Homeland Capital Security Corporation ("Homeland")

As previously reported, in connection with the closing of the Company's acquisition of Safety & Ecology Holdings Corporation ("SEHC") and its subsidiaries (collectively "SEC") from Homeland, Homeland and SEHC agreed that they were in material breach of certain representations and warranties contained in the Stock Purchase Agreement, dated July 15, 2011 ("Agreement"), relating to a fixed cost contract that a subsidiary of SEHC was a party ("Subcontract").  At the closing, the Company deposited $2,000,000, which represented a portion of the purchase price, in an escrow account to satisfy certain claims that the Company has or may have against Homeland for indemnification pursuant to the Agreement.  Homeland and SEHC further agreed that if certain conditions were not met by December 31, 2011, relating to another contract, then the Company could withdraw $1,500,000 from the amount deposited by the Company in escrow.  As previously reported, on January 10, 2012, the Company received from the escrow the $1,500,000, leaving a balance of $500,000 in the escrow account.

As a portion of the purchase price under the Agreement, the Company issued to Homeland an unsecured Promissory Note, dated October 31, 2012, in the principal amount of $2,500,000 (the "Note").  The outstanding principal balance of the Note as of June 30, 2012, was $1,458,000. The Agreement further provides that the Company may offset certain indemnification claims (including those arising from a breach of representations, warranties or covenants) that exceed the amount in the escrow account, against any amounts the Company owes to Homeland under the Note.

The Company currently estimates that the cost to complete the Subcontract will be $5,000,000 to $7,000,000 more than represented by Homeland in the Agreement.  As a result, on July 13, 2012, the Company notified Homeland that the Company will offset its losses resulting from such breach against the payments otherwise due under the Note, pursuant to the terms of the Note and the Agreement, including, but not limited to, the July 15, 2012 regular $76,054 monthly Note payment against such loss.  The Company has asserted a claim for the remaining balance in the escrow account as a result of this breach.  Homeland has notified the escrow agent that it does not believe that the Company is entitled to assert a claim against the escrow and has notified the Company that it does not believe the Company is entitled to offset the amounts payable under the Note.  Also, Homeland has notified the Company that it intends to assert that the Company will be in default under the terms of the Note if the regular July payment is not paid within 30 days of the due date.

If it is determined by a court of competent jurisdiction that we were not entitled to offset against the Note and, as a result, our actions resulted in an event of default under the Note, Homeland would have the right to receive in full and complete satisfaction of our obligations under the Note:

 

 

 

The Agreement limits the aggregate amount of Homeland's liability to the Company to (a) $3,000,000 for indemnification claims relating to breaches of Homeland's representations and warranties, except claims relating to any fundamental warranty (as defined in the Agreement) are limited to the $24,500,000 purchase price; and (b) $4,900,000 for indemnification claims relating to breaches of Homeland's covenants or agreements under the Agreement.

In connection with the Subcontract discussed above and another subcontract ("second Subcontract") that SEHC was working on prior to our acquisition, our SEC subsidiary entered into two surety bonds in the amount of approximately $5,137,000 and $5,718,000, respectively, prior to our acquisition.  We have been informed that one of the sureties who issued the bonds is the subject of a bankruptcy proceeding.  The second Subcontract has been completed.  The Company has not been informed by the obligee that either of the subcontracts is in default as a result of the bankruptcy proceeding.  The Company has discussed this matter with its bonding agent, and in the event that we are required to replace the bond for the Subcontract, we believe we can do so.