. From time to time, we experience
large losses or an overall worsening of our loss payment experience in regard to the frequency or
severity of claims that makes us record additional charges to our claims loss reserve. There are
currently pending several large claims which we believe can be defended successfully without
material loss payments. However, if unanticipated material payments are required to settle these
claims, it could result in or contribute to additional charges to our claim loss reserves. These
loss events are unpredictable and adversely affect our earnings.
At each quarter end, our recorded reserve for claim losses is initially the result of taking
the prior recorded reserve for claim losses, adding the current provision to that balance and
subtracting actual paid claims from that balance, resulting in an amount that management then
compares to the actuarys central estimate provided in the actuarial calculation. Due to the
uncertainty and judgment used by both management and our actuary, our ultimate liability may be
greater or less than our current reserves and/or our actuarys calculation. If the recorded amount
is within a reasonable range of the actuarys central estimate, but not at the central estimate,
31
management assesses
other factors in order to determine our best estimate. These factors, which are more qualitative
than quantitative, can change from period to period and include items such as current trends in the
real estate industry (which management can assess, but for which there is a time lag in the
development of the data used by our actuary), any adjustments from the actuarial estimates needed
for the effects of unusually large or small claims, improvements in our claims management
processes, and other cost saving measures. Depending upon our assessment of these factors, we may
or may not adjust the recorded reserve. If the recorded amount is not within a reasonable range of
the actuarys central estimate, we would record a charge or credit and reassess the provision rate
on a go forward basis.
Our average provision for claim losses was 6.8% of title premiums in 2010. We will reassess
the provision to be recorded in future periods consistent with this methodology and can make no
assurance that we will not need to record additional charges in the future to increase reserves in
respect of prior periods.
Our asset management business was dependent on one contract, which contract just expired. If we
are unable to renew this contract, or enter into other contracts with substantially similar terms,
our asset management business will be materially and adversely harmed.
Until September 30, 2011, we relied on one asset management contract for our asset management
business which represented 100% of our total revenue from that subsidiary. We are continuing to
manage approximately 273 properties that are in contract. If the sales of any of such properties
do not close prior to November 30, 2011, then such properties would revert back to the bank. We
are currently in discussions with the bank to (1) extend the term during which we may manage such
properties; (2) renew the master contract we had with the bank; and (3) if renewed, add more
properties to the scope of such renewed contract. If we are unable to negotiate a satisfactory
result in any of these respects, our business, financial condition and operating results may be
materially and adversely affected.
The financial projections of our asset management contracts could prove inaccurate.
We generally decide to enter into an asset management contract on the basis of financial
projections prepared by our management. These projected operating results will normally be based
primarily on judgments of the management. In all cases, projections are only estimates of future
results that are based upon assumptions made at the time that the projections are developed.
General economic conditions, which are not predictable, along with other factors may cause actual
performance to fall short of the financial projections that were used to establish a given
projection of results. The inaccuracy of financial projections could thus cause our actual
performance to fall short of our expectations.
Because our Timios subsidiary is dependent upon California for a substantial portion of our title
insurance premiums, our business may be adversely affected by regulatory conditions in California.
California is the largest source of revenue for the title insurance industry and, in 2010,
California-based premiums accounted for a substantial portion of the premiums earned by our Timios
subsidiary. A significant part of our revenues and profitability are therefore subject to our
operations in California and to the prevailing regulatory conditions in California. Adverse
regulatory developments in California, which could include reductions in the maximum rates
permitted to be charged, inadequate rate increases or more fundamental changes in the design or
implementation of the California title insurance regulatory framework, could have a material
adverse effect on our results of operations and financial condition.
The title insurance business is highly competitive.
Competition in the title insurance industry is intense, particularly with respect to price,
service and expertise. Business comes primarily by referral from real estate agents, lenders,
developers and other settlement providers. The sources of business lead to a great deal of
competition among title insurers and asset managers. For example, although the top four title
insurance companies during 2010 accounted for about approximately 90% of industry-wide premium
volume, there are numerous smaller companies representing the remainder at the regional and local
levels. The smaller companies are an ever-present competitive risk in the regional and local
markets where their business connections can give them a competitive edge. Although we are not
aware of any current initiatives to reduce regulatory barriers to entering our industry, any such
reduction could result in new competitors, including financial institutions, entering the title
insurance business. From time to time, new entrants enter the marketplace
with alternative products to traditional title insurance, although many of these alternative
products have been disallowed by title insurance regulators. These alternative products, if
permitted by regulators, could adversely affect our revenues and earnings. Competition among the
major title insurance and asset management companies and any new entrants could lower our premium
and fee revenues.
32
The asset management business is intensely competitive.
The asset management business is intensely competitive, with competition based on a variety of
factors, including the quality of service provided to clients, brand recognition and business
reputation. Our asset management business competes with a number of traditional asset managers
including, commercial banks, investment banks and other financial institutions. A number of factors
serve to increase our competitive risks:
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a number of our competitors in some of our businesses
have greater financial, technical, marketing and other resources and more
personnel than we do; |
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some of our property portfolios may not perform as well as
competitors property portfolios or other available asset management
portfolios; |
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some of our competitors may be subject to less regulation and
accordingly may have more flexibility to undertake and execute certain
lines of business than we can and/or bear less compliance expense than we
do; |
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some of our competitors may have more flexibility than us in the
use of asset management software, giving them a technological advantage
over us; |
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some of our competitors may have higher risk tolerances, different
risk assessments or lower return thresholds, which could allow them to
consider a wider variety of property portfolio mixes and to bid more
aggressively than us for these portfolios; |
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there are relatively few barriers to entry impeding new asset
management firms, and the successful efforts of new entrants into our
business is expected to continue to result in increased competition; |
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some of our competitors may have better expertise or be regarded
by potential customers as having better expertise in a specific asset
class or geographic region than we do; and |
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other industry participants will from time to time seek to recruit
our professionals and other employees away from us. |
We may lose opportunities in the future if we do not match prices, structures and terms
offered by competitors. Alternatively, we may experience decreased rates of return and increased
risks of loss if we match prices, structures and terms offered by competitors. Moreover, if we are
forced to compete with other alternative asset managers on the basis of price, we may not be able
to maintain our current fees and profitability. We have historically competed primarily on the
performance, and not on the level of our fees relative to those of our competitors. However, there
is a risk that fees asset management industry will decline, without regard to the historical
performance. Fee income reductions on existing or future business, without corresponding decreases
in our cost structure, would adversely affect our revenues and profitability.
Industry regulatory scrutiny and investigations could adversely affect our ability to compete for
or retain business or increase our cost of doing business.
The title insurance industry has recently been, and continues to be, under regulatory scrutiny
in a number of states with respect to pricing practices, and alleged RESPA violations and unlawful
rebating practices. The regulatory investigations could lead to industry-wide reductions in premium
rates and escrow fees, the inability to get rate increases when necessary, as well as to changes
that could adversely affect the Companys ability to compete for or retain business or raise the
costs of additional regulatory compliance.
33
We may pursue opportunities that involve business, regulatory, legal or other complexities.
We may pursue unusually complex asset management opportunities. This can often take the form
of substantial business, regulatory or legal complexity that would deter other asset management
companies. Our tolerance for complexity presents risks, as such contracts can be more difficult,
expensive and time-consuming to execute; it can be more difficult to manage or realize value from
the assets managed in such contracts; and such contracts sometimes entail a higher level of
regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could harm the
results of our operations.
Our business depends upon our ability to keep pace with the latest technological changes, and our
failure to do so could make us less competitive in our industry.
The market for our products and services is characterized by rapid change and technological
change, frequent new product innovations, changes in customer requirements and expectations and
evolving industry standards. Products using new technologies or emerging industry standards could
make our products and services less attractive. Furthermore, our competitors have access to
technology not available to us, which enable them to produce products of greater interest to
consumers or at a more competitive cost. Failure to respond in a timely and cost-effective way to
these technological developments may result in serious harm to our business and operating results.
As a result, our success will depend, in part, on our ability to develop and market product and
service offerings that respond in a timely manner to the technological advances available to our
customers, evolving industry standards and changing preferences.
Rapid technological changes in our industry require timely and cost-effective responses. Our
earnings may be adversely affected if we are unable to effectively use technology to increase
productivity.
Technological advances occur rapidly in the title insurance industry as industry standards
evolve and title insurers introduce new products and services. We believe that our future success
depends on our ability to anticipate technological changes and to offer products and services that
meet evolving standards on a timely and cost-effective basis. Successful implementation and
customer acceptance of our technology-based services will be crucial to our future profitability.
There is a risk that the introduction of new products and services, or advances in technology,
could reduce the usefulness of our products and render them obsolete.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
None.
The Company subleased approximately 2,260 square feet of office space, which served as its,
and as of June 3, 2011 FRESs, executive offices, at 1005 North Glebe Road, Suite 550, Arlington,
Virginia 22201, through July 31, 2011. Lease payments were $7,756 per month from July 1, 2010
through December 31, 2010 and $7,503 per month from January 1, 2011 through July 31, 2011,
including taxes and utilities. The Company and FRES moved offices on August 1, 2011, leasing
approximately 750 square feet through July 31, 2012 at a cost of $99,216 through that date,
including taxes and utilities.
Timios leases approximately 8,000 square feet of office space at 5716 Corsa Ave., Suite 102,
Westlake Village, CA 91362, which serves as its executive and administrative offices. Lease
payments are $14,157 per month. The lease payments are inclusive of taxes and utilities. The
cumulative lease payment for the remainder of the lease will be approximately $346,000. The lease
expires on August 31, 2013.
Timios also leases approximately 4,000 square feet of office space at 2201 West Plano Parkway,
Suite 175, Plano, TX 75075, which serves as a regional administrative office. Lease payments are
approximately $7,317 per month. The lease payments are inclusive of taxes and utilities. The
cumulative lease payment for the remainder of the lease will be approximately $88,000. The lease
expires on July 31, 2012.
34
Timios also leases approximately 4,000 square feet of office space at 16300 Katy Freeway,
Suite 210, Houston, TX 77084, which is currently sublet to an unrelated company. Lease payments are
approximately $1,848
per month. The lease payments are inclusive of taxes and utilities. The cumulative lease
payment for the remainder of the lease will be approximately $30,000. The lease expires on
December 31, 2012.
DSUSA leases approximately 5,908 square feet of office space at 5111 Commerce Crossing Drive,
Suite 210, Louisville, KY 40229, which serves as its executive and administrative offices. Lease
payments are approximately $7,691 per month. The lease payments are inclusive of taxes and
utilities. The cumulative lease payment for the remainder of the lease will be approximately
$184,582. The lease expires on September 30, 2013.
We believe that our existing facilities are adequate to accommodate our business needs.
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ITEM 3. |
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LEGAL PROCEEDINGS |
From time to time, we may be involved in routine legal proceedings incidental to the conduct
of our business. We are subject to certain claims and lawsuits typically filed against real estate
services companies, alleging primarily professional errors or omissions. We carry professional
liability insurance, subject to certain deductibles and policy limits, against such claims.
However, in some actions, parties may seek damages that exceed our insurance coverage or for which
we are not insured. Managements opinion is that the resolution of any potential claim does not
have a material adverse effect on our financial position, results of operations or cash flows.
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ITEM 4. |
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(Removed and Reserved) |
35
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Market Information
Our common stock is currently traded on the OTC Bulletin Board under the ticker symbol
HOMS.OB. The following table sets forth, for the calendar quarters indicated, the high and low
closing bid prices of our shares of common stock. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily represent actual
transactions. This information was obtained from Bloomberg L.P.
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Fiscal Year 2011 |
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High |
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Low |
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4th Quarter (April June 2011) |
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$ |
0.0285 |
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$ |
0.017 |
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3rd Quarter (January March 2011) |
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$ |
0.031 |
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$ |
0.0131 |
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2nd Quarter (October December 2010) |
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$ |
0.027 |
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$ |
0.011 |
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1st Quarter (July September 2010) |
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$ |
0.032 |
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$ |
0.020 |
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Fiscal Year 2010 |
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High |
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Low |
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4th Quarter (April June 2010) |
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$ |
0.063 |
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$ |
0.035 |
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3rd Quarter (January March 2010) |
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$ |
0.130 |
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$ |
0.055 |
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2nd Quarter (October December 2009) |
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$ |
0.190 |
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$ |
0.111 |
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1st Quarter (July September 2009) |
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$ |
0.215 |
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$ |
0.115 |
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Holders of our Common Stock
As of September 30, 2011, there were approximately 360 holders of record of our common stock.
Dividends
We have not paid dividends on our common stock since inception and do not intend to pay any
dividends to our common stock holders in the foreseeable future. We currently intend to reinvest
our earnings, if any, for the development and expansion of our business. Any declaration of
dividends on any class of our stock in the future will be at the election of our Board of Directors
and will depend upon our earnings, capital requirements and financial position, general economic
conditions and other factors our Board of Directors deems relevant.
Recent Sales of Unregistered Securities
None.
36
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information as of June 30, 2011, concerning our equity
compensation plans:
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Number of |
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securities |
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Number of |
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remaining |
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securities to |
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Weighted |
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available for |
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be issued |
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average |
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future |
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upon exercise |
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exercise price |
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issuance under |
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of |
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of |
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equity compensation |
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outstanding |
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outstanding |
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plans (excluding |
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options, warrants |
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options, warrants |
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securities reflected |
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Plan category |
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and rights |
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and rights |
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in column (a)) |
|
Equity compensation
plans approved by
security holders |
|
|
250,000 |
|
|
$ |
0.120 |
|
|
|
6,950,000 |
(1) |
Equity compensation
plans not approved
by security holders
(2)(3) |
|
|
11,440,000 |
|
|
$ |
0.061 |
|
|
|
64,958,310 |
(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,690,000 |
|
|
$ |
0.063 |
|
|
|
71,508,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
6,950,000 options available for future issuance pursuant to the Companys 2005 Stock Option Plan (the
2005 Plan) and 64,958,310 options available for future issuance pursuant to the Companys 2008 Stock
Option Plan (the 2008 Plan). |
|
(2) |
|
Includes 10,000,000 non-qualified options to purchase common stock to our non-employee directors
pursuant to the Companys 2008 Plan. |
|
(3) |
|
Includes 1,440,000 non-qualified options to purchase common stock issued to our non-employee directors. |
Additional information regarding our stock-based compensation awards outstanding and
available for future grants as of June 30, 2011 is presented in the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
This item is not applicable to smaller reporting companies.
37
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following information should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto appearing elsewhere in this Annual Report on Form
10-K. Statements in this Managements Discussion and Analysis and Results of Operation and
elsewhere in this Annual Report on form 10-K that are not statements of historical or current fact
constitute forward-looking statements.
Overview
Homeland Security Capital Corporation was incorporated in Delaware on August 12, 1997 under
the name Celerity Systems, Inc. In 2005, we changed our business plan to primarily seek
acquisitions of and joint ventures and, since then, have operated solely as a provider of
specialized technology-based radiological, nuclear, environmental, disaster relief and electronic
security solutions to government and commercial customers. Our corporate headquarters is located in
Arlington, Virginia.
In July 2011, we expanded the scope of operations to include companies operating in the real
estate services industry through our acquisition of a majority interest in an intermediary holding
company that owns, through another intermediary company, two companies, one engaged in title and
escrow services for mortgage origination refinance, reverse mortgages and deed-in-lieu
transactions, and the other in real estate-owned liquidation services to institutional real estate
owned, or REO, customers.
In early 2011, we had announced that we were considering strategic alternatives to retire part
or all of our debt, including the sale of one or all of our current subsidiaries. Accordingly, we
developed a coordinated plan to dispose of our current operations and use the proceeds from the
sale of our subsidiaries to retire our debt to YA. As part of this plan, we hired financial
advisors to assist us in identifying solutions and these advisors identified possible buyers for
Safety and CSS Management Corp. (formerly, Corporate Security Solutions, Inc.), or CSS, a
wholly-owned subsidiary of NTG Management Corp. (formerly, Nexus Technologies Group, Inc.), or NTG,
a majority-owned subsidiary of the Company.
Subsequent to year-end, the Company plans to conduct its continuing operations through one
majority-owned subsidiary. On July 6, 2011, the Company formed Holdings and through Holdings on
July 19, 2011 entered into a shareholders agreement to acquire eighty percent (80%) of FRES, a
company involved in the real estate services industry. On July 5, 2011 and on July 29, 2011, FRES,
through a newly formed subsidiary DSUSA, acquired substantially all the assets of Default
Servicing, Inc and 100% of the stock of Timios, Inc., respectively.
The Company expects to grow these businesses both organically and by acquisitions. The Company
continues to target growth companies that are generating revenues but face challenges in scaling
their businesses to capitalize on growth opportunities. The Company will enhance the operations of
these companies by helping them generate new business, grow revenues, develop superior management,
build infrastructure and improve cash flows.
Results of Continuing Operations
The discussion below reflects the consolidated accounts of the Companys continuing operations
only as of June 30, 2011 and 2010. Safety, NTG and PMX are discussed below under Discontinued
Operations. All intercompany balances and transactions related to discontinued operations have been
eliminated.
The Company has measured the impact of inflation and changing prices on operating expenses and
net income for 2011 and 2010, the financial periods included in this Annual Report on Form 10-K. We
have concluded that there has not been a material impact to our financial position, results of
operations or cash flows from inflation or changing prices during 2011 or 2010.
38
Year Ended June 30, 2011 as Compared to the Year Ended June 30, 2010
Operating expenses from continuing operations
For the twelve months ended June 30, 2011, the Companys continuing operations recorded
operating expenses of $2,947,395 as compared to $2,480,103 recorded for the twelve months ended
June 30, 2010.
The increase of $467,292, or 18.8%, was primarily due to the increase in professional services,
mainly legal expenses related to acquisition and disposal activities, offset by a decrease in non
cash compensation in 2011.
Other income and expense from continuing operations
For the twelve months ended June 30, 2011, the Companys continuing operations recorded net
other expenses of $2,249,997 as compared to net other expenses of $2,291,004 recorded for the
twelve months ended June 30, 2010. The decrease in net other expenses of $41,007 are further
outlined below by functional line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
(Increase) |
|
|
Decrease |
|
Interest expense |
|
$ |
2,003,558 |
|
|
$ |
1,877,204 |
|
|
$ |
(126,354 |
) |
|
|
6.7 |
% |
Amortization of debt
offering costs |
|
|
|
|
|
|
335,683 |
|
|
|
335,683 |
|
|
|
|
|
Amortization of debt
discount |
|
|
|
|
|
|
34,053 |
|
|
|
34,053 |
|
|
|
|
|
Impairment losses |
|
|
308,213 |
|
|
|
104,997 |
|
|
|
(203,216 |
) |
|
|
193.5 |
% |
Interest and other
income |
|
|
(61,774 |
) |
|
|
(60,933 |
) |
|
|
841 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,249,997 |
|
|
$ |
2,291,004 |
|
|
$ |
41,007 |
|
|
|
(1.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall decrease in net other expenses of $41,007, or 1.8%, mainly reflects the increase
in interest expense of $126,354, the increase of impairment losses of 203,216, offset by the
absence in 2011 of the amortization for debt offering costs and debt discount which was fully
amortized in 2010.
Net loss from continuing operations
As a result of the foregoing, the Companys continuing operations recorded a net loss of
$5,197,392 for the twelve months ended June 30, 2011 as compared to a net loss from continuing
operations of $4,771,107 for the twelve months ended June 30, 2010.
Discontinued Operations
As previously indicated in this Annual Report on Form 10-K and as of the date of this filing,
the Company has a single coordinated plan to dispose of Safety, NTG and PMX. The Company has either
committed to sell, sold or transferred its entire interests in these operating subsidiaries related
to its homeland security business segment. As a result of these pending or completed transactions,
which had been previously contemplated, the Company has recorded the results of operations of these
subsidiaries as discontinued operations, assets and liabilities have been separated on the balance
sheet and cash flows have been separated on the statement of cash flows at June 30, 2011 and 2010,
in accordance with Generally Accepted Accounting Principles in the U.S., or GAAP.
