-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ui5u1ryCDpRcUI8rj4OkUtGG2hWIXlIDDXMMRSrlUgv7Tnt5txvdkQ+xqY8mR7Af hkSJSSBdmMdIAS0bJRGaxA== 0001019687-04-001021.txt : 20040511 0001019687-04-001021.hdr.sgml : 20040511 20040511173059 ACCESSION NUMBER: 0001019687-04-001021 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20040511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKLAND TECHNOLOGIES INC CENTRAL INDEX KEY: 0001102833 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 841331134 STATE OF INCORPORATION: FL FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-115395 FILM NUMBER: 04797264 BUSINESS ADDRESS: STREET 1: 54 DANBURY ROAD STREET 2: #207 CITY: RIDGEFIELD STATE: CT ZIP: 06877 BUSINESS PHONE: 203-894-9700 MAIL ADDRESS: STREET 1: 54 DANBURY ROAD STREET 2: #207 CITY: RIDGEFIELD STATE: CT ZIP: 06877 FORMER COMPANY: FORMER CONFORMED NAME: QUEST NET CORP DATE OF NAME CHANGE: 20000320 FORMER COMPANY: FORMER CONFORMED NAME: PARPUTT ENTERPRISES INC DATE OF NAME CHANGE: 20000107 SB-2 1 markland_sb2-051104.txt AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 2004 REGISTRATION NO. 333- ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MARKLAND TECHNOLOGIES, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) FLORIDA 84-1334434 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 9995 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 54 DANBURY ROAD, #207 RIDGEFIELD, CT 06877 (203) 894-9700 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) KENNETH DUCEY, JR. PRESIDENT AND CHIEF FINANCIAL OFFICER 54 DANBURY ROAD, #207 RIDGEFIELD, CT 06877 (203) 894-9700 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) COPIES TO: DAVID A. BROADWIN, ESQ. FOLEY HOAG LLP 155 SEAPORT BOULEVARD BOSTON, MASSACHUSETTS 02210 (617) 832-1000 ---------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ----------------
CALCULATION OF REGISTRATION FEE ======================================== ===================== ================= ===================== =============== PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE (2) ======================================== ===================== ================= ===================== =============== Common Stock, par value $.0001 per 18,127,467(3) $1.315 $23,837,619.10 $3,020.23 share - ---------------------------------------- --------------------- ----------------- --------------------- --------------- Common Stock, par value $.0001 per 14,486,882(4)(5)(6) (7) $19,847,824.12 $2,514.72 share ======================================== ===================== ================= ===================== ===============
(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended, there are also registered hereunder such indeterminate number of additional shares as may be issued to the selling stockholders to prevent dilution resulting from stock splits, stock dividends or similar transactions pursuant to the terms of our common stock purchase warrants. (2) Estimated solely for the purpose of determining our registration fee pursuant to Rule 457(c), based on the average of the high and low sales prices of our common stock on May 10, 2004, as reported over-the-counter on the OTC Electronic Bulletin Board by the National Association of Securities Dealers, Inc., of $1.41 and $1.22, respectively. (3) Includes 150% of the 5,833,333 shares of our common stock that were sold to certain selling stockholders pursuant to the Securities Purchase Agreements entered into between the selling stockholders and our company dated April 2, 2004 and April 16, 2004, to cover shares of our common stock, if any, issuable to these selling stockholders as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the respective Securities Purchase Agreements or the related Registration Rights Agreement. (4) Represents shares of common stock issuable upon exercise of warrants evidencing the right to purchase shares of common stock. (5) Includes 110% of the 6,166,666 shares of our common stock that are issuable to certain selling stockholders upon exercise of warrants issued in connection with the Securities Purchase Agreements entered into between the selling stockholders and our company dated April 2, 2004 and April 16, 2004, to cover shares of our common stock, if any, issuable to these selling stockholders as a result of adjustments to the warrants to be made as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the respective Securities Purchase Agreements or the related Registration Rights Agreement. (6) Includes 921,466 shares of our common stock that are issuable to selling stockholders upon exercise of the warrants issued as finder's fee in connection with the Securities Purchase Agreements entered into between certain selling stockholders and our company dated April 2, 2004, April 16, 2004 and May 3, 2004. (7) Estimated solely for the purpose of determining our registration fee pursuant to Rule 457(g), based on 3,716,666 warrants with an exercise price of $1.00 per share, 366,666 warrants with an exercise price of $1.40 per share, 10,378,550 warrants with an exercise price $1.50 per share, and 25,000 warrants with an exercise price of $2.00 per share. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE SELLING STOCKHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED. SUBJECT TO COMPLETION DATED MAY 11, 2004 PROSPECTUS 32,614,349 SHARES OF COMMON STOCK MARKLAND TECHNOLOGIES, INC. ---------------- This prospectus relates to the resale, from time to time, of up to 32,614,349 shares of our common stock by the stockholders referred to throughout this prospectus as "selling stockholders." 15,210,800 shares of our common stock offered in this prospectus are currently outstanding, 13,870,216 shares of our common stock are issuable upon the exercise of warrants and 3,533,333 may be issued as liquidated damages or as a result of adjustments contemplated by our agreements with certain selling stockholders. The selling stockholders may sell the common stock being offered by this prospectus, from time to time (directly or through agents or dealers) on terms to be determined at the time of sale. The prices at which the selling stockholders may sell their shares may be determined by the prevailing market price for the shares or in negotiated transactions. The selling stockholders will receive all of the proceeds from the sales made under this prospectus. Accordingly, we will receive no part of the proceeds from sales made under this prospectus. We are paying the expenses incurred in registering the shares, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders. ---------------- Our common stock is quoted on the OTC Electronic Bulletin Board by the National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." On May 10, 2004, the last reported sale price of our common stock on the OTC Electronic Bulletin Board was $1.24 per share. ---------------- INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS. ---------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- The date of this prospectus is May 11, 2004 TABLE OF CONTENTS PROSPECTUS SUMMARY............................................................1 RISK FACTORS..................................................................4 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................12 USE OF PROCEEDS..............................................................12 PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY.............................12 SELLING STOCKHOLDERS.........................................................13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................................21 CHANGES IN ACCOUNTANTS.......................................................32 BUSINESS.....................................................................32 PROPERTY.....................................................................41 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................41 COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.............................42 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............45 DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES................................................46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47 DESCRIPTION OF SECURITIES....................................................48 PLAN OF DISTRIBUTION.........................................................52 AVAILABLE INFORMATION........................................................54 LEGAL MATTERS................................................................54 EXPERTS......................................................................54 SIGNATURES.................................................................II-13 ---------------- No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this prospectus in connection with the offer contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in our affairs since the date hereof. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities other than those specifically offered hereby or of any securities offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies. This prospectus has been prepared based on information provided by us and by other sources that we believe are reliable. This prospectus summarizes certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents, if any, for a more complete understanding of what we discuss in this prospectus. In making a decision to invest in the common stock, you must rely on your own examination of our company and the terms of the offering and the common stock, including the merits and risks involved. We are not making any representation to you regarding the legality of an investment in the common stock by you under any legal investment or similar laws or regulations. You should not consider any information in this prospectus to be legal, business, tax or other advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the common stock. ---------------- In this prospectus, "Markland," the "Company," "we," "us" and "our" refer to Markland Technologies, Inc. and its subsidiaries, taken as a whole, unless the context otherwise requires. ---------------- The information in this prospectus reflects our 1-for 60 reverse stock split effective October 27, 2003. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS CERTAIN MATERIAL ASPECTS OF THE OFFERING FOR RESALE OF COMMON STOCK BY THE SELLING STOCKHOLDERS COVERED BY THIS PROSPECTUS BUT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY, OUR COMMON STOCK AND OUR FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE "RISK FACTORS" BEGINNING ON PAGE 5. BUSINESS Markland Technologies, Inc. is incorporated in Florida and is the successor to a variety of businesses dating back to 1995. Our business, as it exists today, consists of three business areas: chemical detectors, border security and advanced technologies. Our primary sources of operating revenue are sales of our automatic chemical agent detection and alarm system, border security logistics products and services, and Small Business Investment Research ("SBIR") funded research grants for the development of gas plasma antenna technology. o We have a contract with the U.S. Navy to be the sole producer of the Navy's shipboard automatic chemical agent detection and alarm system used to detect all classic nerve and blister agents as well as other chemical warfare agent vapors. o We have a contract with the Department of Homeland Security to maintain, integrate, and implement design enhancements to border security systems installed at five U.S. land ports of entry. o We have three ongoing funded SBIR government research grants and nine issued and pending U.S. patents related to gas plasma antenna technology. RECENT PRIVATE PLACEMENTS PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004 The selling stockholders are offering up to 6,999,999 shares of our common stock of which 3,333,333 are issuable upon exercise of our outstanding three year common stock purchase warrants having an exercise price of $1.00 per share that were sold in a private placement completed on April 2, 2004, and 333,333 shares of common stock are issuable upon exercise of similar outstanding common stock purchase warrants having an exercise price of $1.40 issued as a finder's fee in this private placement transaction. We agreed to register for resale 150% of the 3,333,333 shares of our common stock in this offering and 110% of the 3,333,333 shares of our common stock that are issuable upon exercise of the warrants sold in this private placement, to cover the shares of our common stock, if any, issuable as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 2, 2004 or the Registration Rights Agreement dated as of April 2, 2004. We agreed to register 110% of the 333,333 shares of our common stock that are issuable upon exercise of the warrants issued as finder's fee in this private placement. We received gross proceeds of $2,000,000 and net proceeds of $1,750,000 (after deducting finders' fees and transactions costs) from this private placement. -1- PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004 The selling stockholders are offering up to 5,025,000 shares of our common stock of which 2,500,000 are issuable upon exercise of our outstanding three year common stock purchase warrants having an exercise price of $1.50 per share that were sold in a private placement transaction completed on April 16, 2004 and 25,000 shares of common stock issuable upon exercise of similar outstanding common stock purchase warrants having an exercise price of $2.00 per share issued as a finder's fee in this private placement transaction. We agreed to register for resale 150% of the 2,500,000 shares of our common stock and 110% of the 2,500,000 shares of our common stock that are issuable upon exercise of the warrants sold in this private placement, to cover the shares of our common stock, if any, issuable as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 16, 2004. We received gross proceeds of $2,000,000 and net proceeds of $1,890,000 (after deducting finders' fees and transactions costs) from this private placement. PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004 The selling stockholders are offering up to 14,727,300 shares of our common stock of which 7,098,750 are issuable upon exercise of our outstanding three year redeemable common stock purchase warrants having an exercise price of $1.50 per share that were sold in a private placement transaction completed on May 3, 2004, and 529,800 are issuable upon exercise of redeemable common stock purchase warrants issued as finders' fees in this private placement transaction. We received gross proceeds of $5,679,000 and net proceeds of $5,133,860 (after deducting finders' fees and transactions costs) from this private placement. ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS Some of our stockholders have outstanding piggy-back registration rights. These selling stockholders are offering up to 2,328,717 shares of our common stock consisting of: o 637,721 shares of our common stock issued to current and former consultants, directors and employees pursuant to consulting and employment agreements for services rendered to us; o 266,334 shares of our common stock issued to ASI Technology Corporation pursuant to a Technology Purchase Agreement dated March 19, 2003; o 1,074,662 shares of our common stock issued to the sole stockholder of Science and Technology Research, Inc. pursuant to an Agreement and Plan of Merger dated September 30, 2003; o 300,000 shares of our common stock issued to investors in our April 2, 2004 private placement in consideration of their consent to the April 16, 2004 private placement; and o 50,000 shares issuable upon exercise of a common stock purchase warrant issued to counsel for the investors in our April 2, 2004 private placement. -2- THE OFFERING The selling stockholders are offering up to 32,614,349 shares of our common stock consisting of 15,210,800 shares of our common stock, 13,870,216 shares of common stock issuable upon the exercise of warrants and 3,533,333 shares of our common stock which may be issued as liquidated damages or as a result of adjustments contemplated by our agreements with certain of the selling stockholders of which 13,870,216 are issuable upon exercise of our outstanding common stock purchase warrants. ISSUER: Markland Technologies, Inc. SECURITIES OFFERED: 32,614,349 shares of Markland's common stock. OTC SYMBOL: MRKL.OB USE OF PROCEEDS: We will not receive any of the proceeds from the sale by any selling stockholder of the common stock. OFFERING PRICE: To be determined by the prevailing market price for the shares at the time of the sale or in negotiated transactions. RISK FACTORS: You should read the "Risk Factors" section beginning on page 4 (along with other matters referred to and incorporated by reference in this prospectus) to ensure that you understand the risks associated with an investment in our common stock. TERMS OF THE SALE: To be determined at the time of the sale. TOTAL SHARES OF OUR COMMON STOCK OUTSTANDING AS OF MAY 10, 2004: 27,074,899 SUMMARY FINANCIAL INFORMATION The following table provides selected financial and operating data for the years ended June 30, 2003 and June 30, 2002 and the six months ended December 31, 2003 and December 31, 2002.
SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30, (UNAUDITED) ----------------------------- ----------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Revenue $658,651 -- $3,563,495 -- Gross Profit (Loss) 213,433 -- 1,233,914 -- Profit (Loss) from Continuing Operations (3,835,594) (247,677) (1,591,417) (171,552) Net profit (Loss) (2,836,881) (2,460,965) (1,739,145) (315,685) Current Assets 342,604 26,661 2,034,921 304,361 Current Liabilities 1,577,910 6,932,525 2,824,916 1,473,169 Total Assets 2,040,936 -- 10,883,501 1,604,631 Long Term Debt 416,666 -- 1,197,769 375,000
---------------- Our executive officers are located at 54 Danbury Road, #207, Ridgefield, CT 06877 and our phone number is (203) 894-9700. ---------------- -3- RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE ADVERSELY AFFECTED. IN THOSE CASES, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF OPERATING LOSSES AND THERE IS NO ASSURANCE THAT WE WILL ACHIEVE PROFITABILITY IN THE FUTURE. We have a history of operating losses. We cannot predict when, or if, we will ever achieve profitability. Our current business operations began in 2002 and have resulted in losses in each fiscal year. As of December 31, 2003, we had an accumulated deficit of approximately $11,511,880. If we continue to experience operating losses, an investment in our common stock is at risk of being lost. WE HAVE A GOING-CONCERN QUALIFICATION IN THE REPORT BY OUR INDEPENDENT AUDITORS FOR OUR FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2003, WHICH MAY MAKE CAPITAL RAISING MORE DIFFICULT AND MAY REQUIRE US TO SCALE BACK OR CEASE OPERATIONS, PUTTING AN INVESTORS FUNDS AT RISK. The report of our independent auditors dated September 15, 2003 includes a going concern qualification, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing operations. If we are unable to obtain additional funding, we may not be able to continue operations. Since January 1, 2004, we have raised a total of $12,336,000 in new capital. There is no guarantee that we will be able to attract additional equity and/or debt investors. To date, we have funded our operations through equity investments and issuances of debt. Additionally, we have an accumulated deficit of approximately $11,511,880 as of December 31, 2003. This deficit indicates that we may be unable to meet our future obligations unless additional funding sources are obtained. WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH. The development of our technologies will require additional capital, and our business plan is to acquire additional revenue producing assets. We may be unable to obtain additional funds in a timely manner or on acceptable terms, which would render us unable to fund our operations or expand our business. If we are unable to obtain capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. Although we have been successful in the past in obtaining financing for working capital and capital expenditures, we will have ongoing capital needs as we expand our business. If we raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. -4- OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF CUSTOMERS SUCH THAT THE LOSS OF ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES. During the six months ended December 31, 2003, we derived more than 90% of our revenues from two customers. We have a contract with the U.S. Navy that may provide for revenues of up to approximately $37,000,000 depending upon the U.S. Navy's needs of which STR, our subsidiary, recognized approximately $12,000,000 in revenues for the three year period ended December 31, 2003 and a subcontract agreement with Computer Science Corporation may provide for revenues of up to approximately $2,000,000 of which STR has generated approximately $1,2000,000 in revenues. The loss of any one of these customers due to cutbacks, competition, or other reasons would materially reduce our revenue base. Annual or quarterly losses would occur if there are material gaps or delays in orders from one of our largest customers and not replaced by other orders or other sources of income. MANY OF OUR TECHNOLOGIES ARE UNPROVEN AND THEIR SUCCESS IN THE MARKETPLACE IS UNKNOWN. Our Gas plasma antenna, Vehicle stopping system, Acoustic Core(TM) signature analysis, APTIS(TM) human screening portal, and cryptography software have not reached commercial viability. There is no guarantee that these products will be successful in the marketplace. Although we currently sell automatic chemical detection and alarm systems, we do not know for how long the U.S. Navy will continue to buy this product, nor do we know if we will be able to sell this product or others like it to other customers. If we do not successfully exploit our technology, our financial condition, results of operations and business prospects would be adversely affected. The development of our technology is subject to certain factors beyond our control, including the production of certain components by our suppliers. Commercially viable plasma antenna technology systems may not be successfully and timely produced by our OEMs due to the inherent risk of technology development, new product introduction, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors. The development and introduction of our technologies could be subject to additional delays. Our various projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in a determination that further exploitation is unfeasible. THE HOMELAND SECURITY INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS, AND UNLESS WE KEEP PACE WITH THE CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS. Our future success will depend, in part, upon our ability to develop and introduce a variety of new products and services and enhancements to these new product and services in order to address the changing and sophisticated needs of the homeland security marketplace. Delays in introducing new products, services and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products and services at competitive prices may cause customers to forego purchases of our products and services and purchase those of our competitors. Frequently, technical development programs in the homeland security industry require assessments to be made of the future directions of technology and technology markets generally, which are inherently risky and difficult to predict. WE FACE INTENSE COMPETITION, WHICH COULD RESULT IN LOWER REVENUES AND HIGHER RESEARCH AND DEVELOPMENT EXPENDITURES AND COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Current political tensions throughout the world have heightened interest in the homeland security industry, and we expect competition in this field, which is already substantial, to intensify. If we do not develop new and enhanced products or if we are not able to invest adequately in our research and development activities, our business, financial condition and results of operations could be negatively impacted. Many of our competitors have -5- significantly more cash and resources than we have. Our competitors may introduce products that are competitively priced, have increased performance or functionality or incorporate technological advances that we have not yet developed or implemented. To remain competitive, we must continue to develop, market and sell new and enhanced systems and products at competitive prices, which will require significant research and development expenditures. SOME OF OUR COMPETITORS ARE MUCH LARGER THAN WE ARE, HAVE BETTER NAME RECOGNITION THAN WE DO AND HAVE FAR GREATER FINANCIAL AND OTHER RESOURCES THAN WE DO. With the U.S. government's large appropriation of money for homeland security programs, many companies are competing for the same homeland security contracts and there can be no assurance that Markland will effectively compete with large companies who have more resources and funds than we do. Several companies have been working on issues relevant to the safety of the American people for the past several years. Lockheed Martin and Northrop Grumman are providers of hardware engineering and systems engineering solutions. Computer Science Corp. and EDS provided computer and computer software solutions. Defense companies, such as General Dynamics, Boeing and Raytheon are solutions providers that could easily expand their business into the homeland security business and are currently allocating resources to develop programs in this area. Because of the services and additional human and financial resources that these larger companies can provide, they may be more attractive to the U.S. Government. IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER. Recently, we have expanded our operations to pursue existing and potential new market opportunities. This growth has placed, and is expected to continue to place, a strain on our personnel, management, financial and other resources. To manage our growth effectively, we must, among other things: o upgrade and expand our manufacturing facilities and capacity in a timely manner; o successfully attract, train, motivate and manage a larger number of employees for manufacturing, sales and customer support activities; o control higher inventory and working capital requirements; and o improve the efficiencies within our operating, administrative, financial and accounting systems, procedures and controls. If we fail to manage our growth properly, we may incur unnecessary expenses and the efficiency of our operations may decline. WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO EXPAND OUR OPERATIONS. To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial and sales and marketing personnel. If we fail to attract, and retain, the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which could lead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academic institutions, government entities and other organizations. -6- OUR SUCCESS DEPENDS ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES. Our future success depends to a significant degree on the skills and efforts of Robert Tarini, our chief executive officer. If we lost the services of Mr. Tarini, our business and operating results could be adversely affected. We also depend on the ability of our other executive officers and members of senior management to work effectively as a team. The loss of one or more of our executive officers or senior management members could impair our ability to manage our business effectively. OUR LARGEST CUSTOMERS ARE THE U.S. NAVY, COMPUTER SCIENCES CORPORATION AND THE DEPARTMENT OF HOMELAND SECURITY WHOSE OPERATIONS ARE SUBJECT TO UNIQUE POLITICAL AND BUDGETARY CONSTRAINTS, INVOLVE COMPETITIVE BIDDING, AND OUR CONTACTS WITH THESE CUSTOMERS MAY BE SUBJECT TO CANCELLATION WITH OR WITHOUT PENALTY WHICH MAY PRODUCE VOLATILITY IN OUR EARNINGS AND REVENUE. Our largest customers are the U.S. Navy and Computer Sciences Corporation with whom we have entered into a subcontracting agreement for the Department of Homeland Security. Due to political and budgetary processes and other scheduling delays that may frequently occur relating to the contract or bidding process, some government agency orders may be canceled or delayed, and the receipt of revenues or payments may be substantially delayed. This irregular and unpredictable revenue stream makes it difficult for our business to operate smoothly. Obtaining contracts from government agencies is challenging, and government contracts often include provisions that are not standard in private commercial transactions. For example, government contracts may: o include provisions that allow the government agency to terminate the contract without penalty under some circumstances; o be subject to purchasing decisions of agencies that are subject to political influence; o contain onerous procurement procedures; and o be subject to cancellation if government funding becomes unavailable. In addition, federal government agencies routinely audit government contracts. These agencies review a contractor's performance on its contract, pricing practices, cost structure and compliance with applicable laws, regulations and standards. These audits may occur several years after completion of the audited work. An audit could result in a substantial adjustment to our revenues because any costs found to be improperly allocated to a specific contract will not be reimbursed, with improper costs already reimbursed must be refunded. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with federal government agencies. In addition, our reputation could be harmed if allegations of impropriety were made against us. OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR PROPRIETARY TECHNOLOGY. Our ability to compete depends significantly upon our patents, our trade secrets, our source code and our other proprietary technology. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged, invalidated or circumvented, in which case the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the United States, which could increase the -7- likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technology without violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could seriously harm our competitive position, which could lead to a substantial reduction in net sales. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we would prevail. CLAIMS BY OTHERS THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS AND FINANCIAL CONDITION. Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others. We do not conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. We may face claims by third parties that our products or technology infringe their patents or other intellectual property rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations. WE RELY ON THIRD PARTIES TO DEVELOP AND PROVIDE KEY COMPONENTS FOR OUR GAS PLASMA ANTENNAE, CRYPTOGRAPHY SOFTWARE, ACOUSTIC CORE(TM) AND APTIS(TM) HUMAN SCREENING PORTAL PRODUCTS. We rely on third party suppliers to supply key components that we will use in our gas plasma antennae, Acoustic Core(TM) and APTIS(TM) human screening portal products. If those suppliers fail to develop and supply these components in a timely manner or at all, or fail to develop or supply components that meet our quality, quantity or cost requirements, and we are unable to obtain substitute sources of these components on a timely basis or on terms acceptable to us, we may not be able to manufacture our products. In addition, to the extent that our supply partners use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable components from alternative sources. NEW CORPORATE GOVERNANCE REQUIREMENTS ARE LIKELY TO INCREASE OUR COSTS AND MAKE IT MORE DIFFICULT TO ATTRACT QUALIFIED DIRECTORS. We face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC. We expect that these laws, rules and regulations will increase our legal and financial compliance costs and make some activities more difficult, time consuming and costly. We also expect that these new requirements will make it more difficult and more expensive for -8- us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher costs to obtain coverage. These new requirements are also likely to make it more difficult for us to attract and retain qualified individuals to serve as members of our board of directors or committees of the board, particularly the audit committee. FUTURE ACQUISITIONS OF OTHER COMPANIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND ADDITIONAL EXPENSES. We have completed the acquisitions of several companies and we plan to review potential acquisition candidates, and our business and our strategy may include building our business through acquisitions. However, acceptable acquisition candidates may not be available in the future or may not be available on terms and conditions acceptable to us. Acquisitions involve numerous risks, including among others, difficulties and expenses incurred in the consummation of acquisitions and assimilations of the operations, personnel and services and products of the acquired companies. Additional risks associated with acquisitions include the difficulties of operating new businesses, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired company. If we do not successfully integrate the businesses we may acquire in the future, our business will suffer. WE FACE RISKS ASSOCIATED WITH OUR PLANS TO MARKET, DISTRIBUTE AND SERVICE OUR PRODUCTS INTERNATIONALLY. We intend to market, distribute and service our products internationally subject to applicable U.S. Governmental approval and regulation on sales of sensitive U.S. technology. Our success in international markets will depend, in part, on our ability to secure relationships with foreign sub-distributors and] on our ability to meet foreign regulatory and commercial requirements. In March 2004 Markland signed an agreement with Tradeways, Ltd. Tradeways, founded in 1974, is the principal worldwide exporter of U.S. Military Special Nuclear, Biological and Chemical (NBC) Equipment, and has fulfilled contracts for NBC products in more than 30 countries. Tradeways provides a complete range of NBC products, as well as training and service. The process of selling to foreign militaries is lengthy, and Markland cannot give any assurances that it will be successful. If Tradeways is unsuccessful in selling Markland's products, it would greatly decrease Markland's success with foreign military sales. To date, we have not sold any products through this channel. RISKS RELATED TO OUR COMMON STOCK THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE. Our stock price has been volatile. From March 31, 2003 to May 10, 2004, the trading price of our common stock ranged from $0.69 to $18.60. Many factors may cause the market price of our common stock to fluctuate, including: o variations in our quarterly results of operations; o the introduction of new products by us or our competitors; o acquisitions or strategic alliances involving us or our competitors; o future sales of shares of common stock in the public market; and -9- o market conditions in our industries and the economy as a whole. In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company's stock drops significantly, stockholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business. IF WE ISSUE SUBSTANTIAL SHARES OF OUR COMMON STOCK PURSUANT TO OUR PRIVATE EQUITY CREDIT AGREEMENT, UPON CONVERSION OF 19,286 SHARES OF THE OUTSTANDING SERIES D CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUR COMMON STOCK PURCHASE WARRANTS, YOU COULD SUFFER SUBSTANTIAL DILUTION OF YOUR INVESTMENT AND OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY. We have entered into a private equity credit agreement with Brittany Capital Management Limited, an offshore investment fund, on September 10, 2003 whereby we can force Brittany Capital to purchase up to $10 million of our common stock; provided that we have an effective registration statement on file with the SEC covering these shares. While we have not filed a registration statement with the SEC to cover these shares of common stock, we intend to file one in the future. In addition, we are obligated to issue a substantial number of shares of common stock upon the conversion of our Series D convertible preferred stock and common stock purchase warrants. Should a significant number of these securities be issued, exercised or converted, the resulting increase in the amount of the common stock in the public market could have a substantial dilutive effect on our outstanding common stock. The conversion and exercise of all of the aforementioned securities or the issuance of new shares of common stock may also adversely affect the terms under which we could obtain additional equity capital. The price, which we may receive for the shares of common stock, that are issuable upon conversion or exercise of such securities, may be less than the market price of the common stock at the time of such conversions or exercise. FLUCTUATIONS IN OUR QUARTERLY NET SALES AND RESULTS OF OPERATIONS COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. Our future net sales and results of operations are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that our net sales or results of operations in a quarter will fall below the expectations of securities analysts or investors. If this occurs, the market price of our common stock could fall significantly. Our results of operations in any quarter can fluctuate for many reasons, including: o Timing of orders from our largest customers, the U.S. Navy and Computer Sciences Corporation; o our ability to manufacture, test and deliver products in a timely and cost-effective manner; o our success in winning competitions for orders; o the timing of new product introductions by us or our competitors; o the mix of products we sell; -10- o competitive pricing pressures; and o general economic climate. A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed. Accordingly, if our net sales decline or do not grow as much as we anticipate, we might be unable to maintain or improve our operating margins. Any failure to achieve anticipated net sales could therefore significantly harm our operating results for a particular fiscal period. THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS AND PRIVILEGES THAT ARE SENIOR TO OUR COMMON STOCKHOLDERS AND WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WITHOUT STOCKHOLDER APPROVAL THAT COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our board of directors has the authority to issue a total of up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges, and restrictions, including voting rights, of the preferred stock, which typically are senior to the rights of the common stockholders, without any further vote or action by you and the other common stockholders. We have issued and outstanding approximately 30,000 shares of our Series A Non-Voting Redeemable Convertible Preferred Stock, approximately 20,000 shares of our Series D Convertible Preferred Stock, and, may from time to time in the future, issue additional preferred stock for financing or other purposes with rights, preferences, or privileges senior to the common stock. Your rights will be subject to, and may be adversely affected by, the rights of the holders of the preferred stock that have been issued, or might be issued in the future. Preferred stock also could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, defer, or prevent a change in control. Furthermore, holders of preferred stock may have other rights, including economic rights, senior to the holders of our common stock. As a result, their existence and issuance could have a material adverse effect on the market value of the common stock. WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THE EXERCISE OF OUR COMMON STOCK PURCHASE WARRANTS. We intend to use the proceeds, if any, from the exercise of our common stock purchase warrants, $19,092,824 assuming all warrants are exercised in their entirety, for general corporate purposes, including capital expenditures, working capital and possible acquisitions. Accordingly, we will have broad discretion in using these proceeds. You will not have the opportunity to evaluate the economic, financial or other information that we will consider in determining how to use the proceeds. We may use the proceeds for purposes that do not result in any increase in our market value or any improvement in our results of operations. WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK, AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. We have not paid dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. In addition, the terms of our Exchange Agreement with Eurotech, Ltd. prohibit us from declaring dividends. -11- SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for historical facts, the statements in this prospectus are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this prospectus and the other documents that we file with the Securities and Exchange Commission. You can read these documents at WWW.SEC.GOV. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR ANY OTHER REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS PROSPECTUS OR THE DATE OF ANY APPLICABLE PROSPECTUS SUPPLEMENT OR THE DATE OF DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS THAT INCLUDE FORWARD-LOOKING STATEMENTS. USE OF PROCEEDS The shares of common stock offered by this prospectus are being offered by the selling stockholders. We will not receive any proceeds from the sale of shares by the selling stockholders. For information about the selling stockholders, see "Selling Stockholders." PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY MARKET INFORMATION Our common stock is quoted on the OTC Electronic Bulletin Board by The National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." The following table provides, for the periods indicated, the high and low bid prices for our common stock as reported by Bloomberg Financial Services. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The prices reflect a 1-for-60 reverse stock split effective October 27, 2003. Prior to December 2003, the common stock of the Company was thinly traded. We believe that the variability of the share price may, in part, be due to thin trading. - ------------------------------------ --------------------- --------------------- YEAR ENDED JUNE 30, 2002 HIGH LOW - ------------------------------------ --------------------- --------------------- First quarter $24.00 $3.60 - ------------------------------------ --------------------- --------------------- Second quarter 28.80 3.00 - ------------------------------------ --------------------- --------------------- Third quarter 4.80 1.80 - ------------------------------------ --------------------- --------------------- Fourth quarter 4.80 1.20 - ------------------------------------ --------------------- --------------------- YEAR ENDED JUNE 30, 2003 - ------------------------------------ --------------------- --------------------- First quarter 1.20 1.20 - ------------------------------------ --------------------- --------------------- Second quarter 24.00 0.60 - ------------------------------------ --------------------- --------------------- Third quarter 18.60 9.60 - ------------------------------------ --------------------- --------------------- Fourth quarter 13.80 3.60 - ------------------------------------ --------------------- --------------------- YEAR ENDED JUNE 30, 2004 - ------------------------------------ --------------------- --------------------- First quarter 9.00 2.40 - ------------------------------------ --------------------- --------------------- Second quarter 5.40 1.90 - ------------------------------------ --------------------- --------------------- Third quarter 2.70 0.69 - -------------------------------------------------------------------------------- -12- On May 10, 2004, the last sale price of our common stock as reported on the OTC Electronic Bulletin Board was $1.24 per share. On that date, we had approximately, 27,074,899 holders of record of our common stock. This number does not include stockholders for whom shares were held in a "nominee" or "street" name. We have never declared or paid cash dividends on our capital stock, and we do not plan to pay any cash dividends in the foreseeable future. We currently intend to retain any future earnings to finance our operations and future growth. In addition, the terms of our Exchange Agreement with Eurotech, Ltd. prohibit us from declaring dividends. SELLING STOCKHOLDERS Up to 32,614,349 shares are being offered by this prospectus, all of which are being registered for sale for the account of the selling stockholders. PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004 The investors in a private placement transaction completed on April 2, 2004, each a selling stockholder, are offering up to 6,999,999 shares of our common stock acquired in this private placement, consisting of: o 3,333,333 shares of our common stock o 3,333,333 shares of our common stock to be obtained by exercising common stock purchase warrants with an exercise price of $1.00 per share; and o 333,333 shares of our common stock to be obtained by exercising common stock purchase warrants with an exercise price of $1.40 per share that were issued as finder's compensation. We agreed to register for resale 150% of the 3,333,333 shares of our common stock and 110% of the 3,333,333 shares of our common stock that are issuable upon exercise of the warrants sold in the April 2, 2004 private placement, to cover the shares of our common stock, if any, issuable as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 2, 2004 or the Registration Rights Agreement dated as of April 2, 2004. We also agreed to register 110% of the 333,333 shares of our common stock that are issuable upon exercise of the warrants issued as finder's fee in this private placement. We received gross proceeds of $2,000,000 and net proceeds of $1,750,000 (after deducting finders' fees and transaction costs) from this private placement. -13- PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004 The investors in a private placement transaction completed on April 16, 2004, each a selling stockholder, are offering up to 5,025,000 shares of our common stock acquired in this private placement, consisting of: o 2,500,000 shares of our common stock; o 2,500,000 shares of our common stock to be obtained by exercising common stock purchase warrants with an exercise price of $1.50 per share; and o 25,000 shares of our common stock to be obtained by exercising common stock purchase warrants with an exercise price of $2.00 per share that were issued as finder's compensation. We agreed to register for resale 150% of the 2,500,000 shares of our common stock and 110% of the 2,500,000 shares of our common stock that are issuable to certain stockholders upon exercise of the warrants, to cover the shares of our common stock, if any, issuable as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 16, 2004. We received gross proceeds of $2,000,000 and net proceeds of $1,890,000 (after deducting finders' fees and transaction costs) from this private placement. PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004 The investors in the private placement transaction completed on May 3, 2004, each a selling stockholder, are offering up to 14,727,300 shares of our common stock acquired in this private placement, consisting of: o 7,098,750 shares of our common stock; o 7,098,750 shares of our common stock to be obtained by exercising redeemable common stock purchase warrants with an exercise price of $1.50 per share; and o 529,800 shares of our common stock to be obtained by exercising redeemable common stock purchase warrants with an exercise price of $1.50 per share that were issued as finder's compensation. We received gross proceeds of $5,679,000 and net proceeds of $5,133,860 (after deducting finders' fees and transaction costs) from this private placement. -14- REGISTRATION RIGHTS We entered into agreements with investors in private placements completed on April 2, 2004, April 16, 2004 and May 3, 2004. Pursuant to these agreements, we agreed to file with the SEC a registration statement covering the resale of all our common stock covered by this prospectus pursuant to Rule 415 of the Securities Act. We are required to register for resale 150% of the common stock that we issued in the private placement transactions completed on April 2, 2004 and April 16, 2004, and 110% of the common stock issuable upon exercise of the common stock purchase warrants issued in connection with these two private placement transactions, to cover the shares of our common stock, if any, issuable to certain selling stockholders as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 2, 2004 and April 16, 2004 or the related Registration Rights Agreement. We will be required to amend this registration statement or file an additional registration statement, of which this prospectus is a part, at any time if the remaining number of shares of common stock or the common stock issuable upon exercise of the common stock purchase warrants exceeds 90% of the number of shares of common stock registered by this registration statement, of which this prospectus is a part. Accordingly, we filed a Registration Statement on Form SB-2, of which this prospectus forms a part, on May 11, 2004, with respect to the resale of these shares from time to time. In addition, we agreed to use our commercially reasonable efforts to cause the registration statement to be declared effective under the Securities Act as promptly as possible thereafter, and to keep the registration statement effective for two years following its effective date, unless the shares of our Common Stock covered by this prospectus have been sold or may be sold pursuant to Rule 144(k) of the Securities Act, subject to certain restrictions. Under the Registration Rights Agreements entered into on April 2, 2004 and April 16, 2004, we will be obligated to pay liquidated damages to the holders of our common stock who are parties to those agreements, if this registration statement is not filed by forty five (45) days after the close of the private placement, and if it is not declared effective by the earlier of five (5) trading days after oral or written notice by the SEC that it may be declared effective or ninety days after the close of the private placement. The amount that we must pay will be calculated as follow:(A) 2% of the purchase price paid by each holder in the January 2004 private placement during the first three 30-day periods (or part), and (B) 3% of the principal amount of all that purchase price for each subsequent 30-day period (or part). ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS The selling stockholders with piggy-back registration rights are offering up to 2,328,717 shares of our common stock being registered for resale by this registration statement, of which this prospectus is part, consisting of: o 637,721 shares of our common stock obtained by current and former consultants, directors and employees pursuant to consulting and employment agreements for services rendered to us; o 266,334 shares of our common stock obtained by ASI Technology Corporation pursuant to a Technology Purchase Agreement dated March 19, 2003; o 1,074,662 shares of our common stock obtained by the sole stockholder of Science and Technology Research, Inc. pursuant to an Agreement and Plan of Merger dated September 30, 2003; o 300,000 shares of our common stock issued to investors in our April 2, 2004 private placement in consideration of their consent to the April 16, 2004 private placement; and o 50,000 shares of our common stock issuable upon exercise of a common stock purchase warrant issued to counsel for the investors in our April 2, 2004 private placement. -15- SELLING STOCKHOLDERS TABLE Based on the information supplied to us by each selling stockholder, the following table sets forth the approximate number of shares beneficially owned as of May 10, 2004, by each of the selling stockholders and their pledgees, assignees and successors in interest. The "Right to Acquire" column reflects beneficial ownership of shares subject to warrants and convertible preferred stock that may be exercised and converted within 60 days after May 11, 2004. The "Shares Offered" column reflects all of the shares that each selling stockholder may offer under this prospectus. Percentage ownership is based on 27,074,899 shares issued and outstanding as of May 10, 2004. The table assumes that the selling stockholders sell all of the shares. We prepared this based on information supplied to us by the selling stockholders. Although we have assumed for purposes of the table below that the selling stockholders will sell all of the shares offered by this prospectus, because the selling stockholders may offer from time to time all or some of their shares covered under this prospectus, or in another permitted manner, no assurances can be given as to the actual number of shares that will be resold by the selling stockholders or that will be held by the selling stockholders after completion of the resales. The terms of the common stock purchase warrants provide that the number of shares to be obtained by each of the holders of the warrants, upon exercise of our common stock purchase warrants cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by each of them, would result in any one of them owning more than 4.99% (or, in some cases, 9.99%) of our outstanding common stock at any given point in time. In addition, the selling stockholders may have sold, transferred or otherwise disposed of the warrants issued in the private placements completed on April 2, 2004, April 6, 2004 and May 3, 2004 in transactions exempt from the registration requirements of the Securities Act since the date the selling stockholders provided the information regarding their securities holdings. Information concerning the selling stockholders may change from time to time and changed information will be presented in a supplement to this prospectus if and when necessary and required. Except as described above, there are currently no agreements, arrangements or understandings with respect to the resale of any of the shares covered by this prospectus. The applicable percentages of ownership are based on an aggregate of 27,074,899 shares of our common stock issued and outstanding on May 10, 2004. The number of shares beneficially owned by the selling stockholders is determined under rules promulgated by the SEC.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING ------------------------------------- -------------------------------- RIGHT TO RIGHT TO NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT - ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- ------- PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004 Elite Properties Ltd. ................... 1,183,333 1,083,333 2,266,666 2,266,666(1)(9) 0 0 * Montana View Corporation ................ 1,350,000 1,250,000 2,600,000 2,600,000(1)(9) 0 0 * Sparrow Ventures, Inc. .................. 1,100,000 1,000,000 2,100,000 2,100,000(1)(9) 0 0 * West Hastings Ltd. ...................... 0 333,333 333,333 333,333(1)(2) 0 0 * -16- BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING ------------------------------------- -------------------------------- RIGHT TO RIGHT TO NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT - ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- ------- PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004 Caslterigg Master Investments, Ltd.. .... 1,000,000 1,000,000 2,000,000 2,000,000(1) 0 0 * Spectra Capital Management, LLC ......... 500,000 500,000 1,000,000 1,000,000(1) 0 0 * AS Capital Partners, LLC ................ 250,000 250,000 500,000 500,000(1) 0 0 * Vestcap International Management, Ltd. .. 250,000 250,000 500,000 500,000(1) 0 0 * OTAPE Investments, LLC .................. 125,000 125,000 250,000 250,000(1) 0 0 * Basso Holding, Ltd. ..................... 83,334 83,334 166,668 166,668(1) 0 0 * Basso Eq Op Hld Fund, Ltd. .............. 83,333 83,333 166,666 166,666(1) 0 0 * Basso Multi Strategy Hldg Fund, Ltd. .... 83,333 83,333 166,666 166,666(1) 0 0 * Fredrick Berdon & Co. L.P. .............. 62,500 62,500 125,000 125,000(1) 0 0 * SRG Capital, LLC ........................ 62,500 62,500 125,000 125,000(1) 0 0 * Baker Consulting......................... 0 25,000 25,000 25,000(1)(2) 0 0 * PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004 Gamma Opportunity Capital Partners, LP... 625,000 625,000 1,250,000 1,250,000 0 0 * Alpha Capital AG......................... 625,000 625,000 1,250,000 1,250,000 0 0 * Stonestreet LP........................... 562,500 562,500 1,125,000 1,125,000 0 0 * Bristol Investment Fund, Ltd. ........... 500,000 500,000 1,000,000 1,000,000 0 0 * IAB Island Ventures SA................... 375,000 375,000 750,000 750,000 0 0 * Ellis International Limited, Inc. ....... 312,500 312,500 625,000 625,000 0 0 * Winton Capital Holdings, Ltd. ........... 312,500 312,500 625,000 625,000 0 0 * Rock II, LLC............................. 300,000 300,000 600,000 600,000 0 0 * Professional Traders Fund, LLC........... 250,000 250,000 500,000 500,000 0 0 * Platinum Long Term Growth................ 250,000 250,000 500,000 500,000 0 0 * DKR Sound Shore Oasis Holding Fund, Ltd.. 375,000 375,000 750,000 750,000 0 0 * Congregation Miskan Sholom............... 250,000 250,000 500,000 500,000 0 0 * Jay Goldman Master Limited Partners...... 200,000 200,000 400,000 400,000 0 0 * SRG Capital, LLC......................... 187,500 187,500 375,000 375,000 0 0 * Greenwich Growth Fund Limited............ 187,500 187,500 375,000 375,000 0 0 * David A. Lyons........................... 156,250 156,250 312,500 312,500 0 0 * Whalehaven Fund Limited.................. 156,250 156,250 312,500 312,500 0 0 * South Ferry L.P. #2...................... 125,000 125,000 250,000 250,000 0 0 * Blair Capital Corporation................ 125,000 125,000 250,000 250,000 0 0 * -17- BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING ------------------------------------- -------------------------------- RIGHT TO RIGHT TO NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT - ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- ------- Michael Hamblet.......................... 100,000 127,411 227,411 227,411 0 0 * MEA Group, LLC........................... 62,500 62,500 125,000 125,000 0 0 * Iron Grid, Ltd. ......................... 46,875 46,875 93,750 93,750 0 0 * Gordon Gregoretti........................ 37,500 37,500 75,000 75,000 0 0 * Gerard Caviston.......................... 30,000 30,000 60,000 60,000 0 0 * Quentin Olwell........................... 15,625 15,625 31,250 31,250 0 0 * Michael Gleason.......................... 15,625 15,625 31,250 31,250 0 0 * Wolfe, L.P. ............................. 15,625 15,625 31,250 31,250 0 0 * Global Opportunity Fund Limited.......... 12,500 12,500 25,000 25,000 0 0 * Apex Opportunity Fund, L.P. ............. 100,000 100,000 200,000 200,000 0 0 * Richard Molinsky......................... 100,000 100,000 200,000 200,000 0 0 * Technology Transfer Venture Fund, LP..... 375,000 375,000 750,000 750,000 0 0 * Lone Star Holding Partnership, LP........ 125,000 125,000 250,000 250,000 0 0 * Brickman Investments..................... 125,000 125,000 250,000 250,000 0 0 * Solomon Yakoby........................... 62,500 62,500 125,000 125,000 0 0 * Alberdale Capital LLC.................... 0 162,500 162,500 162,500(2) 0 0 * Starboard Capital Markets LLC............ 0 13,707 13,707 13,707(2) 0 0 * Anthony Spatacco, Jr. ................... 0 13,707 13,707 13,707(2) 0 0 * Richard F. Sands......................... 0 10,925 10,925 10,925(2) 0 0 * Richard F. Sands 1999 Family Trust DTD 12/20/1999............................. 0 3,000 3,000 3,000(2) 0 0 * Wayde Walker............................. 0 3,000 3,000 3,000(2) 0 0 * Kevin Wilson............................. 0 1,000 1,000 1,000(2) 0 0 * Richard Brewster......................... 0 1,000 1,000 1,000(2) 0 0 * Rafael Vasquez........................... 0 1,000 1,000 1,000(2) 0 0 * Matthew Eitner........................... 0 1,000 1,000 1,000(2) 0 0 * Matthew Richard McGovern Living Trust 0 Dated 7/28/2000........................ 9,000 9,000 9,000(2) 0 0 * Nathaniel Clay........................... 0 200 200 200(2) 0 0 * William Poon............................. 0 1,000 1,000 1,000(2) 0 0 * Shraga Faskowitz......................... 0 1,000 1,000 1,000(2) 0 0 * Richard Michalski........................ 0 200 200 200(2) 0 0 * Brian Smith.............................. 0 200 200 200(2) 0 0 * James Ahern.............................. 0 200 200 200(2) 0 0 * Scott Kenneth Steele..................... 0 1,000 1,000 1,000(2) 0 0 * -18- BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING ------------------------------------- -------------------------------- RIGHT TO RIGHT TO NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT - ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- ------- Anthony Miller........................... 0 100 100 100(2) 0 0 * Alan Feldman............................. 0 1,000 1,000 1,000(2) 0 0 * Charles Savage........................... 0 1,000 1,000 1,000(2) 0 0 * David Bloom.............................. 0 100 100 100(2) 0 0 * Matthew E. Donohue....................... 0 100 100 100(2) 0 0 * Kent Mitchell............................ 0 100 100 100(2) 0 0 * Ian O'Brien Rupert....................... 0 100 100 100(2) 0 0 * Jason Lyons.............................. 0 221,000 221,000 221,000(2) 0 0 * Mark Groussman........................... 0 55,250 55,250 55,250(2) 0 0 * ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS ASI Technology Corporation (4) .......... 306,284 266,334 0 0 * Commonwealth Acquisitions, Ltd. ........ 16,667 16,667 0 0 * David Danovitch.......................... 3,334 3,334 0 0 * Dean Denuccio ........................... 280,000 280,000 0 0 * Rodney Dodd ............................. 7,937 7,937 0 0 * ECON Investor Relations, Inc. ........... 14,458 12,049 0 0 * Oscar Hayes ............................. 21,035 21,035 0 0 * Edward Kessler (7)....................... 7,937 7,937 0 0 * Delmar Kintner (7)....................... 122,116 119,303 0 0 * Samuel Krieger........................... 0 25,000 25,000 25,000(3) 0 0 * MarketShare Recovery, Inc. .............. 27,272 27,272 0 0 * George Martin............................ 4,546 4,546 0 0 * Ernie Mercier (7)........................ 8,334 8,334 0 0 * Jo-Ann Nichols (7)....................... 3,571 3,571 0 0 * Ronald Nussbaum.......................... 0 25,000 25,000 25,000(3) 0 0 * Joe O'Neill (4) ......................... 8,334 8,334 0 0 * John Readey ............................ 65,000 65,000 0 0 * Larry Shatsoff (7)....................... 1,667 1,667 0 0 * Stuart Siller .......................... 13,636 13,636 0 0 * The Research Works, Inc. (4) ............ 37,099 37,099 0 0 * George Yang (8) ......................... 1,074,662 1,074,662 0 0 *
- --------------------------- * Less than 1% (1) We are registering shares equal to 150% of the shares of common stock sold to the holder plus 110% of the shares issuable to the holder upon exercise of those warrants to include shares of our common stock which might be issuable to the selling security holder as adjustment in the event of the breach of certain covenants contained in that Securities Purchase -19- Agreements and the related Registration Rights Agreement. All such shares are also being offered pursuant to this Offering. (2) Shares issuable with respect to warrants paid as a finders fee in connection with the private placements. (3) Shares issuable with respect to warrants issued in connection with consents for the third private placement. (4) Shares acquired pursuant to a Technology Purchase Agreement dated March 19, 2003. (5) Shares acquired pursuant to a consulting agreement. (6) Shares acquired pursuant to an Exchange Agreement dated December 9, 2002. (7) Shares acquired pursuant to an employment agreement or consulting agreement. (8) Shares acquired pursuant to an Agreement and Plan of Merger dated September 30, 2003. VOTING AND INVESTMENT CONTROL The table below sets forth selling stockholders that are entities and the names of individuals having voting and investment control over the securities held by these entities. We determined beneficial ownership based upon information supplied to us by the selling stockholders and in accordance with rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as otherwise indicated, we believe that the persons or entities named in the following table have voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable, and have not held any office or maintained any material relationship, except as investor, with us, or any of our predecessors or affiliates, over the past three years. Certain of the individuals with voting and investment control have indicated that they exercise such control through a corporate or other organizational structure, which structural information has not been included. The following entities have informed us that the following individuals have voting and investment control over our securities held by them:
ENTITY VOTING AND INVESTMENT CONTROL - ------ ----------------------------- Elite Properties Ltd. Shai Granot Montana View Corporation Touvia Strauss Sparrow Ventures, Inc. Michal Raviv West Hastings, Ltd. Bernhard Korolnik Castlerigg Master Investments, Ltd. Thomas Sandell Spectra Capital Management, LLC Gregory Porges AS Capital Partners, LLC Michael Coughlan Vestcap International Management Ltd. Rima Salam OTAPE Investments, LLC Ira Leventhal Basso Holding Ltd. Howard I. Fischer Basso Equity Opportunity Holding Fund Ltd. Howard I. Fischer Basso Multi-Strategy Holding Fund Ltd. Howard I. Fisher Fredrick Berdon & Co. L.P. Fredrick Berdon SRG Capital, LLC Tai May Lee and Edwin McCabe Baker Consulting Philip Baker Gamma Opportunity Capital Partners, LP. Jonathan Knight Alpha Capital AG Conrad Ackerman Stonestreet LP Elizabeth Leonard and Michael Finkelstein Bristol Investment Fund, Ltd. Paul Kestler IAB Island Ventures SA Margot Hutchinson Ellis International Limited, Inc. Wilhelm Ungar Winton Capital Holdings, Ltd. Marc Belzberg Rock II, LLC Howard Chalfin -20- ENTITY VOTING AND INVESTMENT CONTROL - ------ ----------------------------- Professional Traders Fund, LLC Howard Berger Platinum Long Term Growth Mark Nordlicht DKR Sound Shore Oasis Holding Fund, Ltd. Seth Fischer Congregation Mishkan Sholom *(1) Jay Goldman Master Limited Partners Jay Goldman Greenwich Growth Fund Limited Evan Schemenaur Whalehaven Fund Limited Evan Schemenaur South Ferry L.P. #2 Abraham Wolfson Blair Capital *(1) MEA Group, LLC Albert Shabbat Iron Grid, Ltd. William King Wolfe, L.P. Gerald Wolfe Global Opportunity Fund Limited Thieme Associates Apex Opportunity Fund, L.P. Eric Vaughan Technology Transfer Venture Fund, LP William Custer Lone Star Holding Partnership, LP William Custer Brickman Investments Vaness Andrade Alberdale Capital LLC Courtland Miller Casimir Capital LP *(1) Starboard Capital Markets LLC James Dotzman and W. Tyson Perry III
*The entity investors have not supplied me with information on who has voting or investment control. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE OTHER FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE. ALL INFORMATION IN THIS PROSPECTUS REFLECTS A 1-FOR-60 REVERSE STOCK SPLIT EFFECTIVE OCTOBER 27, 2003. The following management's discussion and analysis of results of operations and financial condition is organized as follows: o OVERVIEW. This section provides a general description of Markland, as well as recent developments and events that have occurred since 2001 and that we believe are important in understanding the results of operations and financial condition or to anticipate future trends. In addition, we have provided a brief description of significant transactions and events that impact the comparability of the results being analyzed. o RESULTS OF OPERATIONS. This section provides an analysis of Markland's results of operations for the fiscal years ended June 30, 2003 and June 30, 2002 and the six months ended December 31, 2003 and December 31, 2002. This analysis is presented on a consolidated basis. -21- o FINANCIAL CONDITION AND LIQUIDITY. This section provides an analysis of Markland's cash flows for the fiscal years ended June 31, 2003 and 2002 and the six months ended December 31, 2003, and December 31, 2002, as well as a discussion of recent financing arrangements. o CRITICAL ACCOUNTING POLICIES. This section discusses certain critical accounting policies that we consider important to Markland's financial condition and results of operations, and that required significant judgment and estimates on the part of management in application. Markland's significant accounting policies, including the critical accounting policies discussed in this section, are summarized in the notes to the accompanying consolidated financial statements. BACKGROUND GENERAL. We have undergone material changes to our business and our financial structure during the period covered by the financial statements included in this prospectus (our financial statements for the fiscal years ended June 30, 2002 and June 30, 2003 and for the six month periods ended December 31, 2002 and December 31, 2003). We have a limited operating history in the businesses we are currently pursuing. Our business, as it exists today, consists of three business areas: chemical detectors, border security and advanced technologies. Our primary sources of operating revenue are sales of our automatic chemical agent detection and alarm system, border security logistics products and services, and three SBIR funded research grants for the development of gas plasma antenna technology. In fiscal year 2003 and in the six months ended December 31, 2003, we derived revenue of approximately $546,400 and $440,276, respectively, from our border security products and services, and approximately $112,251 and $79,465 respectively from SBIR research grants performed for the development of gas plasma antenna technology. In the six months ended December 31, 2003 we derived revenue of approximately $2,898,009 from sales of our automatic chemical agent detection and alarm system. During the fiscal year ended June 30, 2003 we incurred a net loss of approximately $2,837,000. During the six months ended December 31, 2003 we incurred a net loss of approximately $1,739,145. Our strategy is to grow through acquisitions and marketing of our products. EVENTS PRIOR TO FISCAL 2002. Markland, previously known as Quest Net, was incorporated in Colorado in November 1995, under the name "A.P. Sales Inc." In December 1998, A.P. Sales Inc. dissolved as a Colorado corporation, redomiciled in Florida and changed its name to Quest Net Corp. In 2001, before the period covered by the financial statements included in this prospectus, our only asset was the stock of a subsidiary CWTel, Inc., a company in the telecommunications business. We acquired this company in March 2000 and secured our payment obligations with 30,000 shares of our Series A Non-Voting Redeemable Convertible Preferred Stock. CWTel filed for bankruptcy and was liquidated on March 11, 2002. After the bankruptcy of our subsidiary, we had no active business operations. On June 30, 2003, we issued 30,000 shares of our Series A Non-Voting Redeemable Convertible Preferred Stock in satisfaction of our remaining obligations to the holder of the security interest. On March 15, 2001, we acquired all the outstanding capital stock of a company called Vidikron of America, Inc. Vidikron was a development stage company in the business of creating digital broadband and wireless networking solutions for the internet. The sole stockholder of Vidikron was Markland LLC. To acquire Vidikron we issued 10 shares of our convertible Series B Preferred -22- Stock to Markland LLC. Markland LLC converted all of its Series B Preferred Stock in June 2001, which, resulted in Markland LLC owning approximately 85% of our then outstanding common stock. There is no Series B Preferred Stock outstanding. At this time we changed our name to Markland Technologies, Inc. On October 19, 2000 we executed a promissory note for $3,500,000 in favor of James LLC. In July 2001, after the Vidikron acquisition, James LLC elected to convert $2,500,000 of the principal amount of its $3,500,000 promissory note, together with $125,000 accrued interest, into shares of our common stock. In September 2001, we assumed all of Vidikron's rights and obligations under a $3,500,000 secured revolving credit facility with Market LLC. These transaction made Market LLC our senior secured lender. EVENTS DURING FISCAL 2002. In May of 2002, we received a notice of default from Market LLC. In June of 2002, we transferred all the stock of Vidikron to Market in partial satisfaction of our indebtedness to Market. After this partial payment, we still owed Market $500,000. Our disposition of the business of Vidikron has been treated as a discontinued operation. As a result, we recorded a loss of $3,259,421 for the fiscal year ended June 30, 2002 resulting from discontinued operations. At this point in our history we again had no active business operations. In fiscal 2003, we recorded income of $998,713 for the fiscal year ended June 30, 2003 resulting from the settlement of certain liabilities and obligations recorded in previous periods in connection with the discontinued operations. EVENTS DURING FISCAL 2003. In December of 2002, we entered into a transaction with Eurotech, Ltd., ipPartners, Inc., Market LLC, and James LLC. Pursuant to this transaction to following took place: o We formed a subsidiary corporation called Security Technology, Inc. o Eurotech transferred certain rights to its acoustic core technology to our subsidiary. o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners transferred certain rights to their cryptology technologies to our subsidiary. o 90% of the shares of our common stock held by Market and James were retired. o We issued shares of common stock representing 80% of our then issued and outstanding common stock to Eurotech and shares of common stock representing 10% of our then issued and outstanding shares of common stock to ipPartners. o We issued $5,225,000 in stated value of our Series C 5% Cumulative Convertible Preferred Stock to Market and James in satisfaction of $5,225,000 of convertible notes held by Market and James as well as for their agreement to surrender 4,498,638 shares of our common stock. We are no longer a majority-owned subsidiary of Eurotech due to the issuances of additional common stock. In January of 2003, we acquired all of the common stock of Ergo Systems, Inc., a provider of security logistic support and related product development services. Ergo has a contract with the United States government to provide border security logistic support at five ports of entry. In consideration for this acquisition we agreed to pay $400,000 in cash, payable at -23- certain milestones which are related to research efforts. During the six month period ended December 31, 2003, we realized $440,276 from these services. EVENTS OCCURRING AFTER FISCAL 2003. In March of 2003, we entered into an agreement to acquire the intellectual property (including patents), equipment and government contracts relating to our gas plasma antenna technology from ASI Technology Corporation, but this transaction did not close until September 30, 2003. In consideration for this acquisition we issued 283,333 shares of common stock and agreed to pay $1,000,000. During the six months ended December 31, 2003 we realized $225,210 from SBIR research grants related to this technology. In October of 2003, we acquired all of the common stock of Science and Technology Research Corporation, Inc. This company is the producer of the U.S. navy's shipboard automatic chemical agent detection and alarm system. In consideration for this acquisition we issued 1,539,779 shares of common stock and agreed to pay $900,000 in cash, and issued a promissory note for $375,000. During the six months ended December 31, 2003, we realized $2,898,009 from sales of our automatic chemical agent detection and alarm system to the U.S. Navy. FINANCING ACTIVITIES. We have financed our business activities through borrowings and private placements of our securities to institutional investors. We have engaged in the following financing activities: o In October 2003, we borrowed $1,400,000 from Bay View Capital, LLC. This borrowing was repaid in April 2004. o At various times between April 2003 and March 2004 we have raised an aggregate of approximately $3,832,000 through private placements of our Series D Preferred Stock to an institutional investor. o On April 2, 2004, we sold 3,333,333 shares of common stock and warrants to purchase 3,333,333 shares of our common stock for $2,000,000 to three investors in a private placement. o On April 16, 2004, we sold 2,500,000 shares of our common stock and warrants to purchase 2,500,000 shares of our common stock for $2,000,000 to ten investors in a private placement. o On May 3, 2004, we sold 7,098,750 shares of our common stock and warrants to purchase 7,098,750 shares of our common stock for 5,679,000 to 34 investors in a private placement. o As of April 2004, all of our Series C Cumulative Convertible Preferred Stock has been converted into common stock and none remains outstanding. RESULTS OF OPERATIONS The following selected consolidated financial data reflects the combined results of operations of Markland Technologies and Science and Technology Research, which was acquired by us on September 30, 2003, restated for all periods presented pursuant to the purchase method of accounting. -24- The selected consolidated financial data for the years ended June 30, 2003 and 2002 and for each of the six month periods ended December 31, 2003 and 2002 have been derived from the audited consolidated financial statements of Markland which are included elsewhere in this prospectus. The historical results presented are not necessarily indicative of future results. You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in this Registration Statement.