The table below reflects certain information regarding discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
|
Safety |
|
|
NTG |
|
|
PMX |
|
|
Total |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,144,175 |
|
|
|
5,736,294 |
|
|
|
44,604 |
|
|
|
1,619,632 |
|
|
|
236,622 |
|
|
|
48,768 |
|
|
|
1,425,401 |
|
|
|
7,404,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
217,392 |
|
|
|
425,182 |
|
|
|
|
|
|
|
165,048 |
|
|
|
|
|
|
|
|
|
|
|
217,392 |
|
|
|
590,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations |
|
|
926,783 |
|
|
|
5,311,112 |
|
|
|
44,604 |
|
|
|
1,454,584 |
|
|
|
236,622 |
|
|
|
48,768 |
|
|
|
1,208,009 |
|
|
|
6,814,464 |
|
39
Liquidity and Capital Resources
From August 2005 through March 2008, the Company operated and acquired businesses using
funding from issuance of its common stock, preferred stock and convertible debt to YA Global
Investments, L.P. (YA) (formerly known as Cornell Capital, L.P.) totaling approximately
$23,250,000. At June 30, 2011, the Company owed YA approximately $19,725,040, including accrued
interest. In March 2008, the total debt was consolidated into three notes, each with a maturity
date of March 14, 2010. This due date was initially extended to October 1, 2010 and it was
subsequently extended to July 15, 2011, by which time the Company had expected to sell Safety, NTG
and PMX and retire the debt. Since neither Safety, NTG nor PMX were sold by this date, YA agreed to
a forbearance until August 31, 2011 and then subsequently agreed to an extension of the forbearance
period until September 14, 2011. On August 19, 2011, $1,733,917 of the proceeds from the sale of
NTG was paid to YA. Unless and until the Company sells Safety, it cannot repay this debt. Upon the
expiration of the forbearance period, the Company is subject to foreclosure without notice. Since
September 15, 2011 and until the date of this filing, YA has not notified the Company of its
intention to foreclose on the assets of the Company, all of which are pledged as collateral for its
debt. Such a foreclosure would have a material adverse effect on the Companys continuing
operations, its liquidity, its capital resources and its stockholders.
The Company had cash on hand of $3,494,256 at June 30, 2011 and $1,892,429 at June 30, 2010.
Our primary needs for cash are to repay debt and fund our ongoing operations. Our secondary need
for cash is to make additional acquisitions of businesses that provide products and services in our
target industries. We do not have sufficient capital on hand to repay our debt nor are we able to
internally generate sufficient capital to repay our debt at this time. We will require significant
additional capital in order to repay our debt, fund our operations and to make additional
acquisitions.
During the year ended June 30, 2011, the Companys operations had a net increase in cash of
$1,664,827. The Companys continuing sources and uses of funds were as follows:
Cash Flows From Operating Activities
We provided net cash of $4,985,446 in our operating activities during the year ended June 30,
2010, primarily provided by our subsidiaries Safety and NTG in their ongoing operations.
Cash Flows From Investing Activities
We provided net cash of $831,863 in our investing activities during the year ended June 30,
2011, consisting of the proceeds from the disposal of fixed assets in the amount of $1,562,825,
offset by the purchase of fixed assets of $730,962, mainly by Safety and NTG.
Cash Flows From Financing Activities
We used cash of $4,183,035 in financing activities during the year ended June 30, 2010,
consisting of net repayments on Safetys line of credit of $2,162,000, repayments of bank notes of
$1,156,955, repayments of related party debt of $500,000, $216,200 for the repurchase of stock
options outstanding at Safety and $147,880 for distributions to non-controlling interests.
As of June 30, 2011, the Holding Company had a net working capital deficit of $9,531,622.
Off-Balance Sheet Arrangements
Safety, in the normal course of business, is required to post a performance bond on certain
projects. Typically, the bonding or surety company who posts the bond on Safetys behalf will
require collateralization of their potential liability for posting the bond. Through June 30, 2011,
our President has guaranteed this potential liability.
The Company recognizes the potential exposure to our President and, on January 1, 2011,
entered into an agreement with him and his spouse, indemnifying them against any liabilities they
may endure as a result of
collateralizing Safetys bonding requirements. At June 30, 2011, the amount of possible
indemnification to the President and his spouse was approximately $13,000,000.
40
Critical Accounting Policies and Estimates Used in Continuing and Discontinued Operations
Revenue Recognition The Company recognizes revenue when it is realized or realizable and
earned less estimated future doubtful accounts. The Company considers revenue realized or
realizable and earned when all of the following criteria are met:
|
(i) |
|
persuasive evidence of an arrangement exists, |
|
|
(ii) |
|
the services have been rendered and all required milestones achieved, |
|
|
(iii) |
|
the sales price is fixed or determinable, and |
|
|
(iv) |
|
collectability is reasonably assured. |
Revenues are derived primarily from services performed under time and materials and fixed fee
contracts and products sold. Revenues and costs derived from fixed price contracts are recognized
using the percentage of completion (efforts expended) method. Revenue and costs derived from time
and material contracts are recognized when revenue is earned and costs are incurred. Revenue and
costs based on sale of products are derived when the products have been delivered and accepted by
the customer.
Deferred Revenue Revenue from service contracts, for which the Company is obligated to
perform, is recorded as deferred revenue and subsequently recognized over the term of the contract.
Contract costs include all direct labor, material and other non-labor costs and those indirect
costs related to contract support, such as depreciation, fringe benefits, overhead labor, supplies,
tools, repairs and equipment rental. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty provisions and final
contract settlements may result in revisions to costs and income and are recognized in the period
in which the revisions are determined.
Foreign Operations Safety and Ecology Corporation Limited, or SECL, a United Kingdom
corporation, is wholly-owned by Safety. The financial statements of SECL are included in
discontinued operations. The financial statements of SECL are translated into U.S. dollars using
exchange rates in effect at period-end for assets and liabilities and average exchange rates during
the period for results of operations. The related translation adjustments are reported as
discontinued operations.
Use of Estimates The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Estimates are used when accounting for amounts recorded in revenue when applying percentage of
completion accounting, fair value determination of assets and liabilities, impairment of long-lived
assets (including goodwill and other intangible assets), collectability of accounts receivable,
share based compensation assumptions and valuation allowance related to deferred tax assets.
The estimates we make are subject to several factors including managements judgment, the
industry in which we conduct our operations, the overall economy, market valuations concerning
certain assets and liabilities and the government. Although we believe our estimates take into
consideration the effect of these various factors, uncertainty still exists in such estimates and
actual results may differ from our estimates.
Fair Value of Financial Instruments The carrying amount of items included in working
capital approximates fair value because of the short maturity of those instruments. The carrying
value of the Companys
debt approximates fair value because it bears interest at rates that are similar to current
borrowing rates for loans of comparable terms, maturity and credit risk that are available to the
Company.
41
Recognition of Losses on Receivables Trade accounts receivable are recorded at their
estimated net realizable values using the allowance method. Management periodically reviews
accounts for collectability, including accounts determined to be delinquent based on contractual
terms. An allowance for doubtful accounts is maintained at the level management deems necessary to
reflect anticipated credit losses. When accounts are determined to be uncollectible, they are
charged off against the allowance for bad debts. Net accounts receivable are included in Current
assets related to discontinued operations.
Investments in Assets Held for Sale The Company classifies certain investments in
marketable securities as assets held for sale. Under this classification securities are carried
at fair value (period end market closing prices) with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders equity until the gains or losses are
realized or a provision for impairment is recognized.
Investment Valuation Investments in equity securities are recorded at fair value,
represented as cost, plus or minus unrealized appreciation or depreciation, respectively. The fair
value of investments that have no ready market, are recorded at the lower of cost or a value
determined in good faith by management, and approved by the Board of Directors, based upon assets
and revenues of the underlying investee companies as well as the general market trends for
businesses in the same industry. Because of the inherent uncertainty of valuations, management
estimates of the value of the investments may differ significantly from the values that would have
been used had a ready market for the investments existed and the differences could be material.
Periodically management makes an assessment as to impairment of the Companys investment and
accordingly adjusts the investment to record other than a temporary change in value.
Valuation of Stock Options and Warrants The valuation of stock options and warrants granted
to unrelated parties for services are measured at the earlier of: (i) the dates at which a
commitment for performance by the counterparty to earn the equity instrument is reached, or (ii)
the date the counterpartys performance is complete.
Goodwill Goodwill on acquisition is initially measured as the excess of the cost of the
business acquired, including directly related professional fees, over the Companys interest in the
net fair value of the identifiable assets, liabilities and contingent liabilities. The Companys
acquisition of Safety in March of 2008 resulted in the recording of $6,403,982 as goodwill after
the final allocation of the purchase price of the acquisition. All of the goodwill recorded on the
Companys consolidated balance sheet is allocated to Safety.
The Company performs impairment tests of goodwill at its operating segment level. Goodwill is
tested for impairment at least annually, usually in the fourth quarter or more frequently if events
or changes in circumstances indicate that the carrying amount may be impaired. The impairment test
requires management to undertake certain judgments and consists of a two step process, if
necessary. The first step is to compare the fair value of the operating segment to its carrying
value, including goodwill. The Company typically uses a discounted cash model to determine the fair
value of an operating segment, using assumptions in the model it believes to be consistent with
those used by hypothetical market participants.
If the fair value of the operating segment is less than its carrying value, a second step of
the impairment test must be performed in order to determine the amount of impairment loss, if any.
The second step compares the implied fair value of the operating segment goodwill with the carrying
amount of that goodwill. If the carrying amount of the operating segments goodwill exceeds its
implied fair value, an impairment charge is recognized in an amount equal the carrying amount of
the goodwill less its implied fair value.
Any impairment of goodwill based on the above calculations is recognized immediately in the
income statement and is not subsequently reversed. At June 30, 2011, no goodwill impairment has
been recognized.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This item is not applicable to smaller reporting companies.
42
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements required to be filed pursuant to this Item 8 are appended to this
Annual Report on Form 10-K. A list of the financial statements filed herewith is found at Item 15.
Exhibits, Financial Statement Schedules.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of June
30, 2011, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, as well as other key members of our management, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not effective to provide reasonable
assurance that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely
basis within the time periods specified in the Commissions rules and forms, and is accumulated and
communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure because of the material weakness described below under Managements Annual
Report on Internal Control over Financial Reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13A-15(f) and 15d-15(f) under the Securities Exchange Act.
Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Our internal control over financial reporting includes those
policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect transactions involving our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with the authorization of our management, and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our
internal control over financial reporting as of June 30, 2011. In making this assessment,
management used the framework set forth in the reporting entitled Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.
The COSO framework summarizes each of the components of a companys internal control system,
including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv)
information and communication, and (v) monitoring. Based on such evaluation, our Chief Executive
Officer and
Chief Financial Officer concluded that our internal control over financial reporting was not
effective as of June 30, 2011.
43
The Chief Executive Officer and the Chief Financial Officer determined that material
information was omitted in determining whether contracts were in a loss position and such missing
information would have caused a material misstatement within our financial statements.
The Chief Executive Officer and the Chief Financial Officer have undertaken a review of the
current policies and procedures used in contract accounting and determined that changes to the
policies and procedures, along with additional training of the employees responsible for applying
such policies and procedures, will prevent such material weaknesses from occurring in the future.
Attestation Report of the Independent Registered Public Accounting Firm
This item is not applicable to smaller reporting companies.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we routinely enhance our information systems by either
upgrading our current systems or implementing new systems. No change occurred in our internal
controls over financial reporting during the year ended June 30, 2011 that has materially affected,
or is reasonably likely to materially affect, our internal controls over financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None.
44
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive Officers and Directors
Set forth below are, as of September 30, 2011, the names of our executive officers and
directors, their ages, their positions, their principal occupations or employment for the past five
years, the length of their tenure as directors and the names of other public companies in which
such persons hold or have held directorships during the past five years. In addition, the following
paragraphs include specific information about each directors experience, qualifications,
attributes or skills that led the Board of Directors to the conclusion that the individual is
qualified to serve on the Board of Directors as of the time of this filing, in light of our
business and structure.
|
|
|
|
|
|
|
Name |
|
|
Age |
|
|
Position |
|
|
|
|
|
|
|
C. Thomas McMillen
|
|
|
59 |
|
|
Chief Executive Officer and
Chairman of the Board of Directors |
|
|
|
|
|
|
|
Christopher P. Leichtweis
|
|
|
52 |
|
|
President and Director |
|
|
|
|
|
|
|
Michael T. Brigante
|
|
|
57 |
|
|
Senior Vice President of Finance and
Chief Financial Officer |
|
|
|
|
|
|
|
Zev E. Kaplan
|
|
|
59 |
|
|
Director |
|
|
|
|
|
|
|
Philip A. McNeill
|
|
|
52 |
|
|
Director |
C. Thomas McMillen. Mr. McMillen has served as the Companys Chief Executive Officer and
Chairman of the Board since August 30, 2005 and served as the Companys President from August 30,
2005 until March 19, 2008. From December 2004 until January 2007, Mr. McMillen served as the
Chairman of Fortress America Acquisition Corporation (now Fortress International Group, Inc.,
FIGI.PK), and from January 2007 until August 2009, he served as Vice Chairman and director. From
October 2007 until October 2009, Mr. McMillen served as Chairman and Co-Chief Executive Officer of
Secure America Acquisition Corporation, (now Ultimate Escapes, Inc. OTCBB: ULEIQ.PK) and from
October 2009 to December 2010 as a director and from November 2009 to December 2010 as Vice
Chairman. Ultimate Escapes, Inc. filed for Chapter 11 bankruptcy protection in the United States
Bankruptcy Court in Wilmington, Delaware in September 2010. In March 2003, Mr. McMillen co-founded
Global Secure Corp., a homeland security company providing integrated products and services for
critical incident responders, and served as its Chief Executive Officer until February 2004. From
February 2004 until February 2005, Mr. McMillen served as a consultant to Global Secure Corp. From
December 2003 to February 2004, Mr. McMillen served as Vice Chairman and Director of Sky Capital
Enterprises, Inc., a venture firm, and until February 2005 served as a consultant. From March 2003
to February 2004, Mr. McMillen served as Chairman of Sky Capital Holdings, Ltd, Sky Capital
Enterprises London stock exchange listed brokerage affiliate. Mr. McMillen has also been Chief
Executive Officer of Washington Capital Advisors, a merchant bank and one of our stockholders since
2003. Mr. McMillen also served as Chairman of TPF Capital, its predecessor company, from 2001
through 2002. Mr. McMillen has also been an independent consultant throughout his career. In
addition, from 1987 through 1993, Mr. McMillen served three consecutive terms in the U.S. House of
Representatives representing the 4th Congressional District of Maryland. Mr. McMillen
received a Bachelor of Science in Chemistry from the University of Maryland and a Bachelor and
Master of Arts from Oxford University as a Rhodes Scholar.
Mr. McMillen is qualified for service on our Board of Directors based on his many years of
senior executive experience in the homeland security industry, including his experiences as a
successful businessman, Congressman and Presidential appointee.
45
Christopher P. Leichtweis. Mr. Leichtweis has served as the Companys President and as a
director of the Company since March 19, 2008. In addition, Mr. Leichtweis has been serving as
Chairman and Chief Executive Officer of Safety & Ecology Holdings Corporation since 1991. Mr.
Leichtweis founded Safety in 1991 and over the last decade has grown the Company to its present
state of over $70 million in revenue. Prior to founding Safety, Mr. Leichtweis served in various
engineering and management positions at Bechtel National and Bechtel Environmental, Inc. a global
engineering and construction Company starting in 1985 and was a key contributor to the
environmental clean-up of major federal nuclear legacy programs. He currently serves on the board
of directors of his undergraduate Universitys Foundation Board (SUNY Brockport). Mr. Leichtweis
received a Bachelor of Science in Physics from SUNY Brockport and a Masters of Business
Administration from the University of Tennessee and is a Certified Industrial Hygienist. Mr.
Leichtweis was nationally recognized as the Southeast United States 2005 Ernst & Young Entrepreneur
of the Year award.
Mr. Leichtweis is qualified for service on our Board of Directors based on his 26 years of
environmental remediation experience, including his extensive background in managing a growing
company for 20 years.
Michael T. Brigante. Mr. Brigante has served as the Companys Vice President of Finance since
July 14, 2006 and the Companys Chief Financial Officer since May 10, 2007. Mr. Brigante is a
director of each of the Companys subsidiary boards of directors. In January 2003, Mr. Brigante
joined Sky Capital Enterprises, a venture firm, and Sky Capital Holdings, a FINRA registered broker
dealer, which were both London Stock Exchange listed companies and served as their Chief Financial
Officer until June 2006. From July 1999 until December 2002, Mr. Brigante was the Managing Partner
of Pilot Rock Consulting, a diversified financial consulting practice to public and private
companies, which he founded. From December 1995 until December 1996, Mr. Brigante served as the
Controller and from January 1997 until June 1999 served as Chief Financial Officer of Complete
Wellness Centers, Inc. a publicly held healthcare services company. Prior to his position with
Complete Wellness Centers, Inc. Mr. Brigante served in a variety of Senior Financial positions with
public and private companies. Mr. Brigante received a Bachelor of Science degree in Accounting and
Economics from James Madison University and is a Certified Public Accountant.
Zev. E. Kaplan. Mr. Kaplan has served as a director of the Company since December 30, 2005.
Mr. Kaplan is the founder of a law firm concentrating its practice in the areas of transportation,
infrastructure, government relations, business and administrative law. Mr. Kaplan was Associate
General Counsel to Global Cash Assess, Inc., a NYSE traded company from August 2008 to August 2009.
Mr. Kaplan previously served as General Counsel to Cash Systems Inc., a publicly traded company in
the financial services business, a position he has held from March 2005 to August 2008. From April
1995 to the present, Mr. Kaplan has been General Counsel to the Regional Transportation Commission
of Southern Nevada, where he played a key policy role in the start-up of the local transit systems
and their facilities. In addition, Mr. Kaplan has had a key role in the planning and financing of
numerous major public infrastructure projects in Las Vegas. Prior to starting his law firm, Mr.
Kaplan spent 15 years in government service in the following capacities: Senior Deputy District
Attorney with the Clark County District Attorneys Office-Civil Division; General Counsel to the
Nevada Public Service Commission; and Staff Attorney to the U.S. Senate Committee on Commerce,
Science and Transportation. Mr. Kaplan received his Juris Doctor from Southwestern University
School of Law and attended Georgetown University for post-graduate legal studies; received a
Masters Business Administration from the University of Nevada, Las Vegas; and received a Bachelor
of Science from the Smith School of Business at the University of Maryland in 1974.
Mr. Kaplan is qualified for service on our Board of Directors based on his extensive legal
experience, which includes various positions serving governmental agencies at the federal and state
level.
Philip A. McNeill. Mr. McNeill has served as a director of the Company since December 30,
2005. Mr. McNeill is a Managing Partner and the Chief Investment Officer of SPP Mezzanine Partners
II, LLC, the Manager of the SPP Mezzanine family of Funds, a position he has held since November
2003. Prior to forming SPP Mezzanine Partners, Mr. McNeill served as Managing Director of Allied
Capital Corporation, where he was co-head of its Private Finance and Mezzanine activities and a
member of its Investment Committee. From the time of his appointment as Managing Director in 1998
until he left Allied Capital in 2002, the company grew from approximately $740 million in assets to
nearly $2.4 billion. Mr. McNeill joined Allied Capital directly from M&T Capital, the SBIC
investment division of M&T Bank, where he was a Vice President of M&T Capital/M&T Bank and an
investment professional from 1988 to 1993. From October 2007 until October 2009, Mr. McNeill also
served as a director of Secure America Acquisition Corporation, (now Ultimate Escapes, Inc. OTCBB:
ULEIQ.PK).
Ultimate Escapes, Inc. filed for Chapter 11 bankruptcy protection in the United States
Bankruptcy Court in Wilmington, Delaware in September 2010. Mr. McNeill graduated from Syracuse
University in 1981 with a Bachelor of Science in Business Administration, with concentrations in
Accounting, Finance, and Law & Public Policy. Mr. McNeill earned his Masters Business
Administration from Harvard Business School in 1985.
46
Mr. McNeill is qualified for service on our Board of Directors based on his experience with
middle-market companies, his financial background and his current position serving as managing
partner and investment officer for an investment fund.
Term of Office
Each director holds office until our annual meeting of stockholders and until his successor is
duly elected and qualified. Officers are elected by our Board of Directors and hold office at the
discretion of our Board of Directors.
Director Nominations
Generally, directors are recommended to the Company by senior management or currently serving
directors. On occasion, as the Company enters an industry sector not familiar to the current
management or directors, the Company will seek outside recommendations for industry experts to
consider as potential director nominees.
Family Relationships
To our knowledge, there are no family relationships; as such term is defined in item 401(d) of
Regulation S-K, among any of the directors or executive officers of the Company.
Involvement in Certain Legal Proceedings
To our knowledge, none of the Companys directors or executive officers has been involved in
legal proceedings over the past ten years that are material to an evaluation of his ability or
integrity to serve as a director or executive officer of the Company.
Corporate Governance
Committees of the Board of Directors and Meetings
Audit Committee. Philip A. McNeill (Committee Chairman) and Zev E. Kaplan serve as members of
the Audit Committee. They are independent members of the Board of Directors and our Board of
Directors has determined that Mr. McNeill satisfies the criteria for an audit committee financial
expert under Item 407 of Regulation S-K. Each Audit Committee member is able to read and
understand fundamental financial statements, including our Companys consolidated balance sheet,
statement of operations and statement of cash flows. The functions of the Audit Committee are
primarily to: (i) provide advice to the Board in selecting, evaluating or replacing outside
auditors, (ii) review the fees charged by the outside auditors for audit and non-audit services,
(iii) ensure that the outside auditors prepare and deliver annually a Statement as to Independence,
(iv) meet with outside auditors to discuss the results of their examination and their evaluation of
internal controls and the overall quality of financial reporting, and (v) meet with the outside
auditors to discuss the scope of the annual audit and to discuss the audited financial statements.
The charter for our Audit Committee can be found on our website at www.hscapcorp.com
under the tab, Investor Relations.
AUDIT COMMITTEE REPORT
The members of the Audit Committee, which is comprised of two directors, have been appointed by the
Board of Directors. The current members of the Committee are Messrs. Philip A. McNeill (Chairman)
and Zev E. Kaplan.
47
The Audit Committee reviews the scope and timing of the independent registered public accounting
firms audit and other services, and their report on our financial statements following completion
of their audits. The Audit Committee also makes annual recommendations to the Board of Directors
regarding the appointment of independent registered public accounting firms for the ensuing year.
The Audit Committee operates under a written Audit Committee Charter.
Management is responsible for the preparation of our financial statements and the independent
registered public accounting firm has the responsibility for the examination of those statements.
The Audit Committee reviewed our audited financial statements for the year ended June 30, 2011 and
met with both management and our external accountants to discuss those financial statements.
Management and the independent registered public accounting firm have represented to the Audit
Committee that the financial statements were prepared in accordance with generally accepted
accounting principles. The Audit Committee also considered taxation matters and other areas of
oversight relating to the financial reporting and audit process that the Audit Committee deemed
appropriate.
The Audit Committee has received from the independent registered public accounting firm their
written disclosure and letter regarding their independence from us as required by applicable
requirements of the Public Company Accounting Oversight Board, and has discussed with the
independent registered public accounting firm their independence. The Audit Committee also
discussed with the independent registered public accounting firm any matters required to be
discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company
Accounting Oversight Board in Rule 3200T, as may be modified or supplemented.
Based upon the reviews and discussions described in this Audit Committee Report, the Audit
Committee has recommended to the Board of Directors that the audited financial statements be
included in our Annual Report on Form 10-K for the year ended June 30, 2011 for filing with the
Securities and Exchange Commission.
RESPECTFULLY SUBMITTED,
THE AUDIT COMMITTEE
Philip C. McNeill, Chairman
Zev E. Kaplan
Compensation Committee. Zev E. Kaplan (Committee Chairman) and Philip A. McNeill serve as
members of the Compensation Committee. Both are independent members of the Board of Directors. The
Compensation Committee met 9 times in fiscal year 2011.
Meeting Attendance. During the fiscal year ended June 30, 2011, there were seventeen meetings
of our Board of Directors, and the various committees of the Board of Directors met a total of
thirteen times. No director attended fewer than 75% of the total number of meetings of the Board of
Directors and of committees on which he served during the fiscal year ended June 30, 2011.
Board Leadership Structure
Mr. McMillen serves as the Chairman of our Board of Directors and Chief Executive Officer and
Mr. Leichtweis serves as our President. The Board of Directors does not have a policy regarding the
separation of the roles of Chief Executive Officer and Chairman of the Board as the Board of
Directors believes it is in the best interests of the Company to make that determination based on
the position and direction of the Company and the membership of the Board of Directors. The Board
of Directors has determined that having the Companys Chief Executive Officer serve as Chairman is
in the best interest of the Companys stockholders at this time. This structure makes the best use
of the Chief Executive Officers extensive knowledge of the Company and its industry, as well as
fostering greater communication between the Companys management and the Board of Directors. In
addition, the Chairman can provide the President with guidance and feedback on his performance and
allows the Chairman to focus on stockholder interests and corporate governance while providing Mr.
Leichtweis with the ability to focus his attention on managing our day-to-day operations. As Mr.
McMillen has significant senior level industry experience, he is particularly well-suited to serve
as Chairman.
48
We recognize that different board leadership structures may be appropriate for companies in
different situations. We will continue to re-examine our corporate governance policies and
leadership structures on an ongoing basis to ensure that they continue to meet the Companys needs.
Role in Risk Oversight
Management is responsible for managing the risks that we face. The Board of Directors is
responsible for overseeing managements approach to risk management that is designed to support the
achievement of organizational objectives, including strategic objectives and risks associated with
our growth strategy, to improve long-term organizational performance and enhance stockholder value.
The involvement of the full Board of Directors in reviewing our strategic objectives and plans is a
key part of the Board of Directors assessment of managements approach and tolerance to risk. A
fundamental part of risk management is not only understanding the risks a company faces and what
steps management is taking to manage those risks, but also understanding what level of risk is
appropriate for us. In setting our business strategy, our Board of Directors assesses the various
risks being mitigated by management and determines what constitutes an appropriate level of risk
for us.
While the Board of Directors has ultimate oversight responsibility for overseeing managements
risk management process, various committees of the Board of Directors assist it in fulfilling that
responsibility.
The Audit Committee assists the Board of Directors in its oversight of risk management in the
areas of financial reporting, internal controls and compliance with legal and regulatory
requirements and the Compensation Committee assists the Board of Directors in its oversight of the
evaluation and management of risks related to our compensation policies and practices.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires the Companys Directors and executive officers,
and persons who beneficially own more than 10% of a registered class of the Companys equity
securities, to file with the Commission initial reports of ownership and reports of changes in
ownership of common stock and the other equity securities of the Company. Officers, Directors, and
persons who beneficially own more than 10% of a registered class of the Companys equity securities
are required by the regulations of the Commission to furnish the Company with copies of all Section
16(a) forms they file. Based solely on our review of these forms and written representations from
the executive officers and directors, we believe that all Section 16(a) filing filings were timely
filed during the twelve-month period ended June 30, 2011, except that two reports on Form 4,
covering an aggregate of two transactions were filed late by C. Thomas McMillen and Michael T.
Brigante.
Code of Ethics
On March 16, 2004, the Board of Directors of the Company adopted a written Code of Ethics that
applies, among others, to our principal executive officer and principal financial officer and is
designed, among other things, to deter wrongdoing and promote honest and ethical conduct, full,
fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to
adherence to the Code of Ethics. Our Code of Ethics can be found on our website at:
www.hscapcorp.com. The Code of Ethics will be made available to our stockholders, without charge,
upon request, in writing to the Corporate Secretary at 4601 North Fairfax Drive, Suite 1200,
Arlington, Virginia 22203, Attention: Michael T. Brigante, Chief Financial Officer. Disclosure
regarding any amendments to, or waivers from, provisions of the Code of Ethics will be included in
a Current Report on Form 8-K within four business days following the date of the amendment or
waiver.
Stockholder Communications to the Board of Directors
Generally, stockholders who have questions or concerns should contact the Chief Financial
Officer at (703) 528-7073 or email at MBrigante@hscapcorp.com. Stockholders wishing to
submit written communications directly to the Board of Directors should send their communications
to our Chairman, Homeland Security Capital Corporation, 4601 North Fairfax Drive, Suite 1200,
Arlington, Virginia, 22203. All stockholder communications will be considered by the independent
members of our Board of Directors.
49
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ITEM 11. |
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EXECUTIVE COMPENSATION |
Summary Compensation Table
The following table shows the compensation paid or accrued during the last two fiscal years
ended June 30, 2011 and 2010 to (1) our Chief Executive Officer, (2) our Vice President of Finance
and Chief Financial Officer, and (3) our next most highly compensated executive officer, other than
our Chief Executive Officer and our Vice President of Finance and Chief Financial Officer, who
earned more than $100,000 during the year ended June 30, 2011.
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Non- |
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Equity |
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Non-qualified |
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Incentive |
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Deferred |
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Options |
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Plan |
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Compensation |
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All Other |
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Name and Principal Position |
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Year |
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Salary |
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Bonus |
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Awards(1) |
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Compensation(2) |
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Earnings |
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Compensation(3) |
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Total |
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C. Thomas McMillen, |
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2011 |
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$ |
304,167 |
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$ |
300,000 |
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$ |
20,000 |
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$ |
23,090 |
(4) |
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$ |
647,257 |
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Chairman of the Board and
Chief Executive Officer |
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2010 |
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$ |
300,000 |
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$ |
678,356 |
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$ |
20,122 |
(4) |
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$ |
999,478 |
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Michael T. Brigante |
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2011 |
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$ |
229,375 |
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$ |
200,000 |
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$ |
20,000 |
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$ |
720 |
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$ |
450,095 |
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Vice President of Finance and
Chief Financial Officer |
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2010 |
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$ |
222,500 |
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$ |
118,712 |
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$ |
341,212 |
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Christopher P. Leichtweis |
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2011 |
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$ |
323,220 |
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$ |
100,000 |
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$ |
6,111 |
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$ |
17,354 |
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$ |
446,685 |
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President and Chief Executive
Officer of Safety & Ecology |
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2010 |
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$ |
312,000 |
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$ |
100,000 |
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$ |
6,111 |
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$ |
17,354 |
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$ |
435,465 |
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1. |
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These amounts represent the dollar amount recognized for financial
statement reporting purposes for the fair value of option awards with respect
to the fiscal years 2010 and 2011 in accordance with FASB ASC Topic 718. A
discussion of the assumptions used in determining grant date fair value may be
found in Note 11 to our consolidated financial statements included elsewhere in
this annual report.
2. Reflects Company contributions to a 401(k) plan. |
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3. |
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Reflects Company-paid health, life and disability insurance. |
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4. |
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Includes $12,000 of car allowance. |
Narrative Disclosure to Summary Compensation Table
C. Thomas McMillen Employment Agreement. On August 29, 2005, the Company and Mr. McMillen
entered into an employment agreement pursuant to which Mr. McMillen agreed to serve as the
Companys Chief Executive Officer and President for a term of two years, such agreement being
renewable by mutual agreement of the Company and Mr. McMillen. Mr. McMillens initial annual salary
under this agreement was $120,000 with the possibility of a performance bonus. Pursuant to this
agreement, Mr. McMillen was also awarded options to acquire a total of 5,800,000 shares of common
stock, as described below in more detail. Mr. McMillen also received a sign-on bonus of $125,000.
Effective September 1, 2007, the Company and Mr. McMillen agreed to a two-year extension of
his employment agreement. Under the terms of the extension, Mr. McMillens annual salary was
increased to $200,000 with the possibility of a performance bonus. Additionally, the base salary
would be increased by $20,000, or pro rata, for every $10,000,000 of equity the Company sells
during the term of the employment agreement (except for any equity securities (i) issued to
employees or consultants as compensation, (ii) issued in acquisition or merger or (iii) purchased
by employees, consultants or directors upon the exercise or conversion of any Company stock option
or other security issued for compensatory purposes).
In connection with the successful completion of the Safety acquisition, Mr. McMillens base
salary was increased to $300,000 effective March 1, 2008 and, on July 30, 2008, he was granted
options to purchase 50,000,000 shares of common stock, as described below in more detail, without
any changes to the remaining terms of his employment agreement as then in effect.
50
On September 1, 2009, Mr. McMillens employment agreement was automatically extended for a
one-year period without any changes to the terms of the agreement then in effect. On September 1,
2010, Mr. McMillens employment agreement was again automatically extended for a one-year period
without any change to the terms of the agreement as then in effect.
On June 15, 2011, the Company entered into a new employment agreement with Mr. McMillen (the
McMillen Agreement). The McMillen Agreement has an initial term of one year and is automatically
renewable for additional consecutive one year terms, unless at least ninety days written notice is
given by either the Company or Mr. McMillen prior to the commencement of the next renewal term. The
McMillen Agreement also provides that Mr. McMillen will continue to serve as Chairman of the Board
of Directors of the Company so long as he is with the Company, with no additional compensation,
subject to any required approvals.
The McMillen Agreement provides for an annual base salary of $350,000, effective June 1, 2011,
and an annual discretionary bonus of up to 100% of Mr. McMillens base salary based upon the
achievement of targeted annual performance objectives to be established by the Compensation
Committee of the Board, in consultation with Mr. McMillen. In addition, Mr. McMillen is eligible
for a one-time special bonus in an amount equal to $726,665 on the earlier of (i) December 31,
2011, and (ii) change of control of the Company (as such term is defined in the McMillen
Agreement). The special bonus shall be reduced by the amount of principal and interest now owed by
Mr. McMillen, as a result of his stepping in as guarantor of the obligations of Secure America
Acquisition Holdings LLC pursuant to that certain promissory note, dated June 1, 2007, by and
between the Company and Secure, which is now in default (the Note). The Company is also obligated
to waive all events of default and amend the maturity date under the Note to the earlier of (i)
December 31, 2011, (ii) a change of control of the Company, and (ii) the termination date of
McMillen Agreement. Mr. McMillen has agreed to forfeit his pre-existing option to purchase
55,800,000 of the Companys shares of common stock.
The McMillen Agreement also provides for a monthly automobile allowance in an amount equal to
$1,000, a matching contribution to his 401(k) account consistent with the plan up to the maximum
amount allowable under Section 401(k) of the Internal Revenue Code of 1986 (the Code), other
benefits provided to other senior executives of the Company, actual and reasonable out-of-pocket
expenses and reimbursement for attorneys fees actually incurred by Mr. McMillen in connection with
the review of his employment agreement of up to an amount equal to $10,000.
Michael T. Brigante Employment Agreement. On May 10, 2007, the Company and Mr. Brigante
entered into an employment agreement pursuant to which Mr. Brigante agreed to serve as the
Companys Chief Financial Officer for a term of three years, such agreement being renewable by
mutual agreement of the Company and Mr. Brigante. Mr. Brigantes initial annual salary under this
agreement was $190,000 with the possibility of a performance bonus. Pursuant to this agreement, Mr.
Brigante was awarded options to acquire a total of 519,210 shares of common stock, as described in
more detail below. Mr. Brigante also received a sign-on bonus of $5,000.
In connection with the successful completion of the Safety acquisition, Mr. Brigantes base
salary was increased to $217,500 effective March 1, 2008 and, on July 30, 2008, he was granted
options to purchase 8,750,000 shares of common stock, as described in more detail below, without
any changes to the remaining terms of his employment agreement as then in effect.
On February 1, 2010, Mr. Brigantes base salary was increased to $227,500 effective January 1,
2010. The increase was in connection with Mr. Brigantes continued service as Chief Executive
Officer of NTG. No other terms in his employment agreement were changed as then in effect.
On May 10, 2010, Mr. Brigantes employment agreement was automatically extended for a one-year
period without any changes to the terms of the agreement as then in effect.
On June 15, 2011, the Company entered into a new employment agreement with Michael T. Brigante
(the Brigante Agreement). The Brigante Agreement has an initial term of one year and is
automatically renewable for additional consecutive one year terms, unless at least ninety days
written notice is given by either the Company or Mr. Brigante prior to the commencement of the next
renewal term.
51
The Brigante Agreement provides for an annual base salary of $250,000, effective June 1, 2011,
and an annual discretionary bonus of up to 50% of Mr. Brigantes base salary based upon the
achievement of targeted annual performance objectives to be established by the Compensation
Committee of the Board of Directors, in consultation with Mr. McMillen and Mr. Brigante. In
addition, Mr. Brigante is eligible for a one-time special bonus in an amount equal to $124,462.66
on the earlier of (i) December 31, 2011, and (ii) change of control of the Company (as such term is
defined in the Brigante Agreement). Mr. Brigante has agreed to forfeit his pre-existing option to
purchase 9,500,000 of the Companys shares of common stock.
The Brigante Agreement also provides for a monthly automobile allowance in an amount equal to
$500 (provided that Mr. Brigante does not use a vehicle provided by the Company), a matching
contribution to his 401(k) account consistent with the plan up to the maximum amount allowable
under Section 401(k) of the Code, use of the Companys corporate apartment in Washington D.C., and
if the Company no longer maintains the apartment, a monthly housing allowance up to the amount that
the Company paid to maintain the corporate apartment, other benefits provided to other senior
executives of the Company, actual and reasonable out-of-pocket expenses and reimbursement for
attorneys fees actually incurred by Mr. Brigante in connection with the review of his employment
agreement of up to an amount equal to $10,000.
Christopher Leichtweis Employment Agreement. On March 14, 2008, Safety and Mr. Leichtweis
entered into an employment agreement pursuant to which Mr. Leichtweis agreed to serve as Safetys
Chief Executive Officer for a term of three years, such agreement being renewable by mutual
agreement of Safety and Mr. Leichtweis. Mr. Leichtweis initial salary under this agreement was
$300,000 annually, subject to annual cost of living increases and an annual minimum bonus of
$100,000 if Safetys annual revenues exceed $50,000,000. Mr. Leichtweis, at his discretion, may
choose to receive less than the annual minimum bonus and allocate a portion thereof to any
employee(s) he may choose. Additionally, Mr. Leichtweis serves as President of the Company, but on
an at-will basis.
On March 14, 2011, Safety and Mr. Leichtweis agreed to extend the employment contract until
July 15, 2011 under the same terms.
The 2005 Stock Option Plan. On August 29, 2005, the Board adopted a stock option plan, or the
2005 Plan, under which the Company reserved 7,200,000 shares of common stock for issuance.
Participants eligible under the 2005 Plan are officers and key employees. There were a total of
250,000 options issued and outstanding under the 2005 Plan at June 30, 2011.
The 2008 Stock Option Plan. On July 30, 2008, the Board adopted a stock option plan, or the
2008 Plan, under which the Company reserved 75,000,000 shares of common stock for issuance.
Participants eligible under the 2008 Plan are officers, key employees and directors. There were a
total of 10,000,000 options issued and outstanding under the 2008 Plan at June 30, 2011.
The table below reflects the activity and assumptions with respect to the 2005 Plan and the
2008 Plan through June 30, 2011:
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Vesting |
|
|
Expected to |
|
|
Options |
|
|
|
Total |
|
|
Options |
|
|
Options |
|
|
Options |
|
|
Options |
|
|
Quarterly- |
|
|
be |
|
|
Available |
|
Option |
|
Options in |
|
|
Vested at |
|
|
Forfeited at |
|
|
Exercised |
|
|
Outstanding |
|
|
Next 4 Quarters |
|
|
outstanding |
|
|
for Grant |
|
Plan |
|
the Plan |
|
|
6/30/10 |
|
|
6/30/11 |
|
|
at 6/30/11 |
|
|
at 6/30/11 |
|
|
Through 6/30/11 |
|
|
at 6/30/12 |
|
|
at 6/30/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Plan |
|
|
7,200,000 |
|
|
|
6,800,000 |
|
|
|
(6,550,000 |
) |
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
250,000 |
|
|
|
6,950,000 |
|
2008 Plan |
|
|
75,000,000 |
|
|
|
73,750,000 |
|
|
|
(63,750,000 |
) |
|
|
|
|
|
|
10,000,000 |
|
|
|
|
|
|
|
10,000,000 |
|
|
|
65,000,000 |
|
Mr. McMillen and Mr. Brigante forfeited 5,800,000 and 750,000 options in the 2005 Plan,
respectively, in connection to signing their employment agreements on June 15, 2011. Mr. McMillen
and Mr. Brigante forfeited 50,000,000 and 8,750,000 options in the 2008 Plan, respectively, in
connection to signing their employment agreements on June 15, 2011. Mr. Griffin, our former
director, forfeited 5,000,000 options in the 2008 Plan upon his
resignation as a Director on May 27, 2011. For additional information on the Companys option
plans, please refer to Note 11 to Consolidated Financial Statements.
52
Outstanding Equity Awards at Fiscal Year-End
At June 30, 2011, the Company did not have any outstanding equity awards, including
non-performance based awards, to each of the executive officers named in the Summary Compensation
Table.
Nonqualified Deferred Compensation
The Company does not have any non-qualified deferred compensation plans.
Potential Payments Upon Termination or Change-In-Control
We have entered into agreements that require us to make payments and/or provide benefits to
certain of our executive officers in the event of a termination of employment or change-in-control.