UNAUDITED SIX MONTHS ENDING DECEMBER 31, YEAR ENDING JUNE 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Revenue 3,563,495 658,651 Cost of revenue 2,329,581 -- 445,218 -- Selling, general and administrative 1,126,966 171,552 1,186,379 247,677 Compensatory element of stock issuances 1,539,142 -- 2,051,822 -- Research and development -- -- 522,657 -- Amortization & Depreciation Expense 159,223 -- 66,668 -- Interest and other expenses 147,728 144,133 221,501 -- Loss from Continuing Operations -- -- (3,835,594) (247,677) Gain on Disposition -- -- -- 1,046,133 Gain (loss) from discontinued Operations -- -- 998,713 (3,259,421) Net income (loss) (1,739,145) (315,685) (2,836,881) (2,460,965)
RESULTS OF OPERATIONS COMPARISON OF FISCAL 2002 AND FISCAL 2003 REVENUE: During the fiscal year ended June 30, 2002, we had no revenue from continuing operations. Revenue for the fiscal year ended June 30, 2003 was $658,651. Of our revenues, approximately $546,400 was from sales of our border security products and services and approximately $112,251 was from SBIR grants for the development of our gas plasma antenna technology. COST OF REVENUES: During the fiscal year ended June 30, 2002, we had no revenue from continuing operation and therefore there was no cost of revenues from continuing operations. Cost of revenues for the year ended June 30, 2003 was $445,218. Gross profits for the year ended June 30, 2003 was $213,433. We had a gross profit margin of approximately 32% for the year ended June 30, 2003. Our contract with the U.S. government for border security products and services provided for the majority of our gross profit. The majority of our cost of revenues was payroll and benefits. In addition, we incurred significant costs from subcontractors and labor. A portion was also from materials used at the Dedicated Commuter Lane. -25- SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative expense for the year ended June 30, 2002 was $247,677. This expense was primarily composed of payments to employees, consultants and vendors. Selling, general and administrative expense for the year ended June 30, 2003 was $1,186,379. Selling, general and administrative expense was primarily composed of payments to employees, consultants and vendors. The increase in selling, general and administrative expense was primarily due to increases in staff resulting from the acquisition of the Acoustic Core technology from Eurotech and the acquisition of Ergo systems and related sales growth. We expect this expense to increase with the size of our business and with any acquisitions we may make. RESEARCH AND DEVELOPMENT: We did not spend any money on research and development during the fiscal year ending June 30, 2002 because we were not an operating business. During the fiscal year ended 2003, $522,657 was spent on research and development activities. Included in research and development costs for the year ended June 30, 2003 is $300,000 payable to Syquest, a related party, for development costs related to a vehicle stopping technology designed for use in protecting our borders. COMPENSATORY ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND ADMINISTRATIVE FEES: During the fiscal year ended June 30, 2002, we had no charges for compensatory stock issuances. Compensatory element of stock issuances for selling, general and administrative fees for the year ended June 30, 2003 was $2,051,822. We use our equity to compensate management and consultants who provide services to us. We expect to continue to do so in the future. For this reason we expect to continue to incur such charges. OPERATING LOSS FROM CONTINUING OPERATIONS. Operating loss from continuing operations during the year ended June 30, 2002 was $247,677. This loss resulted from the existence of selling general and administrative expenses without offsetting revenues. Operating loss from continuing operations for the year ended June 30, 2003 was $3,614,093. This loss resulted primarily from non-cash charges for the compensatory element of stock issuances of $2,051,822 and from selling, general and administrative expenses, which were offset to a small extent by gross profit. INTEREST EXPENSE: During the fiscal year ended June 30, 2002, we had no interest expense. Interest expense for the year ended June 30, 2003 was $226,751. Interest and financing expense was from our notes payable and our outstanding shares of preferred stock. We expect to satisfy our need for working capital with additional equity and/or debt financing. To the extent that we incur additional indebtedness, we expect interest expense to increase. GAIN (LOSS) FROM DISCONTINUED OPERATIONS. Loss from discontinued operations during the year ended June 30, 2002 was $2,213,288. This loss resulted from the disposition of our Vidikron subsidiary. Income from discontinued operations for the year ended June 30, 2003 was $998,713. This resulted from the settlement of certain liabilities and obligations previously recorded in connection with the discontinued operations. NET LOSS: Net Loss during the year ended June 30, 2002 was $2,460,965 ($0.01 per share). This loss resulted primarily from the loss from discontinued operations. Net loss for the year ended June 30, 2003, was $2,836,881 ($.03 per share). This loss resulted primarily from operating losses. PREFERRED STOCK DIVIDENDS: Accrued stated dividends on the Series C Preferred Stock for the year ended June 30, 2003 totaled $152,716. Deemed dividends related to the holder of our Series D Preferred Stock of $4,107,500, represent non-cash charges for beneficial conversion features of such securities. We expect to continue to finance our operations with -26- additional debt and equity financing including, possibly, additional sales of our Series D Preferred Stock. Such financing could result in additional charges for preferred stock dividends. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common stockholders for the year ended June 30, 2002 was $2,460,965 ($0.01 per share). Net loss applicable to common stockholders for the year ended June 30 2003 was $7,598,852 ($0.03 per share). RESULTS OF OPERATIONS COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2003 REVENUE: During the six month period ended December 31, 2002 we had no Revenue from continuing operations. Revenue for the six months ended December 31, 2003 was $3,563,495. Of our revenues, approximately $2,898,009 was from sales of our automatic chemical agent detection and alarm system to the U.S. Navy. Our contract with the U.S. Navy provides for up to $37,000,000 in sales of this product for the life of the product. Through December 2003 our subsidiary STR recognized approximately $12,000,000 in revenues under this contract. We expect sales will continue, but we cannot give any assurance that they will continue because orders depend upon the U.S. Navy's needs. Approximately $440,276 of revenue was derived from border security products and services provided by our subsidiary, Ergo Systems, Inc. Our contract with the U.S. government for border security products and services provides for payments of $2,000,000. Our SBIR grants provide for payments of $1,000,000 over a 12-month period. Approximately $225,210 of revenue was derived from funded SBIR research performed for the U.S. military for gas plasma antenna technology. COST OF REVENUES: During the six month period ended December 31, 2002 we had no revenue and no cost of revenues. Cost of revenues for the six months ended December 31, 2003 was $2,329,581. Gross profit for the six months ended December 31,2003 was $1,233,914. We had a gross profit margin of 34.6% for the six months ended December 31,2003. Our contract with the U.S. Navy contributed a majority of our gross profit. SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative expense for the six months ended December 31, 2002 was $171,552. Selling, general and administrative expense for the six months ended December 31, 2003 was $1,126,966. Selling, general and administrative expense was primarily composed of payments to employees, consultants and vendors. The increase in selling, general and administrative expense was primarily due to increases in staff resulting from the acquisition of Science and Technology Research Corporation and related sales growth. We expect this expense to increase with the size of our business and with any acquisitions we may make. COMPENSATORY ELEMENT OF STOCK ISSUANCES: During the six months ended December 31, 2002 we had no changes for compensatory element of stock issuances. Compensatory element of stock issuances for selling, general and administrative fees for the six months ended December 31, 2003 was $1,539,142. We use our equity to compensate management and consultants who provide services to us. We expect to continue to do so in the future. For this reason we expect to continue to incur such charges. INTEREST AND FINANCING: Interest expense for the six months ended December 31, 2002 was $169,786. Interest and financing expense for the six months ended December 31, 2003 was $147,728. Interest and financing expense was from our loan by Bay View Capital, LLC, and other notes payable. NET LOSS: Net loss for the six months ended December 31, 2002 was $315,685. For the six months ended December 31,2003, we incurred a net loss of $1,739,145. This net loss was primarily due to the compensatory element of stock -27- issuances for selling, general and administrative fees for the six months ended December 31, 2003 of $1,539,142. PREFERRED STOCK DIVIDENDS: Accrued stated dividends or the Series C Preferred Stock for the six months ended December 31, 2003 and 2002 totaled $130,540 and $15,989, respectively. Deemed dividends related to our Series C and Series D Preferred Stock totaled $186,250 for the six months ended December 31, 2003, representing non-cash charges for the beneficial conversion features of such securities. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common stockholders for the six months ended December 31, 2002 was $380,054 ($.04 per share). Net loss applicable to common stockholders for the six months ended December 31, 2003 was $2,055,935 ($.32 per share). LIQUIDITY AND CAPITAL RESOURCES During fiscal 2003, we experienced $764,550 of negative cash flow from operating activities. This negative cash flow was the result of a loss from continuing operatowns of approximately $3,836,000 mitigated by non-cash charges of approximately $2,159,000 and increases in accounts payable and other liabilities of approximately $940,000. In addition, we experienced $191,900 of negative cash flow from investing activities. These investment activities consisted of payments made in connection with our acquisition of ERGO and ASI. Cash flows from financing activities for the year ended June 30, 2003 approximated $957,000. We financed our operations and acquisition activities primarily through sales of common stock and preferred stock as well as through margins from sales of our products and services. We experienced significant revenue growth during this period. This revenue growth helped offset our negative cash flow. We expect our revenues will be variable and unpredictable. During fiscal 2003, we raised $340,000 from sales of our common stock, $170,000 from sales of our Series C Preferred Stock, and $430,000 from sales of our Series D Preferred Stock. During the six months ended December 2003, we experienced $884,314 of negative cash flow from operating activities. The negative cash flow was a result of a net loss of $1,739,000 an increase of accounts receivable of approximately $1,449,000 mitigated by non-cash charges of $1,731,000 and an increase accounts payable and accrued expenses of $545,000. In addition, we experienced $869,170 of negative cash flow from investing activities. These investment activities consisted of payments made in connection with our acquisition of Science and Technology Research Corporation. We financed our operations and acquisition activities primarily through borrowings, sales of preferred stock as well as through margins from sales of our products and services. During this period we borrowed $1,400,000 from Bay View Capital, LLC and repaid $261,000 of that amount. We also raised $745,000 from sales of our Series D Preferred Stock. We believe that required investment capital will be available to us, but there can be no assurance that we will be able to raise funds on terms acceptable to us, or at all. We have the ability to adjust the level of research and development and selling and administrative expenses to some extent based on the availability of resources. However, reductions in expenditures could delay development and adversely affect our ability to generate future revenues. Any equity-based source of additional funds could be dilutive to existing equity holders and the dilution could be material. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our security products and technologies. The timing and amounts of these expenditures -28- and the extent of our operating losses will depend on many factors, some of which are beyond our control. Accordingly, there can be no assurance that our current expectations regarding required financial resources will prove to be accurate. We anticipate that the commercialization of our technologies may require increased operating costs; however, we cannot currently estimate the amounts of these costs. GOING CONCERN For the fiscal year ended June 30, 2003, we incurred a net loss from continuing operations of $3,835,594 and had a working capital deficiency of $1,235,306. We had limited finances and required additional funding in order to market and license our products. There was no assurance that we could reverse our operating losses, or that we could raise additional capital to allow us to continue our planned operations. These factors raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern remains dependent upon our ability to obtain additional financing or through the generation of positive cash flows from continuing operations. FINANCING IN 2004 Since December 31, 2003, we have raised an aggregate of $2,657,000 in new equity capital through private placements of our Series D Preferred Stock and common stock and warrants. At various times between January 1, 2004 and May 3, 2004 we raised aggregate proceeds of $2,657,000 (net of finders fees) through private placements of our Series D Preferred Stock to an institutional investor. On April 2, 2003, we sold 3,333,333 shares of common stock and warrants to purchase 3,333,333 shares of our common stock for $2,000,000 to three investors in a private placement. After deducting expenses, we received approximately $1,750,000 in cash proceeds from this transaction. On April 16, 2003, we sold 2,500,000 shares of our common stock and warrants to purchase 2,500,000 shares of our common stock for $2,000,000 to ten investors in a private placement. After deducting expenses, we received approximately $1,890,000 in cash proceeds from this transaction. On May 3, 2004, we sold 7,089,750 shares of our common stock and warrants to purchase 7,098,750 shares of our common stock for $5,679,000 to 34 investors. We paid $533,140 and issued warrants to purchase 529,800 shares of common stock to finders in connection with these private placements. If the common stock purchase warrants sold in the three private placements are exercised in their entirety, we will receive up to $19,092,824. We used the net proceeds of these private placements for working capital and to repay approximately $2,000,000 of indebtedness including approximately $1,200,000 we owed to Bay View Capital, LLC. As of May 9, 2004, we had approximately $7,850,000 in cash. CONTRACTUAL CASH OBLIGATIONS The following summarizes our contractual cash obligations and commercial commitments at December 31, 2003, and the effect such obligations are expected to have on liquidity and cash flows in the future periods. Contracted Obligations Long-Term Debt Total Less Than 1 Year -------------- ----- ---------------- Secured Convertible note $ 458,334 $ 458,334 (a) Note Payable - Bay View Capital 1,197,769 1,197,769 (b) Insurance Premium Financing 40,976 40,976 Acquisition note 375,000 375,000 ------------ ------------ -29- Total Contractual Obligations $ 2,072,079 $ 2,072,079 Commercial Commitments -0- -0- (a) converted to common stock April, 2004 (b) repaid out of private placements completed in April, 2004 CRITICAL ACCOUNTING POLICIES The preparation of Markland's financial statements and related disclosures 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 the disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. The sections below present information about the nature of and rationale for our critical accounting policies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Markland and its wholly-owned subsidiaries, Security Technology, Inc. and Ergo Systems, Inc. We have eliminated all significant inter-company balances and transactions in consolidation. CONCENTRATION OF CREDIT RISK Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information about Financial Instruments With Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," requires that we disclose any significant off-balance-sheet and credit risk concentrations. We are subject to concentrations of credit risk because the majority of our revenues and accounts receivable are derived from the US Navy, Computer Science Corporation and The Department of Homeland Security, none of whom is required to provide collateral for amounts owed to us. We do not believe that we are subject to any unusual credit risks, other than the normal level of risk attendant to operating our business. For the year ended June 30, 2003, the Department of Homeland Security accounted for 81% of total revenues. At June 30,2003, this customer represented approximately 70% of accounts receivable. For the year ended June 30, 2002, there were no revenues or accounts receivable from either of these customers. RESEARCH AND DEVELOPMENT We charge research and development costs to expense as incurred. We capitalize costs related to acquired technologies that have achieved technological feasibility and have alternative uses. We expense acquired technologies, which are in-process at the date of acquisition or have no alternative uses as research and development costs. Included in research and development costs for the year ended June 30, 2003 is $300,000 payable to Syquest, a related party, for development costs related to a vehicle stopping technology. -30- LOSS PER SHARE We compute basic net loss per common share based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of a secured convertible promissory note, Series A and D Convertible Preferred Stock and Series C 5% Cumulative Convertible Preferred Stock, discussed in the notes to consolidated financial statements, were not included in the calculation of the diluted loss per share because their inclusion would have had the effect of decreasing the loss per share otherwise computed. IMPAIRMENT OF LONG-LIVED ASSETS We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including intangible assets, may not be recoverable. We recognize and impairment loss when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, we evaluate the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of our underlying business. Our policy is to record an impairment loss when it is determined that he carrying amount of the asset may not be recoverable. REVENUE RECOGNITION We recognize revenue when the following criteria are met: (1) we have persuasive evidence of an arrangement, such as agreements, purchase orders or written requests; (2) we have completed delivery and no significant obligations remain, (3) our price to our customer is fixed or determinable, and (4) collection is probable. We recognize revenues at the time we perform services related to border security logistic support. With respect to our revenues from our chemical detectors, we recognize revenue under the units-of-delivery method. At the time the units are shipped to the warehouse of the United States Navy, the Company recognizes as revenues the contract price of each unit and recognizes the applicable cost of each unit shipped. ALLOWANCE FOR DOUBTFUL The allowance for doubtful accounts reflects management's best estimate of probably losses inherent in the accounts receivable balance. Management determines the allowance based on known trouble accounts, historical experiences and other currently available evidence. The Company's receivables are from government contracts. The Company has not experienced any losses in accounts receivable and has provided no allowance at December 31, 2003. ESTIMATED USEFUL LIVES OF INTANGIBLE ASSETS We amortize our amortizable intangible assets over the shorter of the contractual/legal life or the estimated economic life. We are amortizing the intangible assets acquired as of a result of the Ergo and ASI acquisitions over a three-year life commencing with the date of acquisition. With respect to the Science & Technology Research, Inc. acquisition, we currently hired an independent firm to perform an independent valuation. The valuation was not completed as of the date of this registration statement. The December 31, 2003 financial statements were prepared assuming that all of the excess of the purchase price over the net intangible assets ($6,006,808) was allocated to Goodwill and accordingly, no amortization expenses was included in the December 31, 2003 statement of operations. Depending on the outcome of the outside valuation and using an estimate of a five-year economic lifer for any amounts allocated to amortizable intangible assets, future amortization expense could range from $0 to approximately $1,200,000 per year. -31- RECOVERY OF GOODWILL In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we review goodwill for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of our business enterprise below its carrying value. The impairment test requires us to estimate the fair value of our overall business enterprise down to the reporting unit level. We estimate