The following summarizes the potential payments to each named executive officer with whom we
have entered into such an agreement, assuming that one of the events identified below occurs.
C. Thomas McMillen
On June 15, 2011, the Company and Mr. McMillen entered into an employment agreement. The
agreement is terminable by the Company for cause or upon ninety days prior written notice without
cause and by Mr. McMillen for good reason (as such terms are defined in the agreement) or upon
ninety days prior written notice without good reason. If the Company terminates Mr. McMillen
without cause or Mr. McMillen terminates his employment for good reason during the term of
employment, then the Company will pay Mr. McMillen: (i) an amount equal to one year of his base
salary at the rate in effect as of the termination date, (ii) the base salary that the Mr. McMillen
would have received had he remained employed through the expiration date of his agreement, (iii) a
pro-rated bonus, if any, (iv) the special bonus described above and the bonus from the prior year,
if unpaid, (v) health and/or dental insurance coverage pursuant to COBRA until the date that is one
year following the termination date or until Mr. McMillen is eligible for comparable coverage with
a subsequent employer, whichever occurs first, and (vi) any accrued, but unpaid compensation prior
to the termination. If the Company terminates Mr. McMillen without cause or Mr. McMillen terminates
his employment for good reason following the expiration date, then the Company will pay Mr.
McMillen: (i) an amount equal to one year of his base salary at the rate in effect as of the
termination date, and (ii) any accrued, but unpaid compensation prior to the termination.
The agreement is terminable by the Company for cause or upon ninety days prior written notice
without cause and by Mr. McMillen for good reason (as such terms are defined in the agreement) or
upon ninety days prior written notice without good reason. If the Company terminates Mr. McMillen
without cause or Mr. McMillen terminates his employment for good reason during the term of
employment, then the Company will pay Mr. McMillen: (i) an amount equal to one year of his base
salary at the rate in effect as of the termination date, (ii) the base salary that the Mr. McMillen
would have received had he remained employed through the expiration date of his agreement, (iii) a
pro-rated bonus, if any, (iv) the special bonus and the bonus from the prior year, if unpaid, (v)
health and/or dental insurance coverage pursuant to COBRA until the date that is one year following
the termination date or until Mr. McMillen is eligible for comparable coverage with a subsequent
employer, whichever occurs first, and (vi) any accrued, but unpaid compensation prior to the
termination. If the Company terminates Mr. McMillen without cause or Mr. McMillen terminates his
employment for good reason following the expiration date, then the Company will pay Mr. McMillen:
(i) an amount equal to one year of his base salary at the rate in effect as of the termination
date, and (ii) any accrued, but unpaid compensation prior to the termination.
In addition, Mr. McMillen is eligible for a one-time special bonus in an amount equal to
$726,665 on the earlier of (i) December 31, 2011, and (ii) change of control of the Company. The special bonus shall be reduced by the amount of
principal and interest now owed by Mr. McMillen, as a result of his stepping in as guarantor of the
obligations of SAAH pursuant to that certain promissory note, dated June 1, 2007, by and between
the Company and SAAH, which is now in default.
Change in control is defined as the earlier of December 31, 2011, or a change in control, which is defined as
the date (i) that any one person (for purposes herein,
person includes an individual or entity), or more than
one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent
acquisition by such person or persons), assets from the Company that have a total gross fair market value equal
to or more than forty percent (40%) of the total gross fair market value of all of the assets of the
Company immediately before such acquisition or acquisitions (which, for the sake of clarity, includes the
sale of the Companys Safety and Ecology Corporation subsidiary); (ii) that any one person, or more than one
person acting as a group, is or becomes the beneficial owner, directly or indirectly, of forty percent (40%)
or more of the voting stock of the Company; or (iii) of a consummation of a merger, consolidation, share
exchange or similar form of corporate reorganization (a
Business Combination) of the Company with or into
any other entity other than a Business Combination in which the shares of the Company outstanding immediately
before such Business Combination are exchanged or converted into or constitute shares which represent sixty (60%)
or more of the surviving entitys voting capital stock after such Business Combination. Notwithstanding the
foregoing, under no circumstances shall a Change of Control occur under this Agreement if it results from the sale
of the Companys assets to an entity in which more than fifty percent (50%) of the total voting power is owned by
the Companys shareholders (individually or in the aggregate) who own (individually or in the aggregate),
more than fifty percent (50%) of the total voting power of the Company.
53
Michael T. Brigante
On June 15, 2011, the Company and Mr. Brigante entered into an employment agreement. The
agreement is terminable by the Company for cause or upon ninety days prior written notice without
cause and by Mr. Brigante for good reason (as such terms are defined in the agreement) or upon
ninety days prior written notice without good reason. If the Company terminates Mr. Brigante
without cause or Mr. Brigante terminates his employment for good reason during the term of
employment, then the Company will pay Mr. Brigante: (i) an amount equal to one year of his base
salary at the rate in effect as of the termination date, (ii) the base salary that the Mr. Brigante
would have received had he remained employed through the expiration date of his agreement, (iii) a
pro-rated bonus, if any, (iv) the special bonus and the bonus from the prior year, if unpaid, (v)
health and/or dental insurance coverage pursuant to COBRA until the date that is one year following
the termination date or until Mr. Brigante is eligible for comparable coverage with a subsequent
employer, whichever occurs first, and (vi) any accrued, but unpaid compensation prior to the
termination. If the Company terminates Mr. Brigante without cause or Mr. Brigante terminates his
employment for good reason following the expiration date, then the Company will pay Mr. Brigante:
(i) an amount equal to one year of his base salary at the rate in effect as of the termination
date, and (ii) any accrued, but unpaid compensation prior to the termination.
In addition, Mr. Brigante is eligible for a one-time special bonus in an amount equal to
$124,462.66 on the earlier of (i) December 31, 2011, and (ii) change of control of the Company (as
such term is defined in the agreement).
The following table outlines the potential payments that would be made to Messrs. McMillen and
Brigante, assuming separation from the Company on June 30, 2011 under the following circumstances:
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|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
Involuntary |
|
|
|
Involuntary |
|
|
By Executive |
|
|
|
|
|
|
Termination |
|
|
|
|
Termination |
|
|
|
Termination without |
|
|
for Good Reason |
|
|
|
|
|
|
without cause |
|
|
By Executive |
|
For cause or |
|
Payments and |
|
cause before a |
|
|
before a change |
|
|
Change In |
|
|
after a change in |
|
|
for Good Reason after |
|
without Good |
|
Benefits |
|
change in control |
|
|
in control |
|
|
Control |
|
|
control |
|
|
a change in control |
|
Reason(5) |
|
C. Thomas McMillen |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary(1) |
|
$ |
670,833 |
|
|
$ |
670,833 |
|
|
|
|
|
|
$ |
670,833 |
|
|
$ |
670,833 |
|
$ |
29,167 |
|
Annual Bonus(2) |
|
$ |
350,000 |
|
|
$ |
350,000 |
|
|
|
|
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
|
|
|
Special Bonus |
|
|
|
|
|
|
|
|
|
$ |
726,665 |
|
|
$ |
726,665 |
|
|
$ |
726,665 |
|
|
|
|
Other
Benefits(3) |
|
$ |
43,600 |
|
|
$ |
43,600 |
|
|
|
|
|
|
$ |
43,600 |
|
|
$ |
43,600 |
|
|
|
|
Michael T. Brigante |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary(1) |
|
$ |
479,167 |
|
|
$ |
479,167 |
|
|
|
|
|
|
$ |
479,167 |
|
|
$ |
479,167 |
|
$ |
20,833 |
|
Annual Bonus(2) |
|
$ |
125,000 |
|
|
$ |
125,000 |
|
|
|
|
|
|
$ |
125,000 |
|
|
$ |
125,000 |
|
|
|
|
Special Bonus |
|
|
|
|
|
|
|
|
|
$ |
124,463 |
|
|
$ |
124,463 |
|
|
$ |
124,463 |
|
|
|
|
Other
Benefits(4) |
|
$ |
37,600 |
|
|
$ |
37,600 |
|
|
|
|
|
|
$ |
37,600 |
|
|
$ |
37,600 |
|
|
|
|
54
|
|
|
(1) |
|
Represents the balance of the annual salary for the calendar year plus one years base salary. |
|
(2) |
|
Payable at the sole discretion of the Board of Directors and
represents the maximum amount payable, or 100% of base salary.
Amount will be prorated upon happening of certain circumstances set
forth in Employment Agreement. |
|
(3) |
|
Represents $1,000 per month automobile allowance, $22,000 in company matching contributions to the
employees 401(k), and an aggregate of $9,600 in life, dental, long term care and disability coverage. |
|
(4) |
|
Represents $500 per month automobile residual value, $22,000 in company matching contributions to the employees 401(k), and an
aggregate of $9,600 in life, dental, long term care and disability coverage. |
|
(5) |
|
Represents payments owed regardless of whether such triggering events take place before or after a change in control. |
Golden Parachute Compensation
The table below sets the potential golden parachute compensation that Christopher P.
Leichtweis would have received, assuming the consummation of the sale of Safety occurred on June
30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
Pension/ |
|
|
Perquisites/ |
|
|
Reimbursements |
|
|
Other |
|
|
|
|
Name |
|
Cash ($) |
|
|
($)(1) |
|
|
NQDC($) |
|
|
Benefits($) |
|
|
($) |
|
|
($) |
|
|
Total($) |
|
Christopher P. Leichtweis |
|
$ |
100,000.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100,000.00 |
|
|
|
|
(1) |
|
Mr. Leichtweis, together with two additional executives and certain key employees, are entitled to a retention bonus of an aggregate of $100,000.00, as
described above, if they remain employed until the closing of the Purchase Agreement. |
Director Compensation
The following table shows the total compensation paid or accrued during the fiscal year ended
June 30, 2011 to each of our non-employee directors:
|
|
|
|
|
|
|
|
|
Name |
|
Fees Earned or Paid in Cash |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Philip A. McNeill |
|
$ |
70,000 |
|
|
$ |
70,000 |
|
|
|
|
|
|
|
|
|
|
Zev E. Kaplan |
|
$ |
69,000 |
|
|
$ |
69,000 |
|
|
|
|
|
|
|
|
|
|
Brian C. Griffin (1) |
|
$ |
90,000 |
|
|
$ |
90,000 |
|
|
|
|
(1) |
|
Mr. Griffin resigned on May 27, 2011. |
Each director of the Company, except Mr. McMillen and Mr. Leichtweis, is entitled to
receive a quarterly fee for his service as a director. Each director of the Company will be
reimbursed for reasonable expenses incurred in connection with their service on the Board of
Directors. The following table reflects each directors fee per quarter during the year ended June
30, 2011:
|
|
|
|
|
|
|
Fees Received |
|
|
|
Per Quarter |
|
Director |
|
2011 |
|
Philip McNeill |
|
$ |
11,250 |
|
|
|
|
|
|
Zev Kaplan |
|
$ |
11,000 |
|
|
|
|
|
|
Brian C. Griffin(1) |
|
$ |
10,000 |
|
|
|
|
(1) |
|
Mr. Griffin resigned on May 27, 2011. |
In addition to the quarterly payment of fees listed above, each Messers McNeill and
Kaplan received a $25,000 directors fee adjustment in the fourth quarter and Mr. Griffin received
a $50,000 directors fee adjustment in the fourth quarter.
55
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The following table sets forth certain information with respect to the beneficial ownership of
our Common Stock as of September 30, 2011 for (a) our named executive officers, (b) each of our
directors, (c) all of our current directors and executive officers as a group, and (d) each
stockholder known by the us to own beneficially more than 5% of each class of our shares of Common
Stock, relying solely upon the amounts and percentages disclosed in their public filings.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting
or investment power with respect to the securities. We deem shares of common stock that may be
acquired by an individual or group within 60 days of September 30, 2011 pursuant to the exercise or
conversion of options or warrants to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table. Except as indicated in
footnotes to this table, we believe that the stockholders named in this table have sole voting and
investment power with respect to all shares of stock shown to be beneficially owned by them based
on information provided to us by these stockholders.
Percentage of ownership is based on 55,159,022 shares of Common Stock outstanding as of
September 30, 2011.
The address for each of the directors and named executive officers is c/o Homeland
Security Capital Corporation., 4601 North Fairfax Road, Suite 1200, Arlington, Virginia 22203.
Addresses of other beneficial owners are noted in the table.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Percentage of |
|
|
|
of Common Stock |
|
|
Common Stock |
|
|
|
Beneficially Owned(1) |
|
|
Owned |
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers |
|
|
|
|
|
|
|
|
C. Thomas McMillen(2) |
|
|
26,041,883 |
|
|
|
37.9 |
% |
Christopher P. Leichtweis(3) |
|
|
121,312,800 |
|
|
|
68.7 |
% |
Michael T. Brigante |
|
|
|
|
|
|
|
|
Zev E. Kaplan(4) |
|
|
5,720,000 |
|
|
|
9.4 |
% |
Philip A. McNeill(5) |
|
|
5,720,000 |
|
|
|
9.4 |
% |
Executive officers and directors as a group (5 persons)(6) |
|
|
158,795,683 |
|
|
|
92.1 |
% |
5% or more stockholders |
|
|
|
|
|
|
|
|
YA Global Investments, L.P.
101 Hudson Street
Jersey City, NJ 07302 (7) |
|
|
5,510,386 |
|
|
|
9.99 |
% |
Frank P. Crivello
3408 Dover Road
Pompano Beach, FL 33062 (8) |
|
|
3,000,303 |
|
|
|
5.44 |
% |
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the outstanding shares of our Common Stock. |
|
(1) |
|
Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect
to securities. Beneficial ownership also includes shares of Common Stock subject to options and warrants currently exercisable or convertible,
or exercisable or convertible within 60 days of September 30, 2011. |
|
(2) |
|
Includes 325 shares of Series H Preferred which are convertible into 10,833,550 shares of Common Stock and warrants to purchase up to additional
2,708,333 shares of Common Stock at an exercise price of $0.03 per share. |
|
(3) |
|
Includes 505,470 shares of Series I Preferred which are convertible into 101,094,000 shares of Common Stock and warrants to purchase up to
20,218,800 shares of Common Stock at an exercise price of $0.03 per share. |
56
|
|
|
(4) |
|
Represents options to purchase up to 720,000 shares of Common Stock at an exercise price of $0.14 per share and options to purchase up to
5,000,000 shares of Common Stock at an exercise price of $0.05 per share. |
|
(5) |
|
Represents options to purchase up to 720,000 shares of Common Stock at an exercise price of $0.14 per share and options to purchase up to
5,000,000 shares of Common Stock at an exercise price of $0.05 per share. |
|
(6) |
|
See footnotes (2)-(5). |
|
(7) |
|
Based solely on information reported in a Schedule 13G/A filed with the Securities and Exchange Commission on May 26, 2010. YA Global
Investments, L.P., or YA, does not own any shares of Common Stock. As the Investment Manager of YA, Yorkville Advisors, LLC (Yorkville) may
be deemed to beneficially own the same amount of shares of Common Stock beneficially owned by YA. As the president of Yorkville, the investment
manager to YA, and as portfolio manager to YA, Mark Angelo (Angelo) may be deemed to beneficially own the same amount of shares of Common
Stock beneficially owned by YA. Angelo directly owns 6,250 shares of Common Stock. YA may be deemed to beneficially own the 6,250 shares of
Common Stock beneficially owned by Angelo, as he is the president of Yorkville and the investment manager to YA and the portfolio manager to YA.
Yorkville may be deemed to beneficially own the 6,250 shares of Common Stock beneficially owned by Angelo, as he is the president of Yorkville.
In addition to the number of shares indicated above, YA is the owner of derivative securities which have a cap that prevents each derivative
security from being converted and/or exercised if such conversion and/or exercise would cause the aggregate number of shares of Common Stock
beneficially owned by YA and its affiliates to exceed 9.99% of the outstanding shares of the Common Stock of the Company following such
conversion and/or exercise of the derivative security. In addition, the cap pertaining to the derivative securities limits YAs entitlement to
9.9% of the outstanding shares of Common Stock of the Company on an as-converted basis for purposes of any corporate vote. Except for the 6,250
shares of Common Stock beneficially owned by Angelo, YA Global and Yorkville disclaim beneficial ownership of these securities except to the
extent of her, his or its pecuniary interest. Yorkville holds an aggregate of (i) 964,754 shares of Common Stock, (ii) 9,574 shares of Series H
Preferred which are convertible into 319,139,716 shares of Common Stock, (iii) warrants to purchase up to 80,625,000 shares of Common Stock at
an exercise price of $0.03 per share, (iv) warrants to purchase up to 1,000,000 shares of Common Stock at an exercise price of $1.00 per share,
(v) warrants to purchase up to 800,000 shares of Common Stock at an exercise price of $0.15 per share, and (vi) 1,000,000 shares of Series F
Convertible Preferred Stock, with no voting rights. |
|
(8) |
|
Based solely on information reported in a Schedule 13G filed with the Securities and Exchange Commission on October 16, 2007. |
57
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
On June 1, 2007, the Company loaned $500,000 to SAAH, an entity controlled by two of our
directors, and the initial stockholder and founder of SAAC. SAAC was formed for the purpose of
acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition,
stock purchase or other similar business combination, one or more domestic or international
operating businesses. SAAH, in turn, loaned the $500,000 to SAAC. SAAC ultimately consummated its
initial business combination with UEI and changed its name to UEI. The loan is evidenced by a note
bearing 5% interest per annum, which was due on or before May 31, 2011, with no prepayment
penalties. The loan is guaranteed in its entirety by our Chairman and Chief Executive Officer. The
Company expected repayment of the loan from the proceeds of the sale by SAAH of its founder
warrants and ultimately by UEI. On September 20, 2010, UEI filed for bankruptcy protection. At June
30, 2011 and 2010, the balance of the note, including interest, was $449,127 and $444,515,
respectively. As guarantor of this note, our Chairman and Chief Executive Officer has the intent
and ability to satisfy any obligations under this note.
Safety leases approximately 21,000 square feet of office space from a company controlled by
our President. The space, in Knoxville, Tennessee, serves as the headquarters for Safety. The total
rent paid during the twelve months ended June 30, 2011 and 2010 was $344,000, respectively.
Safety, in the normal course of business, is required to post a performance bond on certain
projects. Typically, the bonding or surety company who posts the bond on Safetys behalf will
require collateralization of their potential liability for posting the bond. Through June 30, 2011,
our President and his spouse have guaranteed this potential liability.
The Company recognizes the potential exposure to our President and his spouse and, on January
1, 2011, entered into an agreement with him and his spouse, indemnifying them against any
liabilities they may endure as a result of collateralizing Safetys bonding requirements and agreed
to pay them a standard fee for this collateralization. Through June 30, 2011, the Company paid our
President and his spouse $61,958 under the indemnity agreement. Through June 30, 2011, the amount
of possible indemnification to the President and his spouse was approximately $13,000,000.
On July 29, 2011, the Companys Chief Executive Officer and the Companys Chief Financial
Officer purchased 15 and 5 Class B membership units of Holdings, respectively, both for nominal
amounts. The limited liability operating agreement of Holdings provides, among other things, that
Class B members cannot participate in or receive any financial benefit from their Class B
membership units if and until the Companys total purchase price of the Class A membership units
($1,800,000) is fully repaid, including any interest thereon, and any other loans or advances made
by the Company to Holdings are repaid, including any interest thereon, at which time the will be
entitled to a 20% carry and a pro rata participation in any distributions made by Holdings
thereafter.
We believe that each of the above referenced transactions was made on terms not materially
less favorable to us than could have been obtained from an unaffiliated third party. Furthermore,
any future transactions between us and officers, directors, principal stockholders or affiliates,
will be on terms not materially less favorable to us than could be obtained from an unaffiliated
third party, and will be approved by a majority of our directors, including a majority of our
independent and disinterested directors who have access at our expense to our legal counsel.
58
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table presents fees for professional audit services rendered by Coulter &
Justus, P.C. for the audit of our annual financial statements for the fiscal years ended June 30,
2011 and 2010. And fees billed for other services rendered by Coulter & Justus P.C. during those
periods.
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Audit fees:(1) |
|
$ |
203,084 |
|
|
$ |
218,022 |
|
|
|
|
|
|
|
|
|
|
Audit related fees: |
|
|
98,027 |
|
|
|
118,090 |
|
|
|
|
|
|
|
|
|
|
Tax fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
301,111 |
|
|
$ |
336,112 |
|
|
|
|
(1) |
|
Audit fees represent fees of Coulter & Justus P.C. for the audit of the
Companys annual consolidated financial statements; review of the Companys quarterly results of
operations and reports on Form 10-Q; and the services that an independent registered public
accounting firm would customarily provide in connection with subsidiary audits, other regulatory
filings, and similar engagements for each fiscal year shown, such as consents and assistance with
review of documents filed with the Commission. |
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
Effective May 6, 2003, the Commission adopted rules that require that before an independent
registered public accounting firm is engaged by us to render any auditing or permitted non-audit
related service, the engagement must first be:
|
|
|
approved by our audit committee; or |
|
|
|
|
entered into pursuant to pre-approval policies and procedures
established by the audit committee, provided the policies and
procedures are detailed as to the particular service, the audit
committee is informed of each service, and such policies and
procedures do not include delegation of the audit committees
responsibilities to management. |
Our audit committee was formed in February 2006, and has assumed responsibility for the
pre-approval of audit and permitted non-audit services to be performed by our Companys independent
auditor. The audit committee will, on an annual basis, consider and, if appropriate, approve the
provision of audit and non-audit services by Counter & Justus, P.C. Thereafter, the audit committee
will, as necessary, consider and, if appropriate, approve the provision of additional audit and
non-audit services by Coulter & Justus, P.C. which are not encompassed by the audit committees
annual pre-approval and are not prohibited by law. The audit committee has delegated to the chair
of the audit committee the authority to pre-approve, on a case-by-case basis, non-audit services to
be performed by Coulter & Justus, P.C.
Since we did not have an audit committee in 2005, our full board of directors considered the
nature of services performed by HJ & Associates, LLC, our audit firm at that time, and found them
to be compatible with maintaining HJ & Associates independence. Subsequently, following the
acquisition of Safety, our full board of directors considered the nature of services performed by
Coulter & Justus, P.C. and found them to be compatible with maintaining Coulter & Justus, P.C.s
independence.
Prior to engagement of an independent registered public accounting firm for the next years
audit, management will submit an aggregate of services expected to be rendered during that year for
each of four categories of services to the Audit Committee for approval.
1. Audit services include audit work performed in the preparation of financial statements, as
well as work that generally only an independent registered public accounting firm can reasonably be
expected to provide, including comfort letters, statutory audits, and attest services and
consultation regarding financial accounting and/or reporting standards.
2. Audit-Related services are for assurance and related services that are traditionally
performed by an independent registered public accounting firm, including due diligence related to
mergers and acquisitions, employee benefit plan audits, and special procedures required to meet
certain regulatory requirements.
59
3. Tax services include all services performed by an independent registered public accounting
firms tax personnel except those services specifically related to the audit of the financial
statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
4. Other Fees are those associated with services not captured in the other categories. The
Company generally does not request such services from our independent registered public accounting
firm.
60
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) (1) and (2) The following documents are filed as part of this Annual Report on Form 10-K:
Reference is made to the Index to Consolidated Financial Statements on Page F-1. Other
financial statement schedules have not been included because they are not applicable or the
information is included in the financial statements or notes thereto.
(a) (3) Exhibits:
|
|
|
|
|
EXHIBIT |
|
|
|
NUMBER |
|
|
DESCRIPTION |
2.1 |
|
|
Agreement and Plan Of Merger and Stock Purchase Agreement dated March
13, 2008, among Homeland Security Capital Corp., HSCC Acquisition
Corp., Safety & Ecology Holdings Corp., and certain individuals named
therein (previously filed as Exhibit 2.1 to the Registrants
Registration Current Report on Form 8-K, originally filed with the
SEC on March 19, 2008 and incorporated herein by reference). |
2.2 |
|
|
First Amendment to the Agreement and Plan of Merger and Stock
Purchase Agreement, dated March 13, 2008, among Homeland Security
Capital Corp., Safety & Ecology Holdings Corp., and Christopher
Leichtweis and John H. Macrae (previously filed as Exhibit 2.2 to the
Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on May 7, 2008 and incorporated herein by
reference). |
3.1 |
|
|
Bylaws of Celerity Systems, Inc. (previously filed as Exhibit 3.2 to
the Registrants Registration Statement on Form SB-2, originally
filed with the SEC on August 13, 1997, and incorporated herein by
reference). |
3.2* |
|
|
Certificate of Incorporation of Homeland Security Capital Corporation. |
3.3 |
|
|
Certificate of Designation of Series C Preferred Stock (incorporated
by reference to the Registrants Registration Statement on Form SB-2,
originally filed with the SEC on October 18, 2001). |
3.4 |
|
|
Certificate of Designation of Series D Preferred Stock (previously
filed as Exhibit 3.4 to the Registrants Annual Report on Form 10-K,
originally filed with the SEC on March 27, 2002, and incorporated
herein by reference). |
3.5 |
|
|
Certificate of Designation of Series E Preferred Stock (previously
filed as Exhibit 3.4 to the Registrants Annual Report on Form 10-K,
originally filed with the SEC on April 15, 2005, and incorporated
herein by reference). |
3.6 |
|
|
Certificate of Designation of Series F Preferred Stock (previously
filed as Exhibit 99.2 to the Registrants Registration Current Report
on Form 8-K, originally filed with the SEC on October 7, 2005, and
incorporated herein by reference). |
3.7 |
|
|
Certificate of Designation, Series G Convertible Preferred Stock
(previously filed as Exhibit 3.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on February
14, 2006, and incorporated herein by reference). |
3.8 |
|
|
Certificate of Designation of Relative Rights and Preferences, Series
I Convertible Preferred Stock of Homeland Security Capital Corp.
(previously filed as Exhibit 3.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on March
19, 2008 and incorporated herein by reference). |
3.9 |
|
|
Certificate of Designation of Relative Rights and Preferences, Series
H Convertible Preferred Stock Of Homeland Security Capital Corp.
(previously filed as Exhibit 3.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on March
19, 2008 and incorporated herein by reference). |
4.1 |
|
|
Secured Convertible Debenture (previously filed as Exhibit 4.1 to the
Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on February 14, 2006, and incorporated herein by
reference). |
61
|
|
|
|
|
EXHIBIT |
|
|
|
NUMBER |
|
|
DESCRIPTION |
4.2 |
|
|
Form of Warrant to purchase shares of Homeland Security Capital Corp.
Common Stock (previously filed as Exhibit 4.1 to the Registrants
Registration Current Report on Form 8-K, originally filed with the
SEC on March 19, 2008 and incorporated herein by reference). |
4.3 |
|
|
Warrant to purchase shares of Homeland Security Capital Corp. Common
Stock held by YA Global Investments, L.P., dated March 14, 2008
(previously filed as Exhibit 4.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on March
19, 2008 and incorporated herein by reference). |
10.1 |
|
|
Indemnification Agreement by and between C. Thomas McMillen and
Celerity Systems, Inc. (previously filed as Exhibit 99.1 to the
Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on October 7, 2005 and incorporated herein by
reference). |
10.2 |
|
|
Escrow Agreement, dated as of October 6, 2005, by and between
Celerity Systems, Inc. and Cornell Capital Partners, L.P. (previously
filed as Exhibit 99.3 to the Registrants Registration Current Report
on Form 8-K, originally filed with the SEC on October 7, 2005 and
incorporated herein by reference). |
10.3 |
|
|
Securities Purchase Agreement dated as of October 6, 2005, by and
between the Celerity Systems, Inc. and Cornell Capital Partners, LP
(previously filed as Exhibit 99.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on October
7, 2005 and incorporated herein by reference). |
10.4 |
|
|
Securities Purchase Agreement, dated February 6, 2006, by and among
Homeland Security Capital Corp., and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on February
14, 2006, and incorporated herein by reference). |
10.5 |
|
|
Registration Rights Agreement, dated February 6, 2006, by and among
Homeland Security Capital Corp., and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on February
14, 2006, and incorporated herein by reference). |
10.6 |
|
|
Investment Agreement, dated February 6, 2006, by and between Cornell
Capital Partners, L.P., and Homeland Security Capital Corp.
(previously filed as Exhibit 10.3 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on February
14, 2006, and incorporated herein by reference). |
10.7 |
|
|
Security Agreement, dated February 6, 2006, by and between Homeland
Security Capital Corp. and Cornell Capital Partners, (previously
filed as Exhibit 10.4 to the Registrants Registration Current Report
on Form 8-K, originally filed with the SEC on February 14, 2006, and
incorporated herein by reference). |
10.8 |
|
|
Agreement And Plan Of Merger, dated February 8, 2006, by and among
Nexus Technologies Group, Inc., CSS Acquisition, Inc., and
shareholders of Corporate Security Solutions, Inc. (previously filed
as Exhibit 10.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on February 14, 2006, and
incorporated herein by reference). |
10.9 |
|
|
Series A Convertible Preferred Stock Purchase Agreement, dated
February 8, 2006 by and among Nexus Technologies Group, Inc. and
Homeland Security Capital Corp. (previously filed as Exhibit 10.2 to
the Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on February 14, 2006, and incorporated herein by
reference). |
10.10 |
|
|
Celerity Systems, Inc. 2005 Stock Option Plan (previously filed as
Exhibit 10.8 to the Registrants Optional Form for Quarterly and
Transition Reports of Small Business Issuers on Form 10QSB,
originally filed with the SEC on May 22, 2006, and incorporated
herein by reference). |
10.11 |
|
|
Securities Purchase Agreement, dated August 21, 2006, by and among
Homeland Security Capital Corp. and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on August
24, 2006, and incorporated herein by reference). |
10.12 |
|
|
Registration Rights Agreement, dated August 21, 2006, by and among
Homeland Security Capital Corp. and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on August
24, 2006, and incorporated herein by reference). |
10.13 |
|
|
Pledge And Security Agreement, dated August 21, 2006, by and between
Homeland Security Capital Corp. and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.3 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on August
24, 2006, and incorporated herein by reference). |
62
|
|
|
|
|
EXHIBIT |
|
|
|
NUMBER |
|
|
DESCRIPTION |
10.14 |
|
|
Secured Convertible Debenture issued by Homeland Security Capital
Corp. to Cornell Capital Partners, L.P. on August 21, 2006
(previously filed as Exhibit 10.4 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on August
24, 2006, and incorporated herein by reference). |
10.15 |
|
|
Warrant to purchase shares of Homeland Security Capital Corp. Common
Stock, dated August 21, 2006, held by Cornell Capital Partners, L.P.,
(previously filed as Exhibit 10.5 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on August
24, 2006, and incorporated herein by reference). |
10.16 |
|
|
Agreement And Plan Of Merger, dated August 21, 2006, by and among
Security Holding Corp., and Security Holding Enterprises, Inc. and
its stockholders (previously filed as Exhibit 10.1 to the
Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on August 29, 2006, and incorporated herein by
reference). |
10.17 |
|
|
Series A Convertible Preferred Stock Purchase Agreement dated August
21, 2006 by and among Security Holding Corp. and Homeland Security
Capital Corp. (previously filed as Exhibit 10.2 to the Registrants
Registration Current Report on Form 8-K, originally filed with the
SEC on August 29, 2006, and incorporated herein by reference). |
10.18 |
|
|
Employment Agreement, dated May 15, 2007, by and between Homeland
Security Capital Corp., and Michael T. Brigante (previously filed as
Exhibit 10.1 to the Registrants Optional Form For Quarterly and
Transition Reports of Small Business Issuers on Form 10QSB,
originally filed with the SEC on May 15, 2007, and incorporated
herein by reference). |
10.19 |
|
|
Securities Purchase Agreement, dated June 1, 2007, by and among
Homeland Security Capital Corp. And Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on June 6,
2007, and incorporated herein by reference). |
10.20 |
|
|
Registration Rights Agreement, dated June 1, 2007, by and among
Homeland Security Capital Corp. and Cornell Capital Partners, L.P.
(previously filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on June 6,
2007, and incorporated herein by reference). |
10.21 |
|
|
Security Agreement dated June 1, 2007, by and among Homeland Security
Capital Corp. and Cornell Capital Partners, L.P. (previously filed as
Exhibit 10.3 to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and incorporated
herein by reference). |
10.22 |
|
|
Pledge And Escrow Agreement, dated June 1, 2007 by and among Homeland
Security Capital Corp., Cornell Capital Partners, L.P., and David
Gonzalez, Esq., as escrow agent (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on June 6, 2007, and incorporated herein by
reference). |
10.23 |
|
|
Secured Convertible Debenture issued by Homeland Security Capital
Corp. to Cornell Capital Partners, L.P, dated June 1, 2007
(previously filed as Exhibit 10.5 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on June 6,
2007, and incorporated herein by reference). |
10.24 |
|
|
Warrant to purchase shares of Homeland Security Capital Corp. Common
Stock held by Cornell Capital Partners, L.P., dated June 1, 2007
(previously filed as Exhibit 10.6 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on June 6,
2007, and incorporated herein by reference). |
10.25 |
|
|
Letter Agreement, dated June 1, 2007, in connection with the Purchase
Agreement dated February 6, 2006 between Homeland Security Capital
Corp. and Cornell Capital Partners (previously filed as Exhibit 10.7
to the Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and incorporated
herein by reference). |
10.26 |
|
|
Purchase Agreement, dated July 3, 2007 by and between Supercom Inc.
and the Shareholders of Security Holding Corp. (previously filed as
Exhibit 10.1 to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on July 10, 2007, and incorporated
herein by reference). |
10.27 |
|
|
Securities Purchase Agreement, dated March 13, 2008, by and among
Homeland Security Capital Corp., and YA Global Investments, L.P.
(previously filed as Exhibit 10.1 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on March
19, 2008 and incorporated herein by reference). |
63
|
|
|
|
|
EXHIBIT |
|
|
|
NUMBER |
|
|
DESCRIPTION |
10.28 |
|
|
Registration Rights Agreement, dated March 14, 2008, by and among
Homeland Security Capital Corp., and YA Global Investments, L.P.
(previously filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the SEC on March
19, 2008 and incorporated herein by reference). |
10.29 |
|
|
Security Agreement, dated March 14, 2008, by and among Homeland
Security Capital Corp., and YA Global Investments, L.P. (previously
filed as Exhibit 10.3 to the Registrants Registration Current Report
on Form 8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference). |
10.30 |
|
|
Form of Senior Secured Note between Homeland Security Capital Corp.
and YA Global Investments, L.P. (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated herein by
reference). |
10.31 |
|
|
Guaranty Agreement, dated March 14, 2008, in favor of YA Global
Investments, L.P. (previously filed as Exhibit 10.6 to the
Registrants Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated herein by
reference). |
10.32 |
|
|
Executive Employment Agreement, dated September 1, 2007, by and
between Homeland Security Capital Corp. and C. Thomas McMillen
(previously filed as Exhibit 10.3 to the Registrants Optional Form
for Annual and Transition Reports of Small Business Issuers on Form
10KSB, originally filed with the SEC on March 31, 2008 and
incorporated herein by reference). |
10.33 |
|
|
Homeland Security Capital Corp. 2008 Stock Incentive Plan
(previously filed as Exhibit 10.1 to the Registrants Quarterly
Report on Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference). |
10.34 |
|
|
Common Stock Purchase Agreement, dated November 26, 2008, by and
between YA Global Investments, L.P. and Homeland Security Capital
Corp. (previously filed as Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference). |
10.35 |
|
|
Common Stock Purchase Agreement, dated November 28, 2008, by and
between YA Global Investments, L.P. and Homeland Security Capital
Corp. (previously filed as Exhibit 10.3 to the Registrants Quarterly
Report on Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference). |
10.36 |
|
|
Debt Maturity Extension Agreement, dated September 23, 2010, by and
between Homeland Security Capital Corp. and YA Global Investments,
L.P. (previously filed as Exhibit 10.1 to the Registrants Current
Report on Form 8-K, originally filed with the SEC on September 29,
2010 and incorporated herein by reference). |
10.37 |
|
|
Indemnification and Compensation Agreement, dated as of February 22,
2011, by and among Homeland Security Capital Corporation and
Christopher P. Leichtweis and Myra Leichtweis (previously filed as
Exhibit 10.1 to the Registrants Current Report on Form 8-K,
originally filed with the SEC on February 28, 2011 and incorporated
herein by reference). |
10.38 |
|
|
Stock Purchase Agreement, dated May 27, 2011, by and among Homeland
Security Capital Corporation, Timios Acquisition Corp., Timios, Inc.
and DAL Group, LLC (previously filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K, originally filed with the
SEC on May 31, 2011 and incorporated herein by reference). |
10.39 |
|
|
Employment Agreement, dated June 15, 2011, by and between Homeland
Security Capital Corporation and C. Thomas McMillen (previously filed
as Exhibit 10.1 to the Registrants Current Report on Form 8-K,
originally filed with the SEC on June 17, 2011 and incorporated
herein by reference). |
10.40 |
|
|
Employment Agreement, dated June 15, 2011, by and between Homeland
Security Capital Corporation and Michael T. Brigante (previously
filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K,
originally filed with the SEC on June 17, 2011 and incorporated
herein by reference). |
10.41 |
|
|
Asset Purchase Agreement, dated June 22, 2011, by and among Homeland
Security Capital Corporation, Default Servicing USA, Inc., Default
Servicing, LLC and DAL Group, LLC. (previously filed as Exhibit 10.2
to the Registrants Current Report on Form 8-K, originally filed with
the SEC on June 23, 2011 and incorporated herein by reference). |
64
|
|
|
|
|
EXHIBIT |
|
|
|
NUMBER |
|
|
DESCRIPTION |
14.1 |
|
|
Code of Business Conduct and Ethics (previously filed as Exhibit 14.1
to the Registrants Annual Report on Form 10-K, originally filed with
the SEC on April 14, 2004 and incorporated herein by reference). |
21* |
|
|
Subsidiaries of Homeland Security Capital Corp. |
31.1* |
|
|
Certificate of C. Thomas McMillen, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2* |
|
|
Certification of Michael T. Brigante, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1** |
|
|
Certification of C. Thomas McMillen , pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title
18, United States Code). |
32.2** |
|
|
Certification of Michael T. Brigante, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code). |
|
|
|
|
|
Indicates management compensatory plan, contract or arrangement. |
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
65
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
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HOMELAND SECURITY CAPITAL
CORPORATION |
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/s/ C. Thomas McMillen
C. Thomas McMillen
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Chief Executive Officer
(Principal
Executive Officer)
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|
October 6, 2011 |
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/s/ Michael T. Brigante
Michael T. Brigante
|
|
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
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October 6, 2011 |
In accordance with the Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
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Signature |
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Title |
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Date |
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/s/ C. Thomas McMillen
C. Thomas McMillen
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Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
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October 6, 2011 |
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/s/ Michael T. Brigante
Michael T. Brigante
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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|
October 6, 2011 |
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/s/ Christopher P. Leichtweis
Christopher P. Leichtweis
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President and Director
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October 6, 2011 |
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/s/ Zev E. Kaplan
Zev E. Kaplan
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Director
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October 6, 2011 |
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/s/ Philip A. McNeill
Philip A. McNeill
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Director
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October 6, 2011 |
66
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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Page |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Homeland Security Capital Corporation
We have audited the accompanying consolidated balance sheets of Homeland Security Capital
Corporation and subsidiaries (the Company) as of June 30, 2011 and 2010, and the related
consolidated statements of operations, stockholders deficit and comprehensive loss, and cash flows
for each of the years in the two-year period ended June 30, 2011. The Companys management is
responsible for these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. 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 Homeland Security Capital Corporation and subsidiaries as of
June 30, 2011 and 2010, and the results of its operations and its cash flows for each of the
two-year period ended June 30, 2011 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the consolidated financial statements,
Related Party Senior Notes Payable totaling $19,725,040 are due and payable, the Company has
incurred a loss from operations for year ended June 30, 2011 and has a net capital deficiency in
addition to a working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Managements plans regarding those matters are described in Note 3.
The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Coulter & Justus, P.C.