fair value using both a discounted cash flows model, as well as an approach using market comparables, both of which are weighted equally to determine fair value. Under the discounted cash flows method, we utilize estimated long-term revenue and cash flows forecasts developed as part of our planning process, as well as assumptions of terminal value, together with an applicable discount rate, to determine fair value. Under the market approach, fair value is determined by comparing us to similar businesses (or guideline companies). Selection of guideline companies and market ratios require management's judgment. The use of different assumptions within our discounted cash flows model or within our market approach model when determining fair value could result in different valuations for goodwill. CHANGES IN ACCOUNTANTS On January 23, 2003, our board of directors determined not to further retain Sherb & Co., LLP, Markland's independent accountants for the year ending June 30, 2003. On January 24, 2003, Marcum & Kliegman LLP was engaged as our new independent accountants. Sherb & Co., LLP's reports on Markland's financial statements for the year ended June 30, 2002, the six months ended June 30, 2001 and the year ended December 31, 2000 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principle, except that the opinion on the year ended June 30, 2002, the six months ended June 30, 2001 and the year ended December 31, 2000 financial statements included an explanatory paragraph expressing substantial doubt regarding the Company's ability to continue as a going concern. In addition, during our two most recent fiscal years and through January 23, 2003, there was no disagreement with Sherb & Co., LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with its reports. During the year ended June 30, 2002, the six months ended June 30, 2001 and the year ended December 31, 2000 and through the date hereof, the Company did not consult Marcum & Kliegman LLP regarding any matters or events set forth in Item 304(a)(1)(iv) of Regulation S-B and related instructions. BUSINESS BUSINESS HISTORY Markland Technologies, Inc. is the successor to A. P. Sales Inc., a corporation incorporated in Colorado in 1995. In December 1998, A. P. Sales was dissolved as a Colorado corporation and re-domiciled in Florida under the name Quest Net Corporation. In March 2000, Quest Net acquired CWTel, Inc., a Florida corporation. CWTel filed a voluntary bankruptcy petition in November 2001 and was issued a final decree in March 2002. In March 2001, Quest Net acquired all of the outstanding stock of Vidikron of America, Inc., a Delaware corporation. As a result, Vidikron's sole stockholder, Market LLC, a Cayman Islands limited -32- liability company, became Quest Net's majority stockholder and Vidikron became a wholly-owned subsidiary of Quest Net. Quest Net subsequently changed its name to Markland Technologies, Inc. In order to cure a default in our obligations to Market LLC, we transferred all of our interest in Vidikron to Market LLC in June 2002. As a result, at the end of fiscal 2002 we had no active business operations. In December of 2002, we entered into a transaction with Eurotech, Ltd., ipPartners, Inc., Market LLC, and James LLC. Pursuant to this transaction to following took place: o We formed a subsidiary corporation called Security Technology, Inc. o Eurotech transferred certain rights to its acoustic core technology relating to illiat material detection to our subsidiary. o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners transferred certain rights to their cryptology technologies to our subsidiary. o 90% of the shares of our common stock held by Market LLC and James LLC were retired. o We issued shares of common stock representing 80% of our then issued and outstanding common stock to Eurotech and shares of common stock representing 10% of our then issued and outstanding shares of common stock to ipPartners. o We issued $5,225,000 in stated value of our Series C 5% Cumulative Convertible Preferred Stock to Market LLC and James LLC in satisfaction of $5,225,000 of convertible notes held by Market LLC and James LLC as well as for their agreement to surrender 4,498,638 shares of our common stock. In January 2003, we acquired all the common stock of Ergo Systems, Inc., a company in the business of providing border security logistic support and product development services to the U.S. government. Ergo has a contract with the Department of Homeland Security to maintain, integrate and implement design enhancements to border security systems installed at five U.S. ports of entry San Ysidro, California, Otay Mesa, California, El Paso, Texas, Detroit, Michigan, and Buffalo, New York. In consideration for this acquisition we agreed to pay $400,000 in cash, payable at certain milestones which are related to research efforts. In March 2003, we entered into an agreement to acquire the intellectual property (including patents), equipment, and government contracts for certain gas plasma antenna technology from ASI Technology Corporation. We closed this transaction in September 2003. We paid a purchase price of $150,000 in cash and 283,333 shares of our common stock. In October of 2003, we acquired all of the common stock of Science and Technology Research Corporation, Inc. This company is the producer of the U.S. Navy's Shipboard Automatic Chemical Agent Detection and Alarm System. In consideration for this acquisition we issued 1,539,779 shares of common stock and agreed to pay $900,000 in cash, and issued a promissory note for $375,000. BUSINESS OVERVIEW We have three business areas: chemical detectors, border security and advanced technologies. We focus on providing products, services and emerging technologies to protect our country's borders, infrastructure assets and personnel. Our mission is to build world-class integrated solutions for border systems and threat detection through the expansion of our existing contracts, -33- development of our emerging technologies and acquisition of revenue producing assets. Our primary sources of operating revenue are sales of the Automatic Chemical Agent Detection and Alarm System, border security logistics products and services and SBIR funded research programs in the development of gas plasma antenna technology. In fiscal year 2003 and in the six months ended December 31, 2003, we derived revenue of approximately $546,400 and $440,276, respectively, from our border security products and services, and $112,251 and $79,465 respectively from SBIR research grant performed for the development of gas plasma antenna technology. In the six months ended December 31, 2003 we derived revenue of approximately $2,898,009 from sales of our Automatic Chemical Agent Detection and Alarm System. CHEMICAL DETECTORS In October 2003, our subsidiary, Security Technology, Inc., acquired all of the common stock of Science and Technology Research, Inc., a chemical detector manufacturer, as part of our ongoing business strategy of creating an integrated portfolio of homeland security solutions. We have a contract with the U.S. Navy to be the sole producer of the U.S. Navy's shipboard Automatic Chemical Agent Detection and Alarm System used to detect all classic nerve and blister agents as well as other chemical warfare agent vapors. This is our primary source of operating revenue. Our contract provides that the U.S. Navy may order up to $37,000,000 worth of the Automatic Chemical Agent Detection and Alarm System. To date, our subsidiary STR has recognized approximately $12,000,000 of revenue from this product, and we expect that we will get additional orders on this contract. The U.S. Navy accounted for 81% of our revenue in the 6 months ended December 31, 2003 and 0% in the year ended June 30, 2003. Designed and patented by the U.S. Navy, our system is designed to operate in a shipboard environment and to detect agents at low concentrations in real time while ignoring the presence of common vapor interferents. Our system has visible and audible alarms. The ability of the system to disregard common shipboard interferents, thus minimizing false alarms, distinguishes it from other systems on the market. Our system is designed to be easily upgradeable for new and novel nerve and blister agents. Our system analyzes vapor by the use of two ion-mobility spectroscopy cells, a radioactive source, sealed inside each cell and issued as an ionizer. The operational performance of our shipboard Automatic Chemical Agent Detection and Alarm System has been successfully tested in the field and laboratories against live agents and against various interferents present in shipboard environments. Our shipboard Automatic Chemical Agent Detection and Alarm System can operate approximately three hours on its rechargeable battery box and indefinitely on its 110V AC power cord. We are presently working on the design of a next generation chemical detector product, which will also operate utilizing ion mobility spectography cell technology and provide networked wireless communication capability. On December 23, 2003, the U.S. Navy signed a license agreement with us to transfer certain chemical detection technology intellectual property rights to us. We believe the license will allow us to further expand the applications for the chemical detection technology, and market the technology to non-defense customers such as foreign governments and commercial entities. We expect to continue to manufacture the Automatic Chemical Agent Detection and Alarm System for the U.S. Navy and simultaneously pursue opportunities with the Department of Homeland Security as well as foreign military sales. We recently entered into an international distribution agreement with Tradeways, Ltd, to market and sell Markland's Shipboard ACADA chemical detection systems to foreign militaries to market our product in Argentina, Australia, -34- Austria, Bahrain, Canada, Chile, Croatia, Denmark, Egypt, Estonia, Finland, Greece, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Malaysia, The Netherlands, New Zealand, Norway, Oman, Pakistan, Portugal, Qatar, Saudi Arabia, Spain, Sweden, Taiwan, Turkey, and the United Arab Emirates. To date, we have not sold any products through this channel. BORDER SECURITY We acquired the assets of Ergo Systems, Inc., in January 2003. This acquisition provided us with contracts with the Department of Homeland Security to maintain, integrate, and implement design enhancements to border security systems installed at five U.S. ports of entry: San Ysidro, California, Otay Mesa, California, El Paso, Texas, Detroit, Michigan, and Buffalo, New York. Our system, named the Dedicated Commuter Lane, is part of a larger U.S. Customs and Immigration and Naturalization Service initiative to reduce wait times, improve data accuracy, and improve overall efficiencies at all border crossings for both freight and passengers. The Dedicated Commuter Lane integrates several important security checks. It employs automatic vehicle identification technology, which allows participants to pass through the border crossing more efficiently than without automatic screening. Participants run a card through a swipe card reader, which instantaneously sends patron information, including a photograph, to the inspector's screen for clearance. The gate rises and allows the patron through. The whole process takes about 30 seconds. The Dedicated Commuter Lane software also controls a variety of security subsystems, including video surveillance, gates, and tire shredders. We entered into a contract with Computer Science Corporation to subcontract a portion of their border maintenance services in San Ysidro and Otay Mesa, California from December 2003 to September 2004. Computer Science Corporation is one of three potential contractors for the U.S. VISIT program. We believe that we could benefit by receiving increasing subcontract revenues from that contract, if it is awarded to Computer Science Corporation. We cannot provide any assurance that this contract will be awarded to Computer Science Corporation or that they will subcontract any part of it to us. These systems are part of a larger Department of Homeland Security initiative to increase security, reduce wait times, improve data accuracy, and improve overall efficiencies at all border crossings for both freight and passengers by creating and implementing a "trusted traveler" concept of traffic flow. The "trusted traveler" concept is designed for frequent border crossers who are willing to undergo a background check, and travel under certain restrictions, to have the right to use a dedicated commuter lane. This dedicated commuter lane substantially decreases the amount of time it takes drive through the border. We believe that our experience in integrating solutions will remain attractive to the Department of Homeland Security as it confronts the various issues of protecting our borders although there can be no assurances that the trusted traveler concept will result in an increase in our sales or revenues. -35- ADVANCED TECHNOLOGIES Through research and development as well as intellectual property acquisitions, we have established a portfolio of advanced and emerging technologies, which we intend to commercialize and utilize within our own proprietary products or license out for the purpose of revenue generation. These advanced technologies and intellectual property are as follows: o Gas plasma antenna, o Vehicle stopping system, o Acoustic Core(TM) signature analysis, o APTIS(TM) human screening portal, and o cryptography software. GAS PLASMA ANTENNA: We acquired gas plasma antenna technology assets and a sub-license for plasma sterilization and decontamination from ASI Technology Corporation in August 2003. The assets include three ongoing funded SBIR government contracts and nine issued and pending U.S. patents related to gas plasma antenna technology with demonstrated applications in the fields of ballistic missile defense, phased array radar, and forward deployed decontamination. A plasma antenna's performance equals that of a metal antenna, but the gas plasma antenna is lighter. These antennae can be used for any purpose for which a metal antenna is used. A gas plasma antenna weighs substantially less than metal antenna of comparable performance. When a plasma antenna is turned off, it is transparent, immune to electronic countermeasures and allows other adjacent antennas to transmit or receive without interference. Plasma antenna technology employs ionized gas enclosed in a tube (or other enclosure) as the conducting element of an antenna. This is a fundamental change from traditional antenna design that generally employs solid metal wires as the conducting element. Ionized gas is an efficient conducting element with a number of important advantages over wire. Since the gas is ionized only for the time of transmission or reception, "ringing" and associated effects of solid wire antenna design are eliminated. The design allows for extremely short pulses, important to many forms of digital communication and radars. The design further provides the opportunity to construct an antenna that can be compact and dynamically reconfigured for frequency, direction, bandwidth, gain and beam width. We believe plasma antenna technology will enable the design of antennas that are more efficient, lower in weight and smaller in size than traditional solid wire antennas. We believe our plasma antenna offers numerous advantages over traditional wire antennas including stealth for military applications and higher digital performance in commercial applications. We are developing the plasma technology for military and commercial applications. However, we cannot predict when these products will be ready for commercial or military use. Our gas plasma research team has been awarded US patent # 6,710,746 for a gas plasma antenna element demonstrating re-configurable length. The development of this technology has been funded to date through Small Business Innovative Research grants from the US Navy and Army. The US patent relates to plasma antennas having re-configurable length, beamwidth, and bandwidth. Traditionally, antennas have been defined as metallic devices for radiating or receiving radio waves, or as a conducting wire, which is sized to emit radiation at one or more selected frequencies. As a result, the paradigm for antenna design has heretofore been focused on antenna geometry and physical dimensions. We believe that our gas plasma antenna design will provide design antennas which have greater flexibility and security than conventional antennas. -36- VEHICLE STOPPING SYSTEM: Under a funded government contract, we developed a vehicle stopping system to address the increasing risks of unauthorized and illegal entry into the U.S. Our vehicle stopping system is designed to safely capture vehicles that are trying to gain entry without authorization. Our vehicle stopping system consists of a net, buried beneath the road, that will spring up when a car or truck attempts to speed out of the border illegally. The net is attached to two spindles that unwind with increasing tension as the illegal car is trapped. Our Vehicle Stopping System is capable of stopping a vehicle attempting to gain illegal entry at speeds up to, and exceeding, 65 miles per hour safely and without personal injury to occupants and U.S. government border personnel. The vehicle stopping system was successfully tested in June 2003 at the San Ysidro, California port of entry. As a result, we expect to market the vehicle stopping system to the Department of Homeland Security as well as Department of Defense and local traffic and highway authorities, however, we do not have any purchase commitments for this system. ACOUSTIC CORE(TM): We acquired rights to the the Acoustic Core(TM) technology, as it related to illicit material detection, from Eurotech, Ltd. in December 2002. The Acoustic Core(TM) technology utilizes acoustics sensing and signature analysis technologies to detect a variety of materials. Acoustic Core(TM) is a non-intrusive acoustic remote sensing technology, which exhibits the potential for the automated detection of a large variety of potentially harmful materials such as C4, plastic flare guns, and ceramics. This technology is capable of computerized automatic screening of containers, vehicles and humans. It can detect a broad range of illegal materials at high rates of speed, with low false alarm rates and utilizes low frequency acoustic energy, which is safe for humans. This speed and accuracy makes the technology suitable for primary screening applications where large volumes of containers or humans need to be screened quickly and accurately such as in an airport or at a border crossing. After almost a decade of intensive laboratory and field research, we believe the Acoustic Core(TM) technology has the potential to enter the security marketplace to fill high-priority homeland security needs. Because Acoustic Core(TM) technology can utilize the unique and independent acoustic signatures of various materials, products can be developed and programmed to detect a large array of harmful substances, including explosives, and bio-hazardous and radioactive compounds. We believe that the Acoustic Core(TM) technology can screen large containers while they are in motion such as while they are being transported by cranes, trucks, or railcars. Primary screening of containers in this manner allows for segregation of suspicious containers for secondary screening by a handheld version of the remote sensing products. We completed a project with the U.S. Air Force through a Co-Operative Research and Development Agreement to utilize our proprietary Acoustic Core(TM) technology to inspect cargo. While this contract does not generate revenue for us, we expect to develop the technology into commercially viable products. However, we cannot predict when these products will be ready for commercial or military use. APTIS(TM): We are involved in the design and testing of APTIS(TM), which is an acoustic screening portal that is intended to be used to facilitate screening humans for concealed metallic and non-metallic weapons such as ceramic knives and plastic guns. The technology is very flexible and can be used to safely screen humans for explosives when incorporated into existing entry portal systems such as metal detectors, eliminating the need to replace these systems. Although we continue to develop this prototype, we cannot predict when it will be ready for commercial use. -37- CRYPTOLOGY: We have cryptology assets in the form of cryptographic algorithms and software that are under development for telecommunications and commercial encryption applications. We acquired this technology from Eurotech's subsidiary, Crypto.com, Inc., in December 2002. We believe the need for increased cyber security has never been as critical as at the present time. To meet the fundamental confidentiality, integrity, and availability objectives of computer security, better encryption than currently employed is required to defend against unauthorized access to data and communications. This need for better encryption systems also extends to protection that cannot be decrypted today or in the future, even in the face of much improved computer speed and capacity. Our cryptology provides encryption security and forms the basis for a series of government and commercial, computer and communications security software packages. The standards in the industry use encryption technologies with either secret key or a public/private key encryption method, which becomes part of a system, transmitted to another party for decoding purposes or is stored in password protected electronic files. These secret keys are vulnerable to intruders. Our cryptology is a double cipher, keyless transmission system, with no transmitted key subject to compromise. This is a new class of cryptology that prevents decipher of intercepted messages by powerful methods or computers. Our cryptology software is still under development and not yet