Knoxville, Tennessee
September 30, 2011
F-2
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,113,324 |
|
|
$ |
220,944 |
|
Other current assets |
|
|
38,072 |
|
|
|
22,332 |
|
Current assets of discontinued operations |
|
|
23,552,012 |
|
|
|
28,460,475 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
25,703,408 |
|
|
|
28,703,751 |
|
|
|
|
|
|
|
|
Fixed assets of discontinued operations |
|
|
853,050 |
|
|
|
1,129,885 |
|
Notes receivable related party |
|
|
449,127 |
|
|
|
430,627 |
|
Securities available for sale |
|
|
|
|
|
|
110,826 |
|
Other non-current assets |
|
|
|
|
|
|
45,003 |
|
Non-current assets of discontinued operations |
|
|
6,728,807 |
|
|
|
7,050,292 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
33,734,392 |
|
|
$ |
37,470,384 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
952,804 |
|
|
$ |
289,000 |
|
Current portion of long term debt related party |
|
|
19,725,040 |
|
|
|
500,000 |
|
Accrued other liabilities |
|
|
166,894 |
|
|
|
167,273 |
|
Current liabilities of discontinued operations |
|
|
14,390,292 |
|
|
|
14,810,313 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
35,235,030 |
|
|
|
15,766,586 |
|
|
|
|
|
|
|
|
Long term debt related party, less current maturities |
|
|
|
|
|
|
17,755,890 |
|
Dividends payable |
|
|
5,051,048 |
|
|
|
3,464,934 |
|
Non-current liabilities of discontinued operations |
|
|
69,843 |
|
|
|
1,372,416 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
40,355,921 |
|
|
|
38,359,826 |
|
|
|
|
|
|
|
|
Warrants Payable Series H Preferred Stock |
|
|
169,768 |
|
|
|
169,768 |
|
|
|
|
|
|
|
|
Stockholders Deficit |
|
|
|
|
|
|
|
|
Homeland Security Capital Corporation stockholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
1,559,899 and 1,559,985 shares issued and outstanding, respectively |
|
|
14,153,834 |
|
|
|
14,225,110 |
|
Common stock, $0.001 par value, 2,000,000,000 shares authorized,
54,491,449 and 51,624,725 shares issued and
50,921,018 and 48,054,294 shares outstanding, respectively |
|
|
54,492 |
|
|
|
51,625 |
|
Additional paid-in capital |
|
|
55,189,354 |
|
|
|
55,297,972 |
|
Additional paid-in capital warrants |
|
|
272,529 |
|
|
|
272,529 |
|
Treasury stock - 3,570,431 shares at cost |
|
|
(250,000 |
) |
|
|
(250,000 |
) |
Accumulated deficit |
|
|
(76,495,077 |
) |
|
|
(70,509,228 |
) |
Accumulated comprehensive loss |
|
|
|
|
|
|
(152,385 |
) |
Accumulated comprehensive loss of discontinued operations |
|
|
(118,215 |
) |
|
|
(148,768 |
) |
|
|
|
|
|
|
|
Total Homeland Security Capital Corporation stockholders deficit |
|
|
(7,193,083 |
) |
|
|
(1,213,145 |
) |
Noncontrolling interest of discontinued operations |
|
|
401,786 |
|
|
|
153,935 |
|
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(6,791,297 |
) |
|
|
(1,059,210 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
33,734,392 |
|
|
$ |
37,470,384 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Net revenue |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Personnel |
|
|
1,270,411 |
|
|
|
1,774,622 |
|
Insurance and facility costs |
|
|
186,747 |
|
|
|
102,731 |
|
Travel and transportation |
|
|
34,727 |
|
|
|
34,122 |
|
Professional services |
|
|
1,387,237 |
|
|
|
568,628 |
|
Administrative costs |
|
|
68,273 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,947,395 |
|
|
|
2,480,103 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(2,947,395 |
) |
|
|
(2,480,103 |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
Interest expense to related party |
|
|
(2,003,558 |
) |
|
|
(1,877,204 |
) |
Amortization of debt discounts and offering costs |
|
|
|
|
|
|
(369,736 |
) |
Impairment losses |
|
|
(308,213 |
) |
|
|
(104,997 |
) |
Other income |
|
|
61,774 |
|
|
|
60,933 |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(2,249,997 |
) |
|
|
(2,291,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(5,197,392 |
) |
|
|
(4,771,107 |
) |
Income from discontinued operations, net of tax of $217,392 in
2011 and $590,230 in 2010 |
|
|
1,208,009 |
|
|
|
6,814,464 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(3,989,383 |
) |
|
|
2,043,357 |
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interests |
|
|
(395,732 |
) |
|
|
(124,484 |
) |
|
|
|
|
|
|
|
Net (loss) income attributable to Homeland
Security Capital Corporation stockholders |
|
|
(4,385,115 |
) |
|
|
1,918,873 |
|
Less preferred dividends and other beneficial conversion
features associated with preferred stock issuance |
|
|
(1,600,733 |
) |
|
|
(1,610,551 |
) |
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
of Homeland Security Capital Corporation |
|
$ |
(5,985,848 |
) |
|
$ |
308,322 |
|
|
|
|
|
|
|
|
(Loss) income per common share attributable to Homeland
Security Capital Corporation stockholders
basic and diluted |
|
|
|
|
|
|
|
|
Basic continuing operations |
|
$ |
(0.10 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
Diluted continuing operations |
|
$ |
(0.10 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
Basic discontinued operations |
|
$ |
0.02 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
Diluted discontinued operations |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding - |
|
|
|
|
|
|
|
|
Basic |
|
|
53,870,980 |
|
|
|
51,291,270 |
|
|
|
|
|
|
|
|
Diluted |
|
|
53,870,980 |
|
|
|
699,666,666 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,989,383 |
) |
|
$ |
2,180,737 |
|
Adjustments to reconcile net (loss) income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Sale of marketable fixed income securities |
|
|
872,427 |
|
|
|
784,044 |
|
Share-based compensation expense |
|
|
24,449 |
|
|
|
1,075,625 |
|
Stock issued for services |
|
|
|
|
|
|
38,333 |
|
Depreciation |
|
|
1,042,250 |
|
|
|
1,863,333 |
|
Amortization of intangibles |
|
|
52,558 |
|
|
|
44,558 |
|
(Gain) loss on disposal of assets |
|
|
(73,956 |
) |
|
|
9,630 |
|
Impairment losses on securities available for sale |
|
|
571,424 |
|
|
|
104,997 |
|
Impairment losses on equipment held for sale |
|
|
|
|
|
|
425,267 |
|
Amortization of debt offering costs and discounts |
|
|
|
|
|
|
412,263 |
|
Accrued interest on notes payable related parties |
|
|
|
|
|
|
(18,500 |
) |
Accrued interest due to related parties |
|
|
1,950,651 |
|
|
|
1,856,836 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,623,946 |
) |
|
|
(3,339,093 |
) |
Costs in excess of billings on uncompleted contracts |
|
|
3,773,749 |
|
|
|
(3,396,845 |
) |
Other assets |
|
|
193,515 |
|
|
|
43,443 |
|
Accounts payable |
|
|
2,316,247 |
|
|
|
(1,546,149 |
) |
Billings in excess of costs on uncompleted contracts |
|
|
782,445 |
|
|
|
5,375 |
|
Accrued compensation |
|
|
164,740 |
|
|
|
(95,805 |
) |
Accrued other liabilities |
|
|
(172,253 |
) |
|
|
(156,335 |
) |
Income taxes payable |
|
|
(886,643 |
) |
|
|
551,941 |
|
Deferred revenue |
|
|
(12,828 |
) |
|
|
150,358 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,985,446 |
|
|
|
994,013 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
(730,962 |
) |
|
|
(383,206 |
) |
Proceeds from sale of assets |
|
|
1,562,825 |
|
|
|
29,481 |
|
Repayment of related party receivable |
|
|
|
|
|
|
(1,656,471 |
) |
Investment received for noncontrolling interest of subsidiary |
|
|
|
|
|
|
28,000 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
831,863 |
|
|
|
(1,982,196 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (payments) borrowings on line of credit |
|
|
(2,162,000 |
) |
|
|
1,650,000 |
|
Distributions to noncontrolling interest |
|
|
(147,880 |
) |
|
|
|
|
Repayment of related party debt |
|
|
(500,000 |
) |
|
|
(50,110 |
) |
Repayments of debt |
|
|
(1,156,955 |
) |
|
|
(1,062,369 |
) |
Repurchase of stock options outstanding |
|
|
(216,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(4,183,035 |
) |
|
|
537,521 |
|
Effect of exchange rate changes on cash |
|
|
30,553 |
|
|
|
(76,443 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
1,664,827 |
|
|
|
(527,105 |
) |
Cash, beginning of period |
|
|
1,829,429 |
|
|
|
2,356,534 |
|
|
|
|
|
|
|
|
Cash, end of period (including $1,380,932 in 2011 and $1,608,485 in
2010 in discontinued operations) |
|
$ |
3,494,256 |
|
|
$ |
1,829,429 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Deficit and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeland Security Capital Corporation Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Paid-In |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Comprehensive |
|
|
Equity of |
|
|
Total |
|
|
|
Preferred |
|
|
Common Stock |
|
|
Paid-In |
|
|
Capital - |
|
|
Treasury |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Loss-Discontinued |
|
|
Noncontrolling |
|
|
Stockholders |
|
|
|
Stock |
|
|
Shares Issued |
|
|
Amount |
|
|
Capital |
|
|
Warrants |
|
|
Stock |
|
|
Deficit |
|
|
Loss |
|
|
Operations |
|
|
Interests |
|
|
(Deficit) |
|
Balance, July 1, 2009 |
|
$ |
14,261,207 |
|
|
|
53,270,160 |
|
|
$ |
53,270 |
|
|
$ |
54,131,548 |
|
|
$ |
272,529 |
|
|
$ |
(250,000 |
) |
|
$ |
(70,817,550 |
) |
|
$ |
(69,266 |
) |
|
$ |
(72,325 |
) |
|
$ |
(135,930 |
) |
|
|
(2,626,517 |
) |
Amortization of Series H
warrants |
|
|
14,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Series H and
Series I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,826 |
) |
Value of vested stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075,625 |
|
Issuance of stock for services |
|
|
|
|
|
|
648,915 |
|
|
|
649 |
|
|
|
37,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,333 |
|
Conversion of Series G to common |
|
|
(35,808 |
) |
|
|
1,611,360 |
|
|
|
1,612 |
|
|
|
34,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series H to common |
|
|
(15,013 |
) |
|
|
500,010 |
|
|
|
500 |
|
|
|
14,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rescission of option exercise |
|
|
|
|
|
|
(4,405,720 |
) |
|
|
(4,406 |
) |
|
|
4,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in value of securities
available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,119 |
) |
|
|
|
|
|
|
|
|
|
|
(83,119 |
) |
Noncontrolling interests
investment in subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,000 |
|
|
|
28,000 |
|
Currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,443 |
) |
|
|
|
|
|
|
(76,443 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,918,873 |
|
|
|
|
|
|
|
|
|
|
|
261,864 |
|
|
|
2,180,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
|
14,225,110 |
|
|
|
51,624,725 |
|
|
|
51,625 |
|
|
|
55,297,972 |
|
|
|
272,529 |
|
|
|
(250,000 |
) |
|
|
(70,509,227 |
) |
|
|
(152,385 |
) |
|
|
(148,768 |
) |
|
|
153,934 |
|
|
|
(1,059,210 |
) |
Dividends on Series H and
Series I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,586,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,586,011 |
) |
Amortization of Series H
warrants |
|
|
14,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series H to common |
|
|
(86,000 |
) |
|
|
2,866,724 |
|
|
|
2,867 |
|
|
|
83,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of vested stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,449 |
|
Repurchase of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216,200 |
) |
Impairment loss on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,385 |
|
|
|
|
|
|
|
|
|
|
|
152,385 |
|
Liquidating distribution of
noncontroling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147,880 |
) |
|
|
(147,880 |
) |
Currency tranlation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,553 |
|
|
|
|
|
|
|
30,553 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,385,115 |
) |
|
|
|
|
|
|
|
|
|
|
395,732 |
|
|
|
(3,989,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011 |
|
$ |
14,153,834 |
|
|
|
54,491,449 |
|
|
$ |
54,492 |
|
|
$ |
55,189,354 |
|
|
$ |
272,529 |
|
|
$ |
(250,000 |
) |
|
$ |
(76,495,077 |
) |
|
$ |
|
|
|
$ |
(118,215 |
) |
|
$ |
401,786 |
|
|
|
(6,791,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization and Nature of Business
Homeland Security Capital Corporation (together with any subsidiaries shall be referred to as
the Company, we, us and our) is a consolidator of companies, whose current operating
companies provide title, escrow and asset management real estate services. We are focused on
creating long-term value by taking a controlling interest in and developing our subsidiary
companies through superior operations and management. We intend to operate businesses that provide
real estate services, growing organically and by acquisitions. The Company is targeting emerging
companies that are generating revenues but face challenges in scaling their businesses to
capitalize on growth opportunities.
The Company was incorporated in Delaware in August 1997 under the name Celerity Systems Inc.
In December 2005, the Company amended its Certificate of Incorporation to change its name to
Homeland Security Capital Corporation.
In fiscal year 2011, the Company announced it was considering strategic alternatives to retire
part or all of its debt, including the sale of one or all of its current subsidiaries. Accordingly,
the Company developed a coordinated plan to dispose of its operations and use the proceeds from the
sale of its subsidiaries to retire debt. On July 15, 2011, the Company signed a definitive
agreement to sell its wholly owned Safety subsidiary. On August 19, 2011, the Company sold the
assets and related operations of its majority owned Nexus subsidiary.
On July 6, 2011, the Company, through a newly formed subsidiary, Fiducia Holdings, LLC
(Holdings), acquired 80% of Fiducia Real Estate Solutions, Inc. (FRES). This acquisition along with
the decision to sell its current subsidiaries initiated a change in the Companys business plan by
effectively changing our overall focus to pursuing new lines of business outside of the homeland
security sector. Although the Company has not dismissed future acquisitions in the homeland
security sector or other business sectors, its primary focus will be in the real estate services
industry sector.
The Companys primary business plan will continue to be the owner of a majority of the
outstanding capital stock of any of its subsidiaries, to control each of its subsidiary boards of
directors and to provide extensive management and advisory services to its subsidiaries.
Accordingly, the Company believes it will exercise sufficient control over the operations and
financial results of each of its subsidiaries and will consolidate the results of operations,
eliminating minority interests when such minority interests have a basis in the consolidated
entity.
2. Summary of Significant Accounting Policies
Fiscal Year-End The Companys fiscal year ends on June 30. All references in these
consolidated financial statements refer to the fiscal year end (June 30), unless otherwise
specified.
Principles of Consolidation The consolidated financial statements in this Annual Report
include the continuing operations of the holding company and the segregated discontinued operations
of wholly owned subsidiary Safety (including Safetys wholly owned United Kingdom subsidiary SECL
and majority owned subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus
(including its wholly owned subsidiary CSS) and PMX. All significant inter-company transactions and
balances have been eliminated in consolidation.
Foreign Operations (related to discontinued operations) SECL, a United Kingdom corporation,
which is wholly owned by Safety, has total assets of $128,353 and $214,137, total liabilities of
$11,720 and $752,711 and a net loss of $119,121 and $442,788 as of and for the periods ending June
30, 2011 and 2010, respectively, which are included in the Companys discontinued operations for
those periods.
The financial statements of SECL are translated using exchange rates in effect at year-end for
assets and liabilities and average exchange rates during the year for results of operations. The
related translation adjustments are reported as a separate component of shareholders equity.
F-7
Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Estimates are used when accounting for amounts recorded in revenue when applying percentage of
completion accounting, fair value determination of assets and liabilities, impairment of long-lived
assets (including goodwill and other intangible assets), collectability of accounts receivable,
share based compensation assumptions and valuation allowance related to deferred tax assets.
The estimates we make are subject to several factors including managements judgment, the
industry in which we conduct our operations, the overall economy, market valuations concerning
certain assets and liabilities and the government. Although we believe our estimates take into
consideration the effect of these various factors, uncertainty still exists in such estimates and
actual results may differ from our estimates.
Fair Value of Financial Instruments The carrying amount of items included in working capital
approximate fair value as a result of the short maturity of those instruments. The carrying value
of the Companys debt from approximates fair value because it bears interest at rates that are
similar to current borrowing rates for loans of comparable terms, maturity and credit risk that are
available to the Company.
Revenue Recognition (related to discontinued operations) The Company recognizes revenue
when it is realized or realizable and earned less estimated future doubtful accounts. The Company
considers revenue realized or realizable and earned when all of the following criteria are met:
|
(i) |
|
persuasive evidence of an arrangement exists, |
|
|
(ii) |
|
the services have been rendered and all required milestones achieved, |
|
|
(iii) |
|
the sales price is fixed or determinable, and |
|
|
(iv) |
|
collectability is reasonably assured. |
Revenues are derived primarily from services performed under time and materials and fixed fee
contracts and products sold. Revenues and costs derived from fixed price contracts are recognized
using the percentage of completion (efforts expended) method. Revenue and costs derived from time
and material contracts are recognized when revenue is earned and costs are incurred. Revenue and
costs based on sale of products are derived when the products have been delivered and accepted by
the customer.
Deferred Revenue (related to discontinued operations) Revenue from service contracts, for
which the Company is obligated to perform, is recorded as deferred revenue and subsequently
recognized over the term of the contract.
Contract costs from discontinued operations include all direct labor, materials, and other
non-labor costs and those indirect costs related to contract support, such as depreciation, fringe
benefits, overhead labor, supplies, tools, repairs and equipment rental. General and administrative
costs from continuing and discontinued operations are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts for discontinued operations are made in the period in
which such losses are determined. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and final contract
settlements for discontinued operations may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Because of inherent uncertainties
in estimating costs for discontinued operations, it is at least reasonably possible the estimates
used will change within the near term.
F-8
Cash and Cash Equivalents - The Company considers all investments with a maturity of three
months or less when purchased to be cash equivalents. Cash consists of cash on hand and deposits in
banks.
Recognition of Losses on Receivables (related to discontinued operations) - Trade accounts
receivable are recorded at their estimated net realizable values using the allowance method. The
Company generally does not require collateral from customers. Management periodically reviews
accounts for collectability, including accounts determined to be delinquent based on contractual
terms. An allowance for doubtful accounts is maintained at the level management deems necessary to
reflect anticipated credit losses. When accounts are determined to be uncollectible, they are
charged off against the allowance for bad debts. At June 30, 2011 and 2010 the Company had a
consolidated bad debt allowances reported in discontinued operations of approximately $248,840 and
$229,340, respectively.
Property and Equipment Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the underlying assets, generally five
years. Leasehold improvements are amortized using the straight-line method over the shorter of the
estimated useful lives of the improvements or the term of the lease. Routine repair and maintenance
costs are expensed as incurred. Costs of major additions, replacements and improvements are
capitalized. Gains and losses from disposals are included in income. The Company periodically
evaluates the carrying value by considering the future cash flows generated by the assets.
Management believes that the carrying value reflected in the consolidated financial statements is
fairly stated based on these criteria.
Debt Offering Costs Debt offering costs are related to private placements and are amortized
on a straight line basis over the term of the related debt, most of which is in the form of senior
secured notes. Should there be an early extinguishment of the debt prior to the stated maturity
date; the remaining unamortized cost is expensed. Amortization expense amounted to $0 and $378,210
in 2011 and 2010, respectfully. At June 30, 2010 all debt offering costs were fully amortized.
Investments in Assets Held for Sale As of June 30, 2011 and 2010 the shares in Vuance Ltd.
held by the Company were classified as assets held for sale. Under this classification, securities
are carried at fair value (period end market closing prices) with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders equity until the gains
or losses are realized or a provision for impairment is recognized.
At June 30, 2011, the discontinued operations of Safety, Nexus and PMX are also classified as
assets held for sale. The combined results of their operations, assets and liabilities and are
reported as separate line items within our financial statements. The assets are measured at the
lower of their carrying amount or fair value, with the fair value based upon recent offers received
for the assets. Depreciation expense associated with the assets has ceased and no impairment loss
has been recorded associated with the assets.
Investment Valuation (related to continuing operations) Investments in equity securities
are recorded at fair value. The fair value of investments that have no ready market, are recorded
at the lower of cost or a value determined in good faith by management and approved by the Board of
Directors, based on assets and revenues of the underlying investee companies as well as the general
market trends for businesses in the same industry. Because of the inherent uncertainty of
valuations, managements estimates of the value of our investments may differ significantly from
the values that would have been used had a ready market for the investment existed and the
differences could be material.
Income Taxes Deferred income taxes are provided using the liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates as of the date of enactment.
F-9
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Stock Based Compensation Share based payments are measured at fair value on the awards
grant date, based on the estimated number of awards that are expected to vest and are reflected as
compensation cost in the financial statements.
Valuation of Options and Warrants The valuation of options and warrants granted to unrelated
parties for services are measured as of the earlier of: (1) the date at which a commitment for
performance by the counterparty to earn the equity instrument is reached, or (2) the date the
counterpartys performance is complete. The options and warrants will continue to be revalued in
situations where they are granted prior to the completion of the performance.