ready for commercial sale. We believe that, as decryption methods become more efficient and computing power more available, the current industry standards will become more vulnerable, while requiring more and more bandwidth, to prolong their inevitable compromise. Because of our keyless transmission system, we expect that our cryptology will remain invulnerable to compromise without requiring ever-increasing bandwidth to stay ahead of attacks. Our cryptology is adaptable to telephone conversations, networked systems, private email messages, file transfers, and can be adapted to levels of security appropriate to the communication link. It provides a high level of security available for transmission of large files, email, and graphics, as well as, for important small files such as passwords, credit card information, ID card, and personal authentication. Alpha stage demonstrations of software implementations of our VYN(TM) algorithm for communications, file transfers, passwords, and credit cards have demonstrated the applicability of the mathematical approach to the generation of secure encryption algorithms. Our encryption technology development has proceeded to the stage where it is ready for adaptation to computer operating systems, programming languages, communications protocols, and hardware device drivers. COMPETITION The markets for our products and solutions are extremely competitive and are characterized by rapid technological change as a result of technical developments exploited by competitors, the changing technical needs of the customers, and frequent introductions of new features. We expect competition to increase as other companies introduce products that are competitively priced, that may have increased performance or functionality, or that incorporate technological advances not yet developed or implemented by us. Some of our present and potential competitors may have financial, marketing, and research resources substantially greater than ours. In order to compete effectively in this environment, we must continually develop and market new and enhanced products at competitive prices, and have the resources to invest in significant research and development activities. There is a risk that we may not be able to make the technological advances necessary to compete successfully. Existing and new competitors may enter or expand their efforts in our markets, or develop new products to compete against ours. Our competitors may develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features. New products or technologies may render -38- our products obsolete. Many of our primary competitors are well established companies that have substantially greater financial, managerial, technical, marketing, personnel and other resources than we do. We have certain proprietary technologies, some of which have been developed, and others that are in development. We will focus on our proprietary technologies, or leverage our management experience, in order to differentiate ourselves from these organizations. There are many other technologies being presented to the Department of Homeland Security that directly compete with our technologies. The Department of Homeland Security may pursue solutions different from ours. INTELLECTUAL PROPERTY Our ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We rely primarily on patents and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We own nine U.S. and foreign patents. We enter into confidentiality agreements with our consultants and key employees, and maintain controls over access to and distribution of our technology, software and other proprietary information. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. We may face claims by third parties that our products or technology infringe their patents or other intellectual property rights in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations. RESEARCH AND DEVELOPMENT We did not spend any money on research and development during the fiscal year ending June 30, 2002 because we were not an operating business. During the fiscal year ended 2003, we spent $522,657 on research and development. Our research and development activities consist of projects funded by us and projects funded with the assistance of Small Business Innovative Research (SBIR) grants and SBIR projects are generally directed towards the discovery of specific information requested by the government research sponsor. We believe that focused investments in research and development are critical to our future growth and competitive position in the marketplace. Our research and development efforts are directed to timely development of new and enhanced products that are central to our business strategy. The industries in which we compete are subject to rapid technological developments, evolving -39- industry standards, changes in customer requirements, and new product introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products that improve performance and meet customers' operational and cost requirements. We may be unable to successfully develop products to address new customer requirements or technological changes, and any products we develop may not achieve market acceptance. DEPENDENCE ON GOVERNMENT CONTRACTS For the six months ended December 31, 2003, sales to the U.S. Navy, our largest customer accounted for 81% of our sales. If the Navy terminates this contract or ceases or materially diminishes orders under it, we will lose our primary source of revenue. GOVERNMENT REGULATION Most of our U.S. Government business is subject to unique procurement and administrative rules based on both laws and regulations, including the U.S. Federal Acquisition Regulation that provide various profit and cost controls, rules for allocations of costs, both direct and indirect, to contracts and non-reimbursement of unallowable costs such as interest expenses and certain costs related to business acquisitions, including for example the incremental depreciation and amortization expenses arising from fair value increases to the historical carrying values of acquired assets. Companies supplying defense-related equipment to the U.S. Government are subject to certain additional business risks specific to the U.S. defense industry. Among these risks are the ability of the U.S. Government to unilaterally suspend a company from new contracts pending resolution of alleged violations of procurement laws or regulations. In addition, U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. U.S. Government contracts are, by their terms, subject to unilateral termination by the U.S. Government either for its convenience or default by the contractor if the contractor fails to perform the contracts' scope of work. Upon termination other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and an allowance for profit. Foreign defense contracts generally contain comparable provisions permitting termination at the convenience of the government. To date, none of our significant contracts have been terminated. As is common in the U.S. defense industry, we are subject to business risks, including changes in the U.S. Government's procurement policies (such as greater emphasis on competitive procurement), governmental appropriations, national defense policies or regulations, service modernization plans, and availability of funds. A reduction in expenditures by the U.S. Government for products and services of the type we manufacture and provide, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affect our business. Certain of our sales are direct commercial sales to foreign governments. These sales are subject to U.S. Government approval and licensing under the Arms Export Control Act. Legal restrictions on sales of sensitive U.S. technology also limit the extent to which we can sell our products to foreign governments or private parties. Currently we do not have any sales from overseas customers. -40- SALES AND MARKETING We currently divide the marketing efforts of our products and services into three areas: (1) directly to federal or local government agencies, (2) to large partners who may represent an opportunity for us as subcontractors, and (3) to commercial entities. These marketing duties are divided among upper management. MANUFACTURING Our primary manufacturing facilities are located in Fredericksburg, VA. There are approximately 20 employees n that facility whom produce ACADA shipboard chemical detection equipment. We utilize our offices in Providence, RI and San Diego, CA as manufacturing prototype development facilities. Manufacturing of chemical detectors is overseen by Mr. Edward Kessler and manufacturing of production prototypes is overseen by Mr. Michael Curran. EMPLOYEES As of April 2004, we employed approximately 30 full-time employees. We believe our future success will depend upon the continued service of our key technical and senior management personnel and upon our continued ability to attract and retain highly qualified technical and managerial personnel. None of our employees is represented by a labor union. We have never experienced a work stoppage and consider our relationship with our employees to be good. PROPERTY We have a one year lease for our executive offices of approximately 1,000 square feet located in Ridgefield, Connecticut and a month-to-month lease for a manufacturing facility of approximately 5,000 square feet located in Fredericksburg, Virginia. A six month lease for field support offices in San Diego, CA of approximately 2,000 square feet and an administrative office in Providence, RI which is utilized under a monthly sublease comprising approximately 4,000 square feet. We believe that our present facilities are adequate to meet our current needs. If new or additional space is required, we believe that adequate facilities are available at competitive prices. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Each director serves as director until his successor is duly elected and qualified. Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships between our executive officers and directors. Our executive officers and directors are as follows: NAME AGE POSITION YEAR BEGAN - ------------------------ ----- ---------------------------------- ---------- Robert Tarini........... 44 Chief Executive Officer, Chairman 2002 of the Board of Directors Kenneth Ducey, Jr....... 38 President, Chief Financial Officer 2002 and Director ROBERT TARINI, has served as our chief executive officer since November 14, 2003 and as our chairman of the board of directors since December 9, 2002. In April 2003 Mr. Tarini founded Syquest Inc., a firm which specializes in the design and manufacture of acoustic remote sensing devices utilized in marine and land based applications. In April 2001, Mr. Tarini founded Trylon Metrics Corp., a developer of acoustic remote sensing technology, and acted as President of Trylon from April 2001 to present. In May 2001, Mr. Tarini founded ipPartners Inc. and has served as its President to present. ipPartners Inc. specializes in the development of acoustic remote sensing devices. Since 1999, Mr. Tarini has served as the chief executive officer of Ocean Data Equipment Corporation, where he oversaw the design and development of a complete line of scientific instruments targeted fro geophysical and hydrographic research and developed a remote sensing technique, which is currently being applied to detecting illicit materials. From June 1982 to July 1990, Mr. Tarini worked at Raytheon, where he designed active sonar and sonar trainers for US and foreign customers which were installed onto every 688 class attack submarine and every SQQ-89 surface ship combat system, over 100 seafaring vessels in total. -41- KENNETH P. DUCEY, JR., has served as our president, chief financial officer and member of our board of directors since December 2002. From 1998 to 2002, Mr. Ducey led three small technology companies while working under the venture capital firm, Spencer Trask. Mr. Ducey was responsible for developing new business, typically in a segment in which the company was not yet practicing. In 1988, Mr. Ducey launched Palmtop Utilities, a consulting company that developed the first link between the Sharp Wizard and ACT! Contact management software. Mr. Ducey led Palmtop Utilities to become the largest dealer of Sharp Wizards, and secured licensing arrangements with Sharp, Contact Software International, and Microsoft. After successfully selling the assets of Palmtop Utilities in 1992, Mr. Ducey helped to develop The Outsourcing Institute, where he developed and sold multi-million dollar contracts to MCI and Price Waterhouse Coopers. From 1985 to 1986, Mr. Ducey was a trader at Salomon Brothers where he was responsible for actively traded technology companies listed on the NASDAQ National Market. Mr. Ducey was nationally recognized in September 2000 by Business Week as a leading expert in outsourcing. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS DIRECTOR COMPENSATION We do not, as a standard practice, compensate our directors for their service. However, all of our current directors also serve us as either officers or consultants, and we compensate them for their service in such capacities. In addition, during the last completed fiscal year, we granted David Danovitch, who had been serving as a director, "shares of our common stock, with a fair market value of $" as of the date of grant, in connection with his resignation in November 2002. EXECUTIVE OFFICER COMPENSATION SUMMARY COMPENSATION TABLE The following table provides summary information concerning the compensation earned by our chief executive officer and our other executive officers for services rendered for the fiscal years ended December 31, 2003 and June 30, 2003. Delmar Kintner served as our chief executive officer until November 2003 and Larry Shatsoff served as our Chief Executive Officer until December 9, 2002.
ANNUAL COMPENSATION (1) --------------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (2) COMPENSATION ($) - ------------------------------------------------- ------ ----------- ------------- ---------------- Delmar R. Kintner............................... 2003 $ 120,000 $ 128,051 $ 343,097 (3) Chief Executive Officer 2002 2001 Robert Tarini................................... 2003 $ 120,000 $ 76,667 $ 650,268 (5) Chief Executive Officer and Chairman of the 2002 Board of Directors (4) 2001 -42- Kenneth P. Ducey, Jr. .......................... 2003 $ 180,000 $ 76,667 $ 650,268 President and Chief Financial Officer 2002 2001 Lawrence Shatsoff .............................. 2003 $ 120,000 $ 76,667 $ 5,000 (6) President and Director 2002 2001
- ------------------------ (1) Other than as described in this table or the footnotes to this table, we did not pay any executive officer any compensation, including incidental personal benefits, in excess of 10% of such executive officer's salary. (2) Figures contained in this column reflect the fair market value of stock grants made to each named executive officer during the last completed fiscal year. (3) Under our employment agreement with Mr. Kintner, we were required to issue, over the course of the agreement, a number of shares of our stock equal to 2.27% of the total outstanding shares of equity securities of the company (including common stock issuable upon conversion of our outstanding preferred stock or exercise of outstanding purchase warrants) in five installments. Mr. Kintner's employment with us was terminated on November o, 2003 prior to the expiration of his employment agreement. The figure contained in this column represents the fair market value as of o of the actual number of shares granted to Mr. Kintner as of April ", 2004, less any amounts granted in the last completed fiscal year. (4) Mr. Tarini assumed the rule of Chief Executive Officer upon Mr. Kintner's resignation in November 2003. (5) Under our employment agreements with Messrs. Tarini and Ducey, and our consulting agreement with Verdi Consulting, we were required to issue a number of shares of our stock equal to 2.27% of the total outstanding shares of equity securities of the company (including common stock issuable upon conversion of our outstanding preferred stock or exercise of outstanding purchase warrants), provided certain performance criteria are met. As of January, 2004, all of the performance criteria have been met, and all of the stock grants provided for under these agreements have been made. The figures contained in this column reflect the fair market value of all of the stock granted under these agreements, less any amounts granted in the last completed fiscal year. (6) Cash payment in lieu of a stock grant in connection with resignation of Mr. Shatsoff in December 2002. EMPLOYMENT ARRANGEMENTS ROBERT TARINI. We entered into an consulting agreement with Mr. Tarini in January 2003 whereby he will serve as our chairman and chief executive officer for an initial term of three years at an at a base consulting fee of $10,000 per month. We also agreed to reimburse Mr. Tarini for all reasonable and necessary out-of-pocket expenses related to the performance of his duties under this agreement. Also, we have issued o shares of our common stock . Upon the conclusion of the term of the agreement, Mr. Tarini is eligible to receive a performance-based bonus of up to four times his annual base salary. He is also eligible to participate in any bonus or incentive compensation program established by our board of directors. In the event that we terminate Mr. Tarini's engagement without cause, or Mr. Tarini terminates his engagement for "good reason" (defined in the agreement as, among other things, the assignment of duties inconsistent with Mr. Tarini's position or any material breach by us of the consulting agreement), we will be obligated to continue payments until the earlier of (a) three months from the date of termination or (b) the date on which Mr. Tarini obtains a full-time engagement elsewhere. This agreement also subjects Mr. Tarini's to certain restrictive covenants, including an obligation to maintain confidential information. KEN DUCEY, JR. We entered into an employment agreement with Mr. Ducey in January 2003 whereby he will serve as our president and chief financial officer for an initial term of three years at an annual base salary of $185,000. -43- The agreement also provides for up to $1,200 a month for his expenses, including his automobile, health insurance and reasonable expenses associated with setting up and maintaining a home office. In the event that we terminate Mr. Ducey's engagement without cause, or Mr. Ducey terminates his engagement for "good reason" (defined in the agreement as, among other things, the assignment of duties inconsistent with Mr. Ducey's position or any material breach by us of the consulting agreement), we will be obligated to continue payments until the earlier of (a) three months from the date of termination or (b) the date on which Mr. Ducey obtains a full-time engagement elsewhere. This agreement also subjects Mr. Ducey's to certain restrictive covenants, including an obligation to maintain confidential information. DELMAR R. KINTNER. We entered into an employment agreement with Mr. Kintner in January 2003 whereby he would serve as our chief executive officer for an initial term of one year at an annual base salary of $150,000. The agreement provided for a grant of up to 2.27% of our common stock on a fully-diluted basis provided certain performance criteria were met. It also provided for up to $1,200 a month for his expenses, including his automobile, health insurance and reasonable expenses associated with setting up and maintaining a home office. This agreement was terminated in November 2003. Prior to termination, Mr. Kintner was granted 119,303 shares of our common stock, with a fair market value of ". We are not required under the agreement with Mr. Kintner to provide for any further compensation, including any additional grants of our common stock. EQUITY COMPENSATION PLAN DISCLOSURE The following table sets forth certain information as of June 30, 2003, regarding securities authorized for issuance under our equity compensation plans, including individual compensation arrangements. We issue equity compensation in the form of grants of restricted common stock in connection with various employment and consulting agreements. While the amounts vary by agreement, they are generally structured as an initial grant made upon or after the execution of the agreement, followed by an incentive-based grant made upon the achievement of performance milestones.
WEIGHTED-AVERAGE NUMBER OF SECURITIES NUMBER OF SECURITIES TO EXERCISE PRICE OF REMAINING AVAILABLE FOR BE ISSUED UPON EXERCISE OUTSTANDING FUTURE ISSUANCE UNDER OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS PLANS - --------------------------------------- ----------------------- ----------------- ----------------------- Equity Compensation Plans Approved by Security Holders 0 $0 0 (1) Equity Compensation Plans Not Approved by Security Holders 0 $0 0 (2) ---------------- ---------------- ---------------- TOTAL 0 $0 0 ================ ================ ================
-44- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At the close of business on May 10, 2004, there were issued and outstanding 27,074,899 shares of our common stock. The following table provides information regarding beneficial ownership of our common stock as of May 10, 2004 by: o each person known by us to be the beneficial owner of more than five percent of our common stock; o each of our directors; o each executive officers named in the summary compensation table and three former executive officers; and o all of our current directors and executive officers as a group. The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of shares listed as beneficially owned does not constitute an admission of beneficial ownership. Shares included in the "Right to Acquire" column consist of shares that may be purchased through the exercise of options that vest within 60 days of May 10, 2004.
- ------------------------------------------------------- ----------------------------------------------------------------- SHARES BENEFICIALLY OWNED - ------------------------------------------------------- ----------------------------------------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER (1) OUTSTANDING RIGHT TO ACQUIRE TOTAL PERCENT - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Eurotech, Ltd. (1)................................ 2,034,870 0 2,034,870 7.72% 8665 Sudley Road, #608 Manassas, VA 20110-4588 - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Montana View Corporation (2)...................... 1,350,000 1,250,000 2,600,000 9.87% 4 Shderot Chen Herzlia, Israel - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Caslterigg Master Investments, Ltd. (3) .......... 1,000,000 1,000,000 2,000,000 7.59% 1251 Avenue of the Americas New York, New York 10020 - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- George Yang (4) .................................. 1,539,778 0 1,539,778 5.84% c/o Bruce H. Jurist, Esq. 901 Dulaney Valley Rd., #400 Towson, MD 21204 - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Robert Tarini (5)................................. 1,066,323 -- 1,066,323 4.04% - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Kenneth P. Ducey, Jr.............................. 430,474 -- 430,474 1.63% - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Delmar Kintner (6) ............................... 122,116 -- 122,116 * - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- David Danovitch (7) .............................. 3,334 -- 3,334 * - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- Larry Shatsoff (8) ............................... 1,667 -- 1,667 * - ------------------------------------------------------- ------------------ ----------------- -------------- ------------- All directors and executive officers as a group (3 persons)...................................... 1,618,913 -- 1,618,913 6.14% - ------------------------------------------------------- ------------------ ----------------- -------------- -------------
- ---------------------- * Represents beneficial ownership of less than 1.0%. -45- (1) Information is based on a Schedule 13D/A filed by Eurotech, Ltd. with the Securities and Exchange Commission on October 24, 2003. The Schedule 13D/A states that Eurotech granted Woodward LLC a security interest in 58,333 shares of its common stock as security for the repayment of indebtedness owed to Woodward under three promissory notes in the aggregate principal amount of $120,000. The Schedule 13D/A also states that Eurotech has the sole power to vote these shares. (2) Information is based on a Schedule 13G filed by Montana View Corporation with the Securities and Exchange Commission on April 16, 2004. The Schedule 13G states that Montana View holds a warrant to purchase 1,250,000 shares of our common stock. However, under the terms of the warrant the number of shares to be obtained upon exercise of the warrant cannot exceed the number of shares that, when combined with all other shares of our common stock and securities owned by Montana View, would result in Montana View owning more than 4.99% of our outstanding common stock. (3) Information is based on a 13G filed by Caslterigg Master Investments, Ltd. with the Securities and Exchange Commission on April 29, 2004. (4) Includes 465,116 shares held by the Yang Family Charitable Remainder Trust UA/DTD 12/19/03 Stringner & George Yang TTEES. (5) Mr. Tarini is the beneficial owner of 499,848 shares of common stock issued to iP Partners. (6) Mr. Kintner resigned from our company in November 2003. (7) Mr. Danovitch resigned from our company in December 2002. (8) Mr. Shatsoff resigned from our company in December 2002. DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Article X of our charter provides that, subject to Section 607.0850 of the Florida Business Corporation Act, we will indemnify our officers, directors, former officers and directors against expenses (including attorneys fees), judgments, fines and amounts paid in settlement arising out of his services as our officer or director. Section 607.0850 of the Florida Business Corporation Act states that we have the power to indemnify any person made a party to any lawsuit by reason of being our director or officer against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Our employment agreements with our directors and officers contain provisions requiring us to indemnify them to the fullest extent permitted by Florida law. The indemnification agreements require us to indemnify our directors and officers to the extent permitted by our charter and to advance their expenses incurred in connection with a proceeding with respect to which they are entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. -46- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On December 9, 2002, our subsidiary, Security Technology, Inc., acquired intellectual property and assets relating the Acoustic Core(TM) technology from Crypto.com, Inc., a subsidiary of Eurotech, Ltd. In exchange for the purchased technology, we agreed to issue for 4,498,638 shares of our common stock to Eurotech, Ltd. and ipPartners, Inc. Of the shares issued, 3,998,789 were transferred to Eurotech as payment for causing Crypto.com to deliver to us the purchased technology, and 499,849 were transferred to ipPartners in exchange for their forgiveness and discharge of certain obligations owed to them by Crypto in connection to the property transferred. ipPartners, Inc. is controlled by Robert Tarini, our chief executive officer, however, at the time of this transaction Mr. Tarini was an unrelated third party. After the transaction, Eurotech, Ltd. owned eighty percent (80%) of our outstanding common stock, making us their majority-owned subsidiary. In order to accomplish this transaction, Market LLC and James LLC, our then controlling shareholders, agreed to a recapitalization of the Company whereby Market LLC and James LLC collectively surrendered 4,4498,637 shares of our common stock, and $5,225,000 of convertible promissory notes, in exchange for $5,225,000 in stated value Series C Cumulative Convertible Preferred Stock. As of May 10, 2004, Eurotech owned less than 9% of our outstanding common stock, and all of the outstanding Series C Cumulative Convertible Preferred Stock has been converted and retired. On January 1, 2003, we entered into a three year contract with Verdi Consulting, Inc. to perform services assigned to the consultant by our Board of Directors from time to time. To date Verdi Consulting has assisted us with a variety of tasks including strategic planning; identifying, structuring and closing on acquisitions; finding financing; investor relations; and general business advice. We pay Verdi Consulting $12,500 per month as base compensation and a $1,000 per month expense allowance under this agreement. In addition, as incentive compensation, we issued 315,375 shares of common stock to Verdi Consulting which vested in four installments during calendar 2003 and 115,097 shares which vested on January 1, 2004. Finally, Verdi Consulting is eligible to receive a bonus of up to $1,200,000 if Verdi Consulting is instrumental in assisting us to obtain contracts with a total value in excess of $1,000,000 during the life of the contract. We expect to award Verdi Consulting substantially all of this bonus prior to our fiscal year end. This contract is terminable by us without cause on thirty day's notice. We have agreed to pay Verdi Consulting three month's base compensation if we terminate this contract without cause. During January 2003, we completed our acquisition of Ergo Systems, Inc. from Ocean Data Equipment Corporation, now called Syqwest, Inc. Robert Tarini, our chief executive officer, is also the chief executive officer of Syqwest, Inc. Ergo's main asset consists of an annually renewable U.S. Government General Services Administration contract to provide logistic support and product development for five U.S. ports of entry. In exchange for Ergo we agreed to pay Syqwest $400,000 in cash, due in installments that are triggered with the completion of research milestones. As of April 30, 2004, we have paid Syqwest $176,900 of which $126,900 is an advance representing partial payment for monies that will be due with the completion of the first milestone. On March 27, 2003, we entered into an exchange agreement with Eurotech whereby Eurotech exchanged 1,666,666 shares of our common stock for 16,000 shares of our Series D Cumulative Convertible Preferred Stock. Our Series D Cumulative Convertible Preferred Stock has a stated value of $1,000 per share and has a beneficial conversion feature where each share is immediately convertible into common stock at a discount to market prices. During the past -47- six months we have also issued shares of our Series D Cumulative Convertible Preferred Stock to James LLC. James LLC has invested a total of $3,832,000 in our Series D Cumulative Convertible Preferred Stock. As of May 9, 2004, the Series D Cumulative Convertible Preferred Stock held by James LLC was convertible into 4,128,768 shares of our common stock. On July 24, 2003, we entered into an agreement with Syqwest, Inc., in which we issued 750,000 shares of our common stock in exchange for the forgiveness of $450,000 for unpaid services performed by Syqwest in connection with research conducted in relation to our vehicle stopping technology. Robert Tarini, our chief executive officer is also the chief executive officer of Syqwest. We have the right at any time by written notice to repurchase these shares from Syqwest at a price equal to $.60 per share. In September 30, 2003 we acquired one hundred percent (100%) of the outstanding stock of Science and Technology Research, Inc., which produces our U.S. Navy shipboard automatic chemical agent detection and alarm system product. We paid the stockholder of Science and Technology Research a total of $6,475,000 consisting of $900,000 in cash, common stock valued at $5,100,000, a promissory note of $375,000, and acquisition costs of $100,000. To finance this acquisition we executed a two year, twelve percent (12%), secured Promissory Note with Bay View Capital, LLC for $1,400,000. Bay View Capital is controlled by Robert Tarini, our chief executive officer, and Chad Verdi, a consultant to Markland. The outstanding balance and accrued interest of this note were repaid in full on April, 2004. The Company believes that all transactions described above were made on terms no less favorable to it than would have been obtained from unaffiliated third parties. All future transactions, if any, with its executive officers, directors and affiliates will be on terms no less favorable to it than could have been obtained from unrelated third parties. DESCRIPTION OF SECURITIES Our authorized capital stock consists of 500,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value per share. As of May 10, 2004, we had 27,074,899 shares of our common stock issued and outstanding. COMMON STOCK VOTING. Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. Our common stock does not have cumulative voting rights. Persons who hold a majority of the outstanding common stock entitled to vote on the election of directors can elect all of the directors who are eligible for election. DIVIDENDS. Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors. LIQUIDATION AND DISSOLUTION. In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders. OTHER RIGHTS AND RESTRICTIONS. Our charter prohibits us from granting preemptive rights to any of our stockholders. All outstanding shares are fully paid and nonassessable. LISTING. Our common stock is traded on the over-the-counter bulletin board. -48- PREFERRED STOCK Our articles of incorporation authorize us to issue shares of our preferred stock from time to time in one or more series without stockholder approval. As of May 10, 2004, we had designated 30,000 shares as Series A preferred stock, all of which were issued and outstanding on that date, and 40,000 shares of our preferred stock as Series D Preferred Stock, 19,286 of which were issued and outstanding on that date. The following is a summary description of the principal terms of each series of our preferred stock. For a complete statement of all the terms of each series of preferred stock, please review the applicable certificate of designation that we have previously filed. SERIES A NON-VOTING REDEEMABLE CONVERTIBLE PREFERRED STOCK VOTING RIGHTS: Except as otherwise provided under Florida law, the Series A preferred stock has no voting rights. DIVIDENDS: The Series A preferred stock does not accrue dividends. CONVERSION: Each share of the Series A preferred stock is convertible at our option into 20 shares of our common stock. ANTIDILUTION: Upon the occurrence of a stock split or stock dividend, the conversion rate shall be adjusted so that the conversion rights of the Series A preferred stock stockholders shall be nearly equivalent as practicable to the conversion rights of the Series A preferred stock stockholders prior to such event. REDEMPTION: We may redeem all or any portion of the outstanding shares of the Series A preferred stock upon cash payment of $10.00 per share. DISSOLUTION: In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the Series A preferred stock will be treated as senior only to our common stock. If, upon any winding up of our affairs, and after the Series D preferred stockholders are paid in full, our assets available to pay the holders of Series A preferred stock are not sufficient to permit the payment in full, then all our assets will be distributed to those holders on a pro rata basis. SERIES D CONVERTIBLE PREFERRED STOCK VOTING RIGHTS: Except as otherwise provided under Florida law, the Series D preferred stockholders have no right to vote with the holders of our common stock. However, our charter requires that the Series D preferred stockholders approve any amendment to the rights and preferences of the Series D preferred stock. Where the Series D preferred stockholders do have the right to vote as a class, whether under our charter or pursuant to Florida law, the affirmative vote of the holders of at least 67% of the outstanding shares of Series D preferred stock is necessary to constitute approval. DIVIDENDS: The Series D preferred stock does not accrue dividends. CONVERSION: The Series D preferred stock is convertible at the option of the stockholder at any time. The number of shares of our common stock into which each share of Series D preferred is convertible is determined by dividing $1,000 by the discounted bid price. The "discounted" bid price is the average closing bid price of our common stock during the five business days immediately preceding the conversion date multiplied by the applicable discount factor, as set forth below. -49- AVERAGE CLOSING BID PRICE (1) DISCOUNT FACTOR - ------------------------------------------------------- --------------- $15.00 or less 80% more than $15.00, but less than or equal to $30.00 75% more than $30.00, but less than or equal to $45.00 70% more than $45.00 65% - -------------------- (1) After an adjustment for a 1-for-60 reverse stock split effective October 27, 2003. The Series D preferred stock can be converted only to the extent that the Series D stockholder will not, as a result of the conversion, hold in excess of 9.999% of the total outstanding shares of our common stock. ANTIDILUTION: Upon the occurrence of a transaction that results in a change of control, or a split off of the company assets, or a stock split or stock dividend, the price at which the Series D preferred stock is convertible shall be adjusted so that the conversion rights of the Series D preferred stock stockholders shall be nearly equivalent as practicable to the conversion rights of the Series D preferred stock stockholders prior to the transaction. REDEMPTION: We have the right to redeem any outstanding shares of our Series D preferred stock at any time. The redemption price is equal to $1,000, multiplied by 135%. Our Series D preferred stock is convertible, even after we have provided a notice of redemption, until the Series D stockholder has received full cash payment for the shares we are redeeming. DISSOLUTION: In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the Series D preferred stock will be treated as senior to all preferred stock and our common stock. If, upon any winding up of our affairs, our assets available to pay the holders of Series D preferred stock are not sufficient to permit the payment in full, then all our assets will be distributed to those holders on a pro rata basis. COMMON STOCK PURCHASE WARRANTS WARRANTS ISSUED IN APRIL 2, 2004 PRIVATE PLACEMENT. In our private placement transaction completed on April 2, 2004, we issued common stock purchase warrants to purchase an aggregate of 3,333,333 shares of common stock with an exercise price of $1.00 per share to the investors. In addition, we issued a common stock purchase warrant to purchase 333,333 shares of our common stock with an exercise price of $1.40 per share to West Hastings Ltd. as a finder's fee. These warrants have a so-called "most favored nation" provision pursuant to which the exercise price of the warrants and the terms of the warrants will automatically be changed if we issue warrants with a lower exercise price or with terms more favorable to the holder at any time prior to 180 days after the effective date of a registration statement providing for the resale of shares issuable upon exercise of the warrant. If we issue warrants with a lower exercise price than the warrants we issued on April 2, 2004 during this period, the exercise price of the warrants we issued on April 2, 2004 will be reduced to that new lower price. If we issue warrants with terms more favorable to the warrant holder than the terms set forth in the warrants we issued on April 2, 2004, such new more favorable terms will automatically be incorporated into the April 2 warrants. -50- WARRANTS ISSUED IN APRIL 16, 2004 PRIVATE PLACEMENT. In our private placement transaction completed on April 16, 2004, we issued common stock purchase warrants to purchase an aggregate of 2,500,000 shares of common stock with an exercise price of $1.50 per share to the investors. In addition, we issued a common stock purchase warrant to purchase 25,000 shares of our common stock with an exercise price of $2.00 per share to Baker Consulting as a finder's fee. These warrants have a so-called "most favored nation" provision pursuant to which the exercise price of the warrants will automatically be changed (but only to the extent that such change does not itself cause a change to the warrants we issued on April 2, 2004, on account of the most favored nation clause contained in the April 2 warrants), if we issue warrants with a lower exercise price at any time prior to 180 days after the effective date of a registration statement providing for the resale of shares issuable upon exercise of the warrant. If we issue warrants with a lower exercise price than the warrants we issued on April 16, 2004 during this period, the exercise price of the warrants we issued on April 16, 2004 will be reduced to that new lower price. WARRANTS ISSUED IN MAY 3, 2004 PRIVATE PLACEMENT. In our private placement transaction completed on May 3, 2004, we issued redeemable common stock purchase warrants to purchase an aggregate of 7,098,750 shares of common stock with an exercise price of $1.50 per share to the investors. These common stock purchase warrants are redeemable by us, at any time, after our common stock has a closing bid price of not less than $2.25 per share for 20 consecutive trading days after such effective date for $0.0001 per share; provided that this registration statement, of which this prospectus is a part, has been declared effective by the SEC. These warrants do not have a so-called "most favored nation" clause. All the warrants are exercisable for a period of three (3) years. All of the warrants contain provisions that protect holders against dilution by adjustment of the exercise price in certain events such as stock dividends and distributions, stock splits, recapitalizations, mergers, consolidations, and issuances of common stock below their respective exercise price per share. The terms of the common stock purchase warrants provide that the number of shares to be obtained by each of the holders of the warrants, upon exercise of our common stock purchase warrants cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by each of them, would result in any one of them owning more than 4.99% (or, in some cases, 9.99%) of our outstanding common stock at any given point in time. The holder of a warrant will not possess any rights as a stockholder until the holder exercises the warrant. FLORIDA LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Provisions of Florida law, our charter and by-laws could make it more difficult to acquire us by means of a merger, tender offer, proxy contest, open market purchases and otherwise. These provisions, which are summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms. -51- AUTHORIZED BUT UNISSUED STOCK. We have shares of common stock and preferred stock available for future issuance, in some cases, without stockholder approval. We may issue these additional shares for a variety of corporate purposes, including public offerings to raise additional capital, corporate acquisitions, stock dividends on our capital stock or equity compensation plans. The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us, thereby protecting the continuity of our management. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. SPECIAL MEETING OF STOCKHOLDERS. Our by-laws provide that special meetings may be called only by our board of directors or by holders of not less than 10% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. This provision may make it more difficult for stockholders to take action opposed by our board of directors. AMENDMENT TO OUR BY-LAWS. Section 607.1004 of the Florida Business Corporation Act provides that preferred stockholders have the right to vote as a class on amendments to our charter that would negatively impact their rights or preferences as preferred stockholders of such class, our charter, however, provides that our board of directors has the exclusive authority to alter, amend or repeal them. This provision of our charter may also make it more difficult for stockholders to take action opposed by our board of directors. TRANSFER AGENT The transfer agent and registrar for our common stock is Florida Atlantic Stock Transfer, Inc.. PLAN OF DISTRIBUTION We are registering the shares of common stock on behalf of the selling stockholders. The selling stockholders and any of their pledgees, donees, transferees and successors-in-interest receiving shares from a named selling stockholder after the date of this prospectus may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares and these transactions may or may not involve brokers or dealers. o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; -52- o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The selling stockholders may also sell shares in open market transactions under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this prospectus. Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholder may from time to time pledge or grant a security interest in some or all of the common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933 in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933. The selling stockholders have informed us that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the selling stockholders. Upon being notified by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of our common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Act, disclosing (i) the name of each such selling stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus and (vi) other facts material to the transaction. In addition, upon the company being notified by a selling stockholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed. We are required to pay all fees and expenses incurred by us incident to the registration of the shares of common stock. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments to which such selling shareholders or their respective -53- pledgees, donees, transferees or other successors in interest may be required to make in respect thereof. Any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as amended, may be sold under Rule 144 rather than pursuant to this prospectus. AVAILABLE INFORMATION We are a public company and file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. Copies of the reports, proxy statements and other information may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. This prospectus is part of a registration statement on Form SB-2 that we filed with the SEC. Certain information in the registration statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration statement that are excluded from this prospectus. For further information you may: o read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC's Public Reference Room; or o obtain a copy from the SEC upon payment of the fees prescribed by the SEC. LEGAL MATTERS Foley Hoag LLP of 155 Seaport Boulevard, Boston, Massachusetts 02210 has advised us about the legality and validity of the shares. We know of no members of Foley Hoag who are beneficial owners of our common stock or preferred stock. EXPERTS Our consolidated financial statements as of June 30, 2003 included in this prospectus have been audited by Marcum & Kliegman LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Our consolidated financial statements as of June 30, 2002 included in this prospectus have been audited by Sherb & Co., LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Financial statements as of September 30, 2003 and December 31, 2002 for Science and Technology Research Corporation, Inc. which are included in this prospectus have been audited by Marcum & Kliegman LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. -54- INDEX TO FINANCIAL STATEMENTS