Employee Benefit Plans - Safety has a 401(k) profit sharing plan covering substantially all
its employees. Employees are allowed to make before-tax contributions to the plan, through salary
reductions, up to the legal limits as described under the Internal Revenue Code. Any company match
is discretionary. Safety contributed $432,532 and $332,307 to its plan during 2011 and 2010,
respectively.
SECL, a wholly owned subsidiary of Safety, has a group stakeholder pension scheme for the
benefit of its employees. The plan covers substantially all SECL employees and provides for SECL to
contribute at least three percent of the eligible employees compensation to the plan. SECL
contributed $0 and $582 to their plan during 2011 and 2010, respectively.
Nexus has a salary deferral plan covering substantially all its employees. Employees are
allowed to make before-tax contributions to the plan, through salary reductions, up to the legal
limits as described under the Internal Revenue Code. Any company match is discretionary. Nexus did
not contribute any amount to its plan during 2011 and 2010, respectively.
The holding company has a salary deferral plan covering all its employees. Employees are
allowed to make before-tax contributions to the plan, through salary reductions, up to the legal
limits as described under the Internal Revenue Code. Any company match is discretionary. The
holding company contributed $40,809 and $0 to its plan during 2011 and 2010, respectively.
Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying
amount of an asset to estimated undiscounted future net cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset.
Net Earnings (Loss) Per Share The Company computes basic earnings (loss) per share by
dividing net income (loss) attributable to common stockholders, by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share are computed by
dividing net income attributable to common stockholders, by diluted weighted average shares
outstanding. Potentially dilutive shares include the assumed exercise of stock options and
warrants, the assumed conversion of preferred stock and the assumed vesting of stock option grants
(using the treasury stock method), if dilutive.
Reclassifications As a result of classifying certain of its operations as discontinued,
certain prior years balances have been reclassified to conform to the current year presentation.
F-10
Recent Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08,
Intangibles Goodwill and Other (Topic 350). This Accounting Standards Update amends FASB ASC
350. This amendment specifies the change in method for determining the potential impairment of
goodwill. It includes examples of circumstances and events that the entity should consider in
evaluating whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. The amendments are effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011. The Company is currently assessing
the impact on its consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-29, Business
Combinations (Topic 805). This amendment specifies that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the combined period as
though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments in this ASU also
expand the supplemental pro forma disclosures under FASB ASC 805 to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. The amendments of
this ASU are effective prospectively for business combinations for which the acquisition date in on
or after the beginning of the first annual reporting period beginning on or after December 15,
2010. The Company is currently assessing the impact on its consolidated financial statements.
3. Going Concern
The primary source of financing for the Company since its inception has been through the
issuance of equity and debt securities. The accompanying financial statements have been prepared
assuming the Company will continue as a going concern which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. As of June 30, 2011, the Company
has a stockholders deficit of $6,791,297. Management recognizes it will be necessary to continue
to generate positive cash flow from operations and have availability to other sources of capital to
continue as a going concern and has implemented measures to increase profitability and has
committed to sell certain operations, using such sale proceeds to re-pay debt. Additionally,
management believes the acquisition of new, more profitable operations in new lines of business and
the further reduction of certain operating expenses will have positive impact on cash flow.
Management also recognizes that its inability to repay outstanding debt could result in foreclosure
on the assets of the Company.
As mentioned above, the Company intends to sell its subsidiaries using the proceeds to repay
debt. On August 19, 2011, the Company closed the sale of Nexus and used $1,733,917 from the sale
proceeds to repay debt. On July 15, 2011, the Company entered into an agreement to sell Safety and
as of the date of this filing an agreement on the terms of this sale has not been reached and there
can be no assurance an agreement will be reached. The Company will be unable to repay its debt if a
sale of Safety is not completed.
Forbearance Agreement with YA
On July 29, 2011, the Company, entered into a Forbearance Agreement by and among YA Global
Investments, L.P., as lender (Lender), Homeland Security Advisory Services, Inc., Celerity Systems,
Inc. and Nexus Technology Group, Inc. (the Agreement), pursuant to which the Lender agreed to
forbear from exercising its rights and remedies under the Financing Documents (as defined therein)
and applicable law with respect to one or more Events of Default (as defined in the Financing
Documents) that have occurred and are continuing as a consequence of the Company having failed to
pay, when due at maturity, all outstanding principal and accrued and unpaid interest under the
Companys outstanding debt with the Lender (the Existing Defaults). The forbearance period ends
on the earlier of (i) August 31, 2011 and (ii) the occurrence of a Termination Event, defined in
the Agreement as (a) the failure of the Company or any Guarantor (as defined in the Agreement) to
perform or comply with any term or condition of the Agreement; (b) the determination by the Lender
that any warranty or
representation made by the Company or any Guarantor in connection with the Agreement was false
or misleading; (c) the occurrence of a materially adverse change in or to the collateral granted to
the Lender under the Financing Documents and/or pursuant to the Agreement, as determined by the
Lender in its sole and exclusive discretion; and (d) the occurrence of any default and/or Event of
Default (other than the Existing Defaults) under the Financing Documents.
F-11
As a condition to the entry to the Agreement, the Company has undertaken to grant to the
Lender a security interest in its Class A membership interests in its new subsidiary, Fiducia
Holdings LLC (Holdings) (see note 18), and to cause Holdings to guarantee the Companys
obligations to the Lender and grant a security interest in the capital stock it owns in its
subsidiary, Fiducia Real Estate Holdings, Inc.
On September 7, 2011, the Company, entered into the First Amendment (the Amendment) to the
Forbearance Agreement entered into by and among YA Global Investments, L.P., as lender (Lender),
the Company, Homeland Security Advisory Services, Inc., Celerity Systems, Inc. and Nexus
Technologies Group, Inc. (the Agreement), pursuant to which the Lender agreed to extend the
Forbearance Period (as defined in the Agreement) by amending the definition of Termination Date
to September 14, 2011. As amended, the Forbearance Period now ends on the earlier of (i) September
14, 2011 and (ii) the occurrence of a Termination Event, defined in the Agreement, as (a) the
failure of the Company or any Guarantor (as defined in the Agreement) to perform or comply with any
term or condition of the Agreement; (b) the determination by the Lender that any warranty or
representation made by the Company or any Guarantor in connection with the Agreement was false or
misleading; (c) the occurrence of a materially adverse change in or to the collateral granted to
the Lender under the Financing Documents and/or pursuant to the Agreement, as determined by the
Lender in its sole and exclusive discretion; and (d) the occurrence of any default and/or Event of
Default (other than the Existing Defaults) under the Financing Documents.
Upon the expiration of the Forbearance Agreement mentioned above (September 14, 2011), the
Company is subject to foreclosure without notification. As of the date of this filing the Lender
has not notified the Company it intends to exercise any of its rights or remedies under the
Financing Documents or applicable law with respect to our default under the agreement.
During the course of fiscal year 2012, it remains managements intention to continue to
explore all options available to the Company, which include among other things, sale of
subsidiaries, additional profitable acquisitions, private placements and significant expense
reductions where ever possible.
4. Discontinued Operations
During fiscal year 2011, the Company considered the sale of one or all of its current
subsidiaries and using the proceeds from any sale of a subsidiary to re-pay debt. Accordingly, the
Company developed a coordinated plan to dispose of its subsidiaries and retained advisors to assist
it in the marketing and sale of subsidiary operations. On July 15, 2011, the Company signed a
definitive agreement to sell its wholly owned Safety subsidiary. On August 19, 2011, the Company
sold its majority owned Nexus subsidiary. The results of operations of these subsidiaries, along
with PMX, are reported as discontinued operations and assets and liabilities have been separated
on the balance sheet.
Contract revenues of approximately $105,000,000 in 2011 and $98,000,000 in 2010 are included
in discontinued operations. Included in contract revenues are approximately $2,400,000 in 2011 and
$1,400,000 in 2010 of unbilled claims for costs incurred in excess of contracted amounts for which
Safety believes they have a legal right to recover. However the ultimate realization is subject to
change in the near term.
Revisions in contract profits are made in the period in which circumstances requiring the
revision become known. The effect of changes in estimates of contract profits was to decrease net
income by approximately $3,100,000 in 2011 from that which would have been reported had the revised
estimates been used as the bases of recognition of contract profits in the proceeding period.
F-12
5. Fair Value Measurements
The Company follows Topic 820 Fair Value Measurements and Disclosures (FASB ASC 820),
formerly known SFAS 157 Fair Value Measurements, which, among other things, requires enhanced
disclosures about assets and liabilities carried at fair value. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). We utilize market data or assumptions
that market participants would use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable. We primarily apply the market approach
for recurring fair value measurements and attempt to utilize the best available information. FASB
ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurement) and lowest priority to unobservable inputs
(level 3 measurements). The three levels of fair value hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities
as of the reporting date.
Level 2 Quoted prices for similar assets or liabilities in active markets, or quoted prices
for identical or similar assets or liabilities in markets that are not active, or other observable
inputs other than quoted prices.
Level 3 Unobservable inputs for the asset or liability.
As of September 30, 2010, the Company reduced the carrying value of its securities available
for sale in Vuance, Ltd (692,058 ordinary shares of Vuance, Ltd; OTCQB VUNCF, the Vuance
Shares) to zero as a result of inactive and illiquid markets for the Vuance Shares. The Company
does not believe the quoted prices represent the actual value appurtenant to Vuance Shares.
Consequently, the Company regards the value of the Vuance Shares available for sale as permanently
impaired and has recorded a loss in the amount of $263,210 for the year ended June 30, 2011.
Additionally, as of March 31, 2011, the Company reduced the carrying value of its securities
available for sale in Ultimate Escapes, Inc. (NYSE Amex: UEI; formerly known as Secure America
Acquisition Corporation, or SAAC; referred to herein as UEI) as a result of inactive and
illiquid markets and filing for bankruptcy protection by UEI on September 20, 2010. The Company is
the beneficial owner of 40,912 shares of common stock of UEI through its membership interests in
Secure America Acquisition Holdings, LLC (SAAH). Accordingly, the Company considers its
investment in SAAHs membership units permanently impaired and has recorded a loss in the amount of
$45,004 for the year ended June 30, 2011.
6. Goodwill
Goodwill on acquisition is initially measured at cost being the excess of the cost of the
business acquired including directly related professional fees over the Companys interest in the
net fair value of the identifiable assets, liabilities and contingent liabilities.
Following initial recognition, goodwill is measured at cost less any accumulated impairment
losses. Goodwill is entirely related to Safety and is tested for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying amount may be impaired.
The impairment review requires management to undertake certain judgments, including estimating the
recoverable value of the business acquired to which the goodwill relates, based on either fair
value less costs to sell or the value in use, in order to reach a conclusion on whether it deems
the goodwill to be recoverable. Estimating the fair value less costs to sell is based on the best
information available, and refers to the amount at which the business acquired could be sold in a
current transaction between willing parties. The valuation methods are based on an earnings
multiple approach. The earnings multiple approach uses transaction multiples, obtained from
comparable businesses in the industry sector in which the acquired business operates. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects managements estimate of return on capital employed, which is subject
to a value in use calculation.
F-13
Any impairment is recognized immediately in the income statement and is not subsequently
reversed. No goodwill impairment has been recognized in 2011 or in 2010.
7. Minority Interest in Ultimate Escapes, Inc.
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a
luxury destination club (UEI) (formerly known as Secure America Acquisition Corporation, or
SAAC), as a result of the business combination between SAAC and Ultimate Escapes Holdings, LLC,
which was consummated on October 29, 2009. Through its membership interests in Secure America
Acquisition Holdings, LLC (SAAH), the original investor in SAAC, the Company was deemed to
beneficially own 40,912 shares, or approximately 1.5% of the outstanding capital stock of UEI, at
June 30, 2010, and was entitled to receive such shares of common stock in UEI upon the release of
SAAHs shares from escrow, which was expected in October 2010.
On September 20, 2010, UEI filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
Since the date of UEIs Chapter 11 filing and through the date of this filing, no plan of
reorganization has been made public and the Companys believes the value in its indirect interest
is zero. Additionally, the Company cannot determine with any degree of certainty if its loan to
SAAH in the amount of $449,127 including interest, at June 30, 2011 is collectable under the
circumstances, but believes its interests are secured by alternate means of payment (see Note 16 to
the Consolidated Financial Statements).
8. Income Taxes
The Company and certain of its subsidiaries file income tax returns in the US and in various
state jurisdictions. With few exceptions, the Company is no longer subject to US federal, state and
local, or non-US income tax examinations by tax authorities for years before 2007.
The Internal Revenue Service (IRS) has not notified the Company of any scheduled examination
of the Companys US income tax returns for 2006 through 2010. As of June 30, 2011, the IRS has
proposed no adjustments to the Companys tax positions.
There are no amounts included in the balance at June 30, 2011 or 2010 for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties,
the disallowance of the shorter deductibility period would not affect the annual effective tax rate
but would accelerate the payment of cash to the taxing authority to an earlier period.
It is the Companys policy to recognize any interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During 2011 and 2010, the Company
recognized no interest or penalties.
The tax effects of temporary differences giving rise to the Companys deferred tax assets
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss and capital loss
carryforwards |
|
$ |
14,392,334 |
|
|
$ |
14,002,792 |
|
Related party accruals |
|
|
2,119,780 |
|
|
|
1,557,242 |
|
Allowance for doubtful accounts |
|
|
95,281 |
|
|
|
87,526 |
|
Vacation and workers compensation |
|
|
110,984 |
|
|
|
231,528 |
|
Impairment loss on assets held for sale |
|
|
1,428,618 |
|
|
|
1,310,603 |
|
Other temporary differences |
|
|
|
|
|
|
7,620 |
|
Valuation allowance |
|
|
(17,633,225 |
) |
|
|
(16,574,871 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
513,772 |
|
|
|
622,440 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expenses |
|
|
(256,959 |
) |
|
|
(440,298 |
) |
Amortization of intangible assets |
|
|
(113,804 |
) |
|
|
(130,874 |
) |
Other temporary differences |
|
|
(143,009 |
) |
|
|
(51,268 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(513,772 |
) |
|
|
(622,440 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-14
As a result of significant historical pretax losses, management cannot conclude that it is
more likely than not that the deferred tax asset will be realized. Accordingly, a full valuation
allowance has been established against the total net deferred tax asset. Approximately $874,000 of
the valuation allowance was allocated to reduce the goodwill of discontinued operations. Because
the benefit of the deferred tax assets offset any provision for income tax purposes, the entire
provision for income tax expense, if any, represents amounts currently due state tax jurisdictions
for continuing operations. The valuation allowance increased by $1,058,354 to $17,633,225 in 2011
and decreased by $1,140,055 to $16,574,871 in 2010.
The Companys income tax provision (benefit) differs from that obtained by using the federal
statutory rate of 34% as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Federal income taxes at 34% |
|
$ |
(1,364,291 |
) |
|
$ |
$942,129 |
|
Effect of permanent differences |
|
|
(36,984 |
) |
|
|
506,500 |
|
Other |
|
|
377,191 |
|
|
|
(107,896 |
) |
State income tax |
|
|
66,525 |
|
|
|
389,552 |
|
Change in valuation allowance current year |
|
|
1,058,354 |
|
|
|
(1,140,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense |
|
$ |
100,795 |
|
|
$ |
590,230 |
|
|
|
|
|
|
|
|
At June 30, 2011, the Company had an available net operating loss carryforward of
approximately $42,330,392. This amount is available to reduce the Companys future taxable income
and expires in the years 2014 through 2031 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of |
|
Capital Loss |
|
|
NOL |
|
|
Total |
|
Expiration |
|
Carryover |
|
|
Carryover |
|
|
Carryover |
|
|
2014 |
|
$ |
90,400 |
|
|
$ |
|
|
|
$ |
90,400 |
|
2017 |
|
|
|
|
|
|
3,830,504 |
|
|
|
3,830,504 |
|
2018 |
|
|
|
|
|
|
7,017,587 |
|
|
|
7,017,587 |
|
2019 |
|
|
|
|
|
|
5,878,720 |
|
|
|
5,878,720 |
|
2020 |
|
|
|
|
|
|
4,942,777 |
|
|
|
4,942,777 |
|
2021 |
|
|
|
|
|
|
4,434,157 |
|
|
|
4,434,157 |
|
2022 |
|
|
|
|
|
|
3,438,195 |
|
|
|
3,438,195 |
|
2024 |
|
|
|
|
|
|
2,338,824 |
|
|
|
2,338,824 |
|
2025 |
|
|
|
|
|
|
1,055,115 |
|
|
|
1,055,115 |
|
2026 |
|
|
|
|
|
|
2,542,659 |
|
|
|
2,542,659 |
|
2027 |
|
|
|
|
|
|
1,209,152 |
|
|
|
1,209,152 |
|
2028 |
|
|
|
|
|
|
976,338 |
|
|
|
976,338 |
|
2029 |
|
|
|
|
|
|
1,627,859 |
|
|
|
1,627,859 |
|
2031 |
|
|
|
|
|
|
2,948,105 |
|
|
|
2,948,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,400 |
|
|
$ |
42,239,992 |
|
|
$ |
42,330,392 |
|
|
|
|
|
|
|
|
|
|
|
F-15
9. Related Party Senior Notes Payable
In June 2009 the Company entered into an agreement with YA extending the due date on its three
senior notes payable, and accrued interest, to YA from March 14, 2010 until October 1, 2010 with
respect to $2,500,000 and April 1, 2011 for the balance of the principal and accrued interest
through that date. In exchange for the extension agreement, the Company agreed to an increase in
the interest rate, from 13% to 15%, on the senior notes payable and certain other debt due to YA,
effective January 1, 2010, if the Company failed to secure a certain contract by March 2010. In
December 2009, the Company was informed that it had been eliminated from the award process for this
contract. Accordingly, the Company began recording interest expense at the increased rate effective
January 1, 2010.
In September 2010, the Company entered into a debt extension agreement with YA to extend the
due dates for all senior notes payable and all accrued interest to July 15, 2011. As part of the
agreement, the Company agreed to prepay $500,000 of the accrued interest due at June 30, 2010. On
July 29, 2011, the Company entered into a forbearance agreement with YA whereby YA agreed to not
exercise its rights or remedies under previous financing agreements or applicable law with respect
to our default under the agreements. On September 7, 2011, YA agreed to an amendment to the
forbearance agreement moving the default date to September 14, 2011. Upon expiration of this
extension of the Forbearance Agreement, the Company is subject to foreclosure without notification.
The debt is secured by all the assets of the Company. As of the date of this filing the debt due YA
has not been repaid and YA has not discussed with the Company its future intentions.
The table below reflects the elements of the Companys outstanding senior notes payable.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes Payable (the New Notes) |
|
$ |
6,310,000 |
|
|
$ |
6,310,000 |
|
Senior Secured Notes Payable (the Exchange
Notes) |
|
|
6,750,000 |
|
|
|
6,750,000 |
|
Debenture interest conversion note |
|
|
878,923 |
|
|
|
878,923 |
|
Treasury stock purchase note |
|
|
250,000 |
|
|
|
250,000 |
|
Accrued interest on above notes |
|
|
5,536,117 |
|
|
|
4,066,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
19,725,040 |
|
|
|
18,255,890 |
|
Less current portion of term debt |
|
|
19,725,040 |
|
|
|
(500,000 |
) |
|
|
|
|
|
|
|
Long term portion |
|
$ |
|
|
|
$ |
17,755,890 |
|
|
|
|
|
|
|
|
On August 19, 2011, the Company paid $1,733,917 from the proceeds of the sale of Nexus to
reduce accrued interest.
10. Convertible Preferred Stock
At June 30, 2011, the Company had three series of convertible preferred stock outstanding. The
information below sets out certain information about each series.
F-16
Series F
On October 6, 2005, the Company issued 1,000,000 shares of Series F Convertible Preferred
Stock, par value $0.01 per share (the Series F Preferred Stock), to YA, a related party, pursuant
to a securities purchase agreement. Proceeds from the issuance amounted to $1,000,000 less costs of
$154,277, or $845,723. The Series F Preferred Stock provides for preferential liquidating dividends
at an annual rate of 12%. Also, the Series F Preferred Stock has a preferential liquidation amount
of $0.10 per share or $100,000. The Series F Preferred Stock is convertible into shares of common
stock at a conversion price equal to $0.10 per share, subject to availability. In 2005, the Company
recorded a $1,000,000 dividend relative to the beneficial conversion feature. As of June 30, 2011,
none of the Series F Preferred Stock has been converted into shares of common stock.
Series H
On March 17, 2008, the Company issued 10,000 shares of Series H Convertible Preferred Stock,
par value $0.01 per share (the Series H Preferred Stock), to YA, a related party, pursuant to a
securities purchase agreement. Proceeds from the issuance amounted to $10,000,000. The Series H
Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series H
Preferred Stock has a preferential liquidation amount of $1,000 per share or $10,000,000, plus all
accumulated and unpaid dividends, which at June 30, 2011 amounted to $3,935,147. Each share of
Series H Preferred Stock is initially convertible into 33,334 shares of common stock at a
conversion price equal to $0.03 per share, subject to availability. In 2008, the Company recorded a
$2,740,540 dividend relative to the beneficial conversion feature. As of June 30, 2011, 101 shares
of the Series H Preferred Stock have been converted into 3,366,734 shares of common stock and 9,899
shares of Series H Preferred Stock are outstanding.
As described above, the Series H Stock was convertible into shares of common stock at an
initial ratio of 33,334 shares of common stock for each share of Series H Stock, subject to
adjustments, including achieving certain earnings milestones, as defined, for the calendar years
ending December 31, 2009 and 2008. The second financial milestone for the calendar year ended
December 31, 2009, was not satisfied, resulting in a potential adjustment to the conversion ratio
yielding approximately 56,300 shares of common stock for each share of Series H Stock, or
approximately a potential additional 224,000,000 shares of our common stock in the aggregate.
Management continues to discuss with YA the possibility of a waiver or amendment of any
adjustment to the Series H Stock conversion ratio, however there can be no assurances YA will waive
or amend the adjustment, if any, to the Series H Stock conversion ratio. YA has not exercised any
of its conversion rights pertaining to the adjusted conversion ratio as of the date of this filing.
Series I
On March 13, 2008, the Company issued 550,000 shares of Series I Convertible Preferred Stock,
par value $0.01 per share (the Series I Preferred Stock), to Safety and certain named individuals
pursuant to a merger agreement. The initial value of the stock issued as merger consideration was
$3,300,000. Upon issuance, a portion of the Series I Preferred Stock was placed in escrow to offset
any indemnification claims or purchase price adjustments pursuant to the merger agreement. As of
June 30, 2011, all of the Series I Preferred Stock has been released from escrow. The Series I
Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series I
Preferred Stock has a preferential liquidation amount of $6.00 per share or $3,303,300, plus all
accumulated and unpaid dividends, which at June 30, 2011 amounted to $1,115,901. Each share of
Series I Preferred Stock is convertible into 200 shares of common stock at a conversion price of
$0.03 per share, subject to availability. As of June 30, 2011, none of the Series I Preferred Stock
has been converted into shares of common stock.
The table below reflects the number of shares of common stock that would potentially be
outstanding if: i) all series of preferred stock were to be converted into common stock; and ii)
the Company was unable to obtain a waiver or amendment in the Series H Preferred Stock conversion
ratio for the years ended June 30, 2011 and 2010, respectively, including accrued but unpaid
dividends as of those dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
Potential |
|
|
Accrued |
|
|
Potential |
|
|
Accrued |
|
Preferred Stock |
|
Common Shares |
|
|
Dividends |
|
|
Common Shares |
|
|
Dividends |
|
Series F |
|
|
10,000,000 |
|
|
|
|
|
|
|
10,000,000 |
|
|
|
|
|
Series H |
|
|
557,313,700 |
|
|
$ |
3,935,147 |
|
|
|
562,833,323 |
|
|
$ |
2,745,033 |
|
Series I |
|
|
110,000,000 |
|
|
$ |
1,115,901 |
|
|
|
110,000,000 |
|
|
$ |
719,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
677,313,700 |
|
|
$ |
5,051,048 |
|
|
|
682,833,323 |
|
|
$ |
3,464,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
11. Stock Options
Stock Options Awarded Under the 2005 Plan
There are 7,200,000 shares of common stock reserved for issuance upon exercise of options
under the Companys 2005 stock option plan (the 2005 Plan). From August 2005 through October
2006, 6,800,000 options were granted under the 2005 Plan at strike prices ranging from $0.08 to
$0.17. Of the options granted, all have fully vested, 6,550,000 have been forfeited through June
30, 2011, and $629,096 of total compensation expense has been recognized in the financial
statements of the Company through that date. During the years ended June 30, 2011 and 2010, the
Company recorded $0 and $2,500 as compensation expense, respectively, under the 2005 Plan. At June
30, 2011, there were 6,950,000 options available for award under the 2005 Plan. There have been no
exercises of vested options under the 2005 Plan.
Stock Options Awarded Under the 2008 Plan
There are 75,000,000 shares of common stock reserved for issuance upon exercise of options
under the Companys 2008 stock option plan (the 2008 Plan). In July 2008, 73,850,000 options were
granted under the 2008 Plan at a strike price of $0.05. Of the options granted, all have fully
vested, 33,360 have been exercised, 63,750,000 have been forfeited through June 30, 2011 and
$2,669,709 of total compensation expense has been recognized in the financial statements of the
Company through that date. During the years ended June 30, 2011 and 2010, the Company recorded $0
and $1,000,575 as compensation expense, respectively, under the 2008 Plan. At June 30, 2011, there
are 64,966,640 options available for award under the 2008 Plan.
Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
From December 2005 through May 2007, the Company granted 2,760,000 options to three directors
and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12
to $0.17. All of these options have vested, 1,320,000 have been forfeited through June 30, 2011
and $390,000 of total compensation expense has been recognized in the financial statements of the
Company through that date.
As of June 30, 2011, the Company has a total of 11,690,000 options outstanding at strike
prices ranging from $0.05 to $0.17. A total of $3,688,805 in compensation expense has been
recognized in the financial statements of the Company through that date.
Additional information about the Companys stock option plans is summarized below:
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June 30, 2011 |
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June 30, 2010 |
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Weighted Average |
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Weighted Average |
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Exercise |
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Grant Date |
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Exercise |
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Grant Date |
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Options |
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Price |
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Fair Value |
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Options |
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Price |
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Fair Value |
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Outstanding at
beginning of period |
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83,310,000 |
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$ |
0.056 |
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$ |
0.044 |
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75,669,374 |
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$ |
0.057 |
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$ |
0.049 |
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Granted |
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Rescinded
(Exercised) |
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7,640,626 |
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0.050 |
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|
0.036 |
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Forfeited |
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71,620,000 |
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|
0.056 |
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|
0.043 |
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Outstanding at
end of period |
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11,690,000 |
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$ |
0.058 |
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$ |
0.051 |
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83,310,000 |
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$ |
0.056 |
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$ |
0.044 |
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Options exercisable
at end of period |
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11,690,000 |
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$ |
0.058 |
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$ |
0.051 |
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83,310,000 |
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$ |
0.056 |
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$ |
0.044 |
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F-18
The fair value of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest rate of between 4.0% and
4.95%, volatility between 60% and 456% and expected lives of ten years. All options granted have a
maximum three year service period.
Not included in the table above, but included in discontinued operations compensation expense,
are options issued by our subsidiaries to purchase shares of the subsidiaries common stock in the
future or accept cash settlements in exchange for the increased value of any vested options.
Compensation expense for these options is calculated by comparing our discontinued operations to
comparable publicly traded companies in their industry for stock volatility purposes and using the
Black-Scholes option-pricing model.
12. Common Stock Warrants
On March 14, 2008, in connection with a securities purchase agreement with YA, the Company
issued to YA a warrant to purchase up to 81,166,666 shares of its common stock. The YA warrant
vested when granted and has an exercise price equal to $0.03 with a term of five years from the
date of issuance of March 14, 2008. On July 19, 2011, YA exercised 5,041,181 warrants on a cashless
basis and received 964,754 shares of common stock. As of September 23, 2011, YA has 76,125,485
warrants remaining, expiring on March 13, 2013.
On March 17, 2008, the Company issued warrants to purchase up to 22,000,000 shares of its
common stock as part of the purchase consideration in the acquisition of Safety. A portion of the
warrants were held in escrow, along with the Series I Preferred Stock to offset any indemnification
claims or purchase price adjustments. As of June 30, 2011, all of the warrants have been released
from escrow. The warrants have an exercise price of $0.03 with a term of five years from the date
of issuance of March 17, 2008.
During 2006 and 2007, the Company issued 800,000 and 1,400,000 warrants, respectively, to two
entities and one consultant. These warrants vested when granted and were issued in connection with
our debenture financing, financial advisory services and investor relations consultation. The
exercise price of these warrants range from $0.11 to $1.00. Of these warrants, 800,000 issued in
2006 have expired.
All warrants were valued using the Black Scholes pricing model with the following assumptions;
risk-free interest rate of between 2.2% and 4.95%, volatility of between 60% and 456% and expected
life of five years.
13. Earnings (Loss) Per Share
The basic earnings (loss) per share was computed by dividing the net income or loss applicable
to common stockholders by the weighted average shares of common stock outstanding during each
period.
Diluted earnings per share are computed using outstanding shares of common stock plus the
Convertible Preferred Shares, common stock options and warrants that can be exercised or converted,
as applicable, into common stock at June 30, 2011 and 2010.
F-19
The reconciliations of the basic and diluted income (loss) per share for income (loss)
attributable to the Companys stockholders are as follows:
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Year Ended June 30, |
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2011 |
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2010 |
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Basic and Diluted Earnings (Loss) Per Share: |
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Income (Loss) (Numerator) |
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$ |
(4,385,115 |
) |
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$ |
1,918,872 |
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Less: Series H Preferred Stock beneficial
conversion feature |
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(14,724 |
) |
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(14,724 |
) |
Less: Preferred stock dividends |
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(1,586,009 |
) |
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(1,595,827 |
) |
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Income (Loss) attributable to common
stockholders |
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$ |
(5,985,848 |
) |
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$ |
308,321 |
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Shares (Denominator) |
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Weighted-average number of common shares: |
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Basic |
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53,870,980 |
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51,291,270 |
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Diluted |
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53,870,980 |
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699,666,666 |
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(Loss) Earnings Per Common Share |
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Basic continuing operations |
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$ |
(0.10 |
) |
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$ |
0.09 |
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Diluted continuing operations |
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$ |
(0.10 |
) |
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$ |
0.09 |
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Basic discontinued operations |
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$ |
0.02 |
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$ |
0.13 |
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Diluted discontinued operations |
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$ |
0.02 |
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$ |
0.01 |
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14. Cash Flows
Supplemental disclosure of cash flow information for the twelve months ended June 30, 2011 and
2010 are as follows:
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Year Ended June 30, |
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2011 |
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2010 |
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Cash paid during the period for: |
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Interest |
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$ |
596,495 |
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$ |
227,486 |
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Taxes |
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|
782,670 |
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|
7,677 |
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|
Supplemental disclosure for noncash investing
and financing activity: |
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Temporary impairment of value of securities
available for sale |
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$ |
|
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$ |
83,119 |
|
Dividends accrued on Preferred Stock |
|
|
1,586,114 |
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|
1,595,827 |
|
Dividends paid with Preferred Stock |
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|
14,724 |
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|
14,724 |
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|
Reverse cashless exercise of stock option |
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(4,406 |
) |
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|
Conversion of Series G Preferred Stock |
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|
35,808 |
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|
Conversion of Series H Preferred Stock |
|
|
86,000 |
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|
15,013 |
|
Equipment purchased under capital leases |
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|
68,180 |
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|
130,699 |
|
F-20
15. Commitments and Contingencies
Leases
The Companys continuing operations did not have any long term lease commitments at June 30,
2011.
Rent expense related to continuing operations for the years ended June 30, 2011 and 2010 was
$137,390 and $69,308, respectively.
Commitments
The Company, in the normal course of business, routinely enters into consulting agreements for
services to be provided to the Company. These agreements are generally short term and are
terminable by either party on sixty (60) days notice. As a result, the Company does not believe it
has any material commitments to consultants. At June 30, 2011 and 2010, the Company has not
recognized any material liabilities for loss contingencies.
Claims
During the ordinary course of business, the Company is subject to various disputes and claims
and there are uncertainties surrounding the ultimate resolutions of these matters. Because of the
uncertainties, it is at least reasonably possible that any amount recorded may change within the
near term.
16. Related Party Transactions
Safety leases approximately 21,000 square feet of office space from a company controlled by
our President. The Company recognized rent expense (in discontinued operations) under this
agreement of $344,000 in 2011 and 2010.
Safety, in the normal course of business, is required to post a performance bond on certain
projects. Typically, the bonding or surety company who posts the bond on Safetys behalf will
require collateralization of their potential liability for posting the bond. Through June 30, 2011,
Our President has guaranteed this potential liability.
The Company recognizes the potential exposure to our President and, on January 1, 2011,
entered into an agreement with him and his spouse, indemnifying them against any liabilities they
may endure as a result of collateralizing Safetys bonding requirements and agreed to pay them a
standard fee for this collateralization. Through June 30, 2011, the Company paid our President and
his spouse $61,958 under the indemnity agreement. Through June 30, 2011, the amount of possible
indemnification to the President and his spouse was approximately $13,000,000.
On June 1, 2007, the Company loaned $500,000 to SAAH, an entity controlled by two of our
directors, and the initial stockholder and founder of SAAC. SAAC was formed for the purpose of
acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition,
stock purchase or other similar business combination, one or more domestic or international
operating businesses. SAAH, in turn, loaned the $500,000 to SAAC. SAAC ultimately consummated its
initial business combination with UEI.
The loan is evidenced by a note bearing 5% interest per annum and is due on or before May 31,
2011, with no prepayment penalties (see discussion below concerning CEO special bonus). The loan is
guaranteed in its entirety by our Chairman and Chief Executive Officer. The Company expected
repayment of the loan from the proceeds of the sale by SAAH of its founder warrants and ultimately
by UEI. On September 20, 2010, UEI filed for bankruptcy protection. At June 30, 2011 and 2010, the
balance of the note, including interest, was $449,127 and $430,627, respectively. Interest income
related to this note was $18,500 for each of the years ended June 30, 2011 and 2010. Our Chairman
and Chief Executive Officer intends to fulfill his guarantee has the ability to satisfy any
obligations under this note.
We have entered into employment agreements that require us to make payments and/or provide
benefits to certain of our executive officers in the event of a termination of employment or
change-in-control.
F-21
The following summarizes the potential payments to each named executive officer with whom we
have entered into such an agreement, assuming that one of the events identified below occurs.
On June 15, 2011, the Company and our CEO entered into an employment agreement. The agreement
is terminable by the Company for cause or upon ninety days prior written notice without cause and
by our CEO for good reason (as such terms are defined in the agreement) or upon ninety days prior
written notice without good reason. If the Company terminates the agreement without cause or the
CEO terminates his employment for good reason during the term of employment, then the Company will
pay the CEO: (i) an amount equal to one year of his base salary at the rate in effect as of the
termination date, (ii) the base salary that the CEO would have received had he remained employed
through the expiration date of his agreement, (iii) a pro-rated bonus, if any, (iv) the special
bonus described below and the bonus from the prior year, if unpaid, (v) health and/or dental
insurance coverage pursuant to COBRA until the date that is one year following the termination date
or until the CEO is eligible for comparable coverage with a subsequent employer, whichever occurs
first, and (vi) any accrued, but unpaid compensation prior to the termination. If the Company
terminates the agreement without cause or the CEO terminates his employment for good reason
following the expiration date, then the Company will pay the CEO: (i) an amount equal to one year
of his base salary at the rate in effect as of the termination date, and (ii) any accrued, but
unpaid compensation prior to the termination.
In addition, the CEO is eligible for a one-time special bonus in an amount equal to $726,665
on the earlier of (i) December 31, 2011, and (ii) change of control of the Company (as such term is
defined in the agreement). The special bonus shall be reduced by the amount of principal and
interest now owed by our Chairman and CEO, as a result of his stepping in as guarantor of the
obligations of SAAH pursuant to that certain promissory note, dated June 1, 2007, by and between
the Company and SAAH, which is now in default.
On June 15, 2011, the Company and our CFO entered into an employment agreement. The agreement
is terminable by the Company for cause or upon ninety days prior written notice without cause and
by our CFO for good reason (as such terms are defined in the agreement) or upon ninety days prior
written notice without good reason. If the Company terminates the agreement without cause or the
CFO terminates his employment for good reason during the term of employment, then the Company will
pay the CFO: (i) an amount equal to one year of his base salary at the rate in effect as of the
termination date, (ii) the base salary that the CFO would have received had he remained employed
through the expiration date of his agreement, (iii) a pro-rated bonus, if any, (iv) the special
bonus described below and the bonus from the prior year, if unpaid, (v) health and/or dental
insurance coverage pursuant to COBRA until the date that is one year following the termination date
or until the CFO is eligible for comparable coverage with a subsequent employer, whichever occurs
first, and (vi) any accrued, but unpaid compensation prior to the termination. If the Company
terminates the agreement without cause or the CFO terminates his employment for good reason
following the expiration date, then the Company will pay the CFO: (i) an amount equal to one year
of his base salary at the rate in effect as of the termination date, and (ii) any accrued, but
unpaid compensation prior to the termination.
In addition, the CFO is eligible for a one-time special bonus in an amount equal to $124,462
on the earlier of (i) December 31, 2011, and (ii) change of control of the Company (as such term is
defined in the agreement).
On July 6, 2011, the Company formed a wholly owned subsidiary, Fiducia Holdings, LLC
(Holdings), and purchased Class A membership units of Holdings. The Companys CEO and the Companys
CFO purchased Class B membership units of Holdings for nominal amounts. The Class B membership
interests can be deemed to own twenty percent (20%) of Holdings, but only after the Company
receives its initial purchase price, plus any accrued interest.
17. Subsequent Events
Acquisitions
On July 5, 2011, the Company completed the acquisition of all of the assets and properties of,
and the assumption of certain liabilities (Assets) from, Default Servicing, LLC, (Servicing)
pursuant to the previously announced Asset Purchase Agreement the Company entered into on June 22,
2011 with Default Servicing USA, Inc. (Default), an indirect and majority-owned subsidiary of the
Company, Default and DAL Group, LLC (Seller), the sole member of Default.
F-22
Default is engaged in the business of providing real estate-owned, liquidation-related
services, including property inspection, eviction and broker assignment services. The Assets
acquired include, among other things, certain contract rights of Servicing, certain office
furniture and equipment located at their offices in Kentucky, and other rights and interests of
Servicing.
In consideration for the Assets, the Company paid at closing an aggregate purchase price of
$480,700 in cash. In addition, the Company may pay up to an additional amount of approximately $2.9
million in contingent payments, if any, subject to the achievement of specified net revenue
measurement metrics during each calendar month through 2014. The purchase price was allocated by
applying $33,455 to office furniture and equipment, $15,000 toward a non-compete agreement with the
Chief Operating Officer and $432,245 to certain contract rights that were acquired.
Simultaneously with the completion of the acquisition of the Assets, the employment agreement
between Default and its Chief Operating Officer became effective.
On July 29, 2011, the Company completed the acquisition of all of the issued and outstanding
capital stock (Shares) of Timios, Inc. (Timios), pursuant to a Stock Purchase Agreement (Purchase
Agreement) dated May 27, 2011, by and among the Company, Timios Acquisition Corp., an indirect and
majority-owned subsidiary of the Company, DAL Group, LLC (Seller) and Timios, a wholly-owned
subsidiary of Seller.
Timios and its subsidiaries are engaged in the business of providing settlement services and
asset valuation, including title insurance and escrow services.
In consideration for the Shares, the aggregate purchase price consists of: (a) $1,150,000 in
cash, subject to working capital adjustment to be determined within 60 days following the closing
as set forth in the Purchase Agreement, and (b) an aggregate of up to an additional $1,350,000 in
contingent payments, if any, subject to the achievement of specified net revenue measurement
metrics, as set forth in the Purchase Agreement. The final purchase price of $2.183.238, after a
reduction for working capital deficiency of $316,762, was allocated by applying $119,087 to office
furniture and equipment, computer hardware and software and leasehold improvements, a total of
$45,000 toward a non-compete agreements with each of the Chief Executive Officer, the Chief
Financial Officer and the Vice President of Sales, $344, 909 to intangible assets and $1,674,242 to
goodwill.
Simultaneously with the completion of the acquisition of the Shares, the employment agreements
between Timios and each of its Chief Executive Officer, Chief Financial Officer and Senior Vice
President became effective.
The Company, through Fiducia Holdings, LLC owns eighty percent (80%) of Fiducia Real Estate
Solutions, Inc. (FRES), the parent company and one hundred percent (100%) owner of Default and
Timios. Accordingly, the Company believes it will exercise sufficient control over the operations
and financial results of each of its subsidiaries and will consolidate the results of operations,
eliminating minority interests when such minority interests have a basis in the consolidated
entity.
F-23