Page ---- REPORT OF INDEPENDENT ACCOUNTS CONSOLIDATED FINANCIAL STATEMENTS FOR MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE YEAR ENDED JUNE 30, 2003 Independent Auditors' Report of Marcum & Kliegman LLP.....................................................F-1 Independent Auditors' Report of Sherb & Co., LLP..........................................................F-2 Consolidated Balance Sheet at June 30, 2003...............................................................F-3 Consolidated Statements of Operations for the Years Ended June 30, 2003 and 2002..........................F-4 Consolidated Statements of Stockholders' (Deficiency) Equity for the Years Ended June 30, 2003 and 2002..................................................................................F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 2003 and 2002..........................F-8 Notes to Consolidated Financial Statements................................................................F-10 UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR MARKLAND TECHNOLOGIES, INC. FOR THE PERIOD ENDED DECEMBER 31, 2003 Condensed Consolidated Balance Sheet at December 31, 2003.................................................F-36 Condensed Consolidated Statement of Operations for the Six Months Ended December 31, 2003 and 2002..............................................................................F-37 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2003 and 2002..............................................................................F-38 Condensed Consolidated Statement of Stockholders' Equity for the Six Months ended December 31, 2003.......................................................................................F-39 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2003 and 2002..............................................................................F-43 Notes to Consolidated Financial Statements................................................................F-45 REPORT OF INDEPENDENT ACCOUNTS CONSOLIDATED FINANCIAL STATEMENTS FOR SCIENCE & TECHNOLOGY RESEARCH, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND THE YEAR ENDED DECEMBER 31, 2002 Independent Auditors' Report of Marcum & Kliegman LLP.....................................................F-59 Balance Sheets............................................................................................F-60 Statements of Operations..................................................................................F-61 Statement of Changes in Shareholder's Equity..............................................................F-62 Statements of Cash Flow...................................................................................F-63 Notes to Consolidated Financial Statements................................................................F-65 Pro Forma Consolidated Financial Statements (Unaudited)
FINANCIAL STATEMENTS MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES Board of Directors and Stockholders Markland Technologies, Inc. and Subsidiaries INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying consolidated balance sheet of Markland Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2003 and the related consolidated statements of operations, stockholders' (deficiency) equity, and cash flows for the year ended June 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Markland Technologies, Inc. and Subsidiaries at June 30, 2003 and the results of their operations and their cash flows for the year ended June 30, 2003, 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 shown in the consolidated financial statements, the Company incurred a net loss of approximately $2,837,000 during the year ended June 30, 2003. As of June 30, 2003, the Company had a working capital deficiency of approximately $1,235,000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Marcum & Kliegman LLP New York, New York September 15, 2003 F-1 Board of Directors and Stockholders Markland Technologies, Inc. and Subsidiaries INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying consolidated balance sheet of Markland Technologies, Inc. and Subsidiaries as of June 30, 2002 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year ended June 30, 2002, the six months ended June 30, 2001 and the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, the consolidated financial position of Markland Technologies, Inc. and Subsidiaries at June 30, 2002 and the consolidated results of its operations and its cash flows for the year ended June 30, 2002, the six months ended June 30, 2001 and the year ended December 31, 2000, 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. The Company has incurred losses in each of the last two fiscal years and as more fully described in Note 2, the Company anticipates that additional funding will be necessary to sustain the Company's operations through the fiscal year ending June 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going-concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Sherb & Co., LLP ---------------- Sherb & Co., LLP Certified Public Accountants New York, New York October 4, 2002 F-2 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 2003
ASSETS ------ CURRENT ASSETS: Cash $ 5,465 Accounts receivable (including $112,251 due from related party) 314,222 Prepaid insurance 22,917 ------------- TOTAL CURRENT ASSETS 342,604 ------------- OTHER ASSETS: Advances on purchase of ASI technology - related party 65,000 Intangible assets - ERGO, net of accumulated amortization of $66,668 333,332 Technology rights (Acoustic Core) 1,300,000 ------------- TOTAL OTHER ASSETS 1,698,332 ------------- TOTAL ASSETS $ 2,040,936 ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable (including $573,100 due to related party) $ 1,441,636 Accrued expenses and other current liabilities 119,270 Note payable 17,004 ------------- TOTAL CURRENT LIABILITIES 1,577,910 SECURED CONVERTIBLE PROMISSORY NOTE, less debt discount of $83,334 416,666 ------------- TOTAL LIABILITIES 1,994,576 ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A redeemable convertible preferred stock - no par value; 30,000 authorized, issued and outstanding at June 30, 2003; liquidation preference of $300,000 300,000 Series B convertible preferred stock - $.0001 par value; 10 authorized and -0- issued and outstanding - Series C 5% cumulative redeemable convertible preferred stock - $.0001 par value; 8,000 - authorized; 5,395 issued and outstanding ; liquidation preference of $5,395,000 1 Series D redeemable convertible preferred stock - $.0001 par value; 40,000 authorized; 16,430 issued and outstanding; liquidation preference of $16,430,000 2 Common stock - $.0001 par value; 500,000,000 authorized; 220,294,405 shares issued and outstanding 22,029 Additional paid-in capital 13,878,442 Unearned compensation (4,381,379) Accumulated deficit (9,772,735) ------------- TOTAL STOCKHOLDERS' EQUITY 46,360 ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,040,936 =============
The accompanying notes are an integral part of these consolidated financial statements. F-3 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, ---------------------------------- 2003 2002 -------------- -------------- REVENUES (including $112,251 of revenues from a related party) $ 658,651 $ -- COST OF REVENUES (including $99,973 of costs incurred to a related party) 445,218 -- -------------- -------------- GROSS PROFIT 213,433 -- -------------- -------------- OPERATING EXPENSES: Selling, general and administrative 1,186,379 247,677 Research & development 522,657 -- Compensatory element of stock issuances for selling, general and administrative fees 2,051,822 -- Amortization of intangible asset 66,668 -- -------------- -------------- TOTAL OPERATING EXPENSES 3,827,526 247,677 -------------- -------------- OPERATING LOSS FROM CONTINUING OPERATIONS (3,614,093) (247,677) -------------- -------------- OTHER EXPENSES (INCOME), NET: Interest expense 226,751 -- Other expense (income), net (5,250) -- -------------- -------------- TOTAL OTHER EXPENSES (INCOME), NET 221,501 -- -------------- -------------- LOSS FROM CONTINUING OPERATIONS (3,835,594) (247,677) -------------- -------------- GAIN (LOSS) FROM DISCONTINUED OPERATIONS: Gain on disposition -- 1,046,133 Gain (loss) from discontinued operations 998,713 (3,259,421) -------------- -------------- TOTAL GAIN (LOSS) FROM DISCONTINUED OPERATIONS 998,713 (2,213,288) -------------- -------------- NET LOSS (2,836,881) (2,460,965) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 -- DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 -- PREFERRED STOCK DIVIDEND - Series C 152,716 -- -------------- -------------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (7,598,852) $ (2,460,965) ============== ============== BASIC AND DILUTED LOSS PER COMMON SHARE: Loss from continuing operations $ (0.03) $ 0.00 Gain (loss) from discontinued operations 0.00 (0.01) -------------- -------------- Net loss $ (0.03) $ (0.01) ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 300,163,421 299,909,179 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-4 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Series A Convertible Series C Convertible Common Stock Preferred Stock Preferred Stock ----------------------------- ---------------------------- ---------------------------- Shares Amount Shares Amount Shares Amount ------------- ------------- ------------- ------------- ------------- ------------- Balance - July 1, 2001 299,909,179 $ 29,990 -- $ -- -- $ -- Write-off of accounts payable-CWTEL -- -- -- -- -- -- Net Loss -- -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------- Balance - June 30, 2002 299,909,179 29,990 -- -- -- -- Stock cancelled in connection with December 9, 2002 exchange agreement (269,918,261) (26,992) -- -- -- -- Stock issued in connection with December 9, 2002 exchange agreement 269,918,261 26,992 -- -- -- -- Conversion of promissory notes and interest into Series C convertible preferred stock -- -- -- -- 5,225 1 Stock issued for directors' compensation, net 300,000 30 -- -- -- -- Stock issued in connection with private placement 6,800,000 680 -- -- -- -- Value assigned to beneficial conversion feature of convertible debt -- -- -- -- -- -- Preferred stock dividend - Series C -- -- -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series C -- -- -- -- -- -- Value allocated to Series C preferred stock - beneficial conversion feature dividend -- -- -- -- -- -- Stock issued in connection with consulting agreement 140,000 14 -- -- -- -- Stock issued in connection with consulting agreements 7,951,706 795 -- -- -- -- Stock issued in connection with employment agreements 5,193,520 520 -- -- -- -- Amortization of consulting agreements -- -- -- -- -- -- Amortization of employment agreements -- -- -- -- -- -- Sale of 170 shares of Series C convertible preferred stock -- -- -- -- 170 -- Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- 30,000 300,000 -- -- Conversion of common stock into Series D convertible preferred stock (100,000,000) (10,000) -- -- -- -- Sale of Series D convertible preferred stock -- -- -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- -- -- Value allocated to Series D preferred stock - beneficial conversion feature dividend -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------- Balance - June 30, 2003 220,294,405 $ 22,029 30,000 $ 300,000 5,395 $ 1 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Series D Convertible Preferred Stock -------------------------- Unearned Shares Amount Compensation ------------ ------------ ------------ Balance - July 1, 2001 -- $ -- $ -- Write-off of accounts payable-CWTEL -- -- -- Net Loss -- -- -- ------------ ------------ ------------ Balance - June 30, 2002 -- -- -- Stock cancelled in connection with December 9, 2002 exchange agreement -- -- -- Stock issued in connection with December 9, 2002 exchange agreement -- -- -- Conversion of promissory notes and interest into Series C convertible preferred stock -- -- -- Stock issued for director's compensation, net -- -- -- Stock issued in connection with private placement -- -- -- Value assigned to beneficial conversion feature of convertible debt -- -- -- Preferred stock dividend - Series C -- -- -- Preferred stock dividend - beneficial conversion feature - Series C -- -- -- Value allocated to Series C Preferred stock - beneficial conversion feature dividend -- -- -- Stock issued in connection with consulting agreement -- -- -- Stock issued in connection with consulting agreements -- -- (4,037,237) Stock issued in connection with employment agreements -- -- (3,573,966) Amortization of consulting agreements -- -- 1,178,002 Amortization of employment agreements -- -- 2,051,822 Sale of 170 shares of Series C convertible preferred stock -- -- -- Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- -- Conversion of common stock into Series D convertible preferred stock 16,000 2 -- Sale of Series D convertible preferred stock 430 -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- Value allocated to Series D Preferred stock - beneficial conversion feature dividend -- -- -- Net loss -- -- -- ------------ ------------ ------------ Balance - June 30, 2003 16,430 $ 2 $(4,381,379) ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Total Additional Stockholders' Paid-in Accumulated (Deficiency) Capital Deficit Equity ------------- ------------- ------------- Balance - July 1, 2001 $ -- $ (5,346,191) $ (5,316,201) Write-off of accounts payable-CWTEL -- 871,302 871,302 Net Loss -- (2,460,965) (2,460,965) ------------- ------------- ------------- Balance - June 30, 2002 -- (6,935,854) (6,905,864) Stock cancelled in connection with December 9, 2002 exchange agreement 26,992 -- -- Stock issued in connection with December 9, 2002 exchange agreement 1,273,008 -- 1,300,000 Conversion of promissory notes and interest into Series C convertible preferred stock 5,224,999 -- 5,225,000 Stock issued for director's compensation, net 2,970 -- 3,000 Stock issued in connection with private placement 339,320 -- 340,000 Value assigned to beneficial conversion feature of convertible debt 125,000 -- 125,000 Preferred stock dividend - Series C (152,716) -- (152,716) Preferred stock dividend - beneficial conversion feature - Series C (501,755) -- (501,755) Value allocated to Series C Preferred stock - beneficial conversion feature dividend 501,755 -- 501,755 Stock issued in connection with consulting agreement 30,386 -- 30,400 Stock issued in connection with consulting agreements 5,214,924 -- 1,178,482 Stock issued in connection with employment agreements 4,413,385 -- 839,939 Amortization of consulting agreements (1,178,002) -- -- Amortization of employment agreements (2,051,822) -- -- Sale of 170 shares of Series C convertible preferred stock 170,000 -- 170,000 Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- 300,000 Conversion of common stock into Series D convertible preferred stock 9,998 -- -- Sale of Series D convertible preferred stock 430,000 -- 430,000 Preferred stock dividend - beneficial conversion feature - Series D (4,107,500) -- (4,107,500) Value allocated to Series D preferred stock - beneficial conversion feature dividend 4,107,500 -- 4,107,500 Net loss -- (2,836,881) (2,836,881) ------------- ------------- ------------- Balance - June 30, 2003 $ 13,878,442 $ (9,772,735) $ 46,360 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-7 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, ------------------------------ 2003 2002 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,836,881) $(2,460,965) (Gain) loss from discontinued operations (998,713) 2,213,288 ------------ ------------ Loss from continuing operations (3,835,594) (247,677) Adjustment to reconcile net loss to net cash used in operating activities: Amortization of intangible asset 66,668 -- Amortization of debt discount 41,666 -- Compensatory stock issuance 2,051,822 -- Changes in operating assets and liabilities: Accounts receivable (314,223) -- Prepaid expenses (1,167) -- Accounts payable 939,774 -- Accrued expenses and other current liabilities 328,170 -- ------------ ------------ NET CASH USED IN CONTINUING OPERATIONS (764,550) (247,677) NET CASH USED IN DISCONTINUED OPERATIONS -- (700,511) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (764,550) (948,188) ------------ ------------ CASH USED IN INVESTING ACTIVITIES: Payments on acquisition of intangible assets - ERGO (126,900) -- Advances on purchase of ASI (65,000) -- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (191,900) -- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Secured line of credit -- 779,531 Proceeds in connection with premium financing agreement 44,000 -- Principal payments relating to premium financing agreement (26,996) -- Proceeds from sale of common stock in private placement 340,000 -- Proceeds from sale of Series C 5% cumulative convertible preferred stock 170,000 -- Proceeds from sale of Series D convertible preferred stock 430,000 -- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 957,004 779,531 ------------ ------------ NET INCREASE (DECREASE) IN CASH 554 (168,657) CASH - BEGINNING OF YEAR 4,911 173,568 ------------ ------------ CASH - END OF YEAR $ 5,465 $ 4,911 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-8 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - ------------------------------------------------- For the Years Ended June 30, ------------------------------ 2003 2002 ------------- ------------ Cash paid during the years for: Interest $ -- $ -- ============= ============ Taxes $ -- $ -- ============= ============ Non-cash investing and financing activities: Conversion of notes payable and accrued interest into preferred stock $ 5,225,000 $ -- ============= ============ Conversion of liabilities from discontinued operations into Series A convertible preferred stock $ 300,000 $ -- ============= ============ Acquisition of technology rights by issuance of common stock $ 1,300,000 $ -- ============= ============ Conversion of common stock into Series D convertible preferred stock $ 10,000 $ -- ============= ============ Deemed dividend preferred stock - beneficial conversion Feature - Series C $ 501,755 $ -- ============= ============ Deemed dividend preferred stock - beneficial conversion Feature - Series D $ 4,107,500 $ -- ============= ============ Accrued Dividends on preferred stock $ 152,716 $ -- ============= ============ Payable on purchase of Ergo $ 273,100 $ -- ============= ============ Secured convertible promissory note debt discount $ 125,000 $ -- ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-9 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS Markland Technologies, Inc. ("Markland" or the "Company"), previously known as Quest Net, was incorporated in Colorado in November 1995, under the name "A.P. Sales Inc." In December 1998, A.P. Sales Inc. dissolved as a Colorado corporation, redomiciled in Florida and changed its name to Quest Net Corp. In March 2000, the Company acquired CWTel, Inc., a Florida-based telecommunication corporation. On November 11, 2001, CWTel filed a voluntary bankruptcy petition under Chapter 7 in the State of Florida. On March 11, 2002, a final decree was issued, the trustee discharged and the case closed. On March 15, 2001, the Company acquired all of the outstanding capital stock of Vidikron of America, Inc. ("Vidikron") As a result of this acquisition, the sole stockholder of Vidikron, Market LLC, controlled a majority of the common stock of the Company and, accordingly, the transaction was accounted for as a reverse acquisition and as a recapitalization of Vidikron, pursuant to which Vidikron was treated as the accounting acquirer. Accordingly the historical financial statements are those of Vidikron. Vidikron became a wholly-owned subsidiary of the Company. Subsequently, Quest Net changed its name to Markland Technologies, Inc. and Vidikron adopted the year-end of Quest Net. On May 28, 2002, the Company received a notice of default from Market LLC relating to a loan and security agreement and a related secured convertible revolving credit note due to the Company's failure to make payments of principal and interest due under the note. In addition, as a result of the defaults under the note, Market LLC declared all outstanding principal and interest under the note, totaling $4,213,300, to be immediately due and payable. In June of 2002, all of the shares of the Vidikron subsidiary, including all of its operating assets and liabilities, were transferred to Market LLC in partial satisfaction of the indebtedness due Market LLC of $50,000. As a result, the Company had no active business following such event. The assets and liabilities and operating results of Vidikron have been treated as a discontinued operation in the accompanying consolidated financial statements. On November 21, 2002, Security Technology, Inc. ("STI") was incorporated as a Delaware C corporation and became a wholly-owned subsidiary of Markland Technologies, Inc. On December 9, 2002, the Company, Eurotech Ltd. ("Eurotech"), ipPartners, Inc. ("ipPartners")- a related party, Market LLC and James LLC, entered into an exchange agreement ("Exchange Agreement"). On December 19, 2002, the transactions contemplated by the Exchange Agreement were consummated. Pursuant to the Exchange Agreement, Eurotech transferred to the Company certain rights to Eurotech's Acoustic Core technology, relating to illicit materials detection, and certain cryptology technology. 90% of the Company's issued and outstanding common stock held by Market LLC and James LLC, the holders of 100% of the issued and outstanding common stock of the Company, was retired. The Company issued 239,927,344 shares of common stock, representing approximately eighty percent (80%) of its outstanding common stock, to Eurotech, and 29,990,917 shares of common stock, representing approximately ten percent (10%) of its outstanding common stock, to ipPartners. As a result of this transaction, a change of control occurred and the Company became an 80%-owned subsidiary of Eurotech (see Note 4). F-10 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS (Continued) In January 2003, the Company acquired all of the common stock of Ergo Systems, Inc., a provider of security logistic support and related product development services (see Note 4). As a result of the technology acquired from Eurotech in December 2002, and the acquisition of Ergo Systems, Inc. in January 2003, Markland Technologies, Inc. plans to build a comprehensive offering of integrated security technologies and services to provide tools necessary to protect personnel, data and infrastructure assets as part of Homeland Security. Markland provides end-to-end solutions to the Department of Homeland Security ("DHS") by bringing together and integrating innovative technologies that currently exist in Universities, small companies, and large defense contractors. Markland has proprietary technologies and existing government contracts they leverage to provide these solutions. Markland's principal end customer is the United States Government. NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, for the year ended June 30, 2003, the Company incurred a net loss from continuing operations of $3,835,594 and had a working capital deficiency of $1,235,306. The Company has limited finances and requires additional funding in order to market and license its products. There is no assurance that the Company can reverse its operating losses, or that it can raise additional capital to allow it to continue its planned operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. During the year ended June 30, 2003, the Company funded its operations primarily from proceeds of $340,000 received from a private equity financing of 6,800,000 shares of the Company's common stock and the sale of 170 shares of Series C preferred stock for $170,000. In addition, during the year the Company sold 430 shares of Series D preferred stock for $430,000. During the second half of the year ended June 30, 2003, the Company produced revenues from operations of $658,651 as shown in the consolidated statements of operations. The Company's ability to continue as a going concern remains dependent upon the ability to obtain additional financing or through the generation of positive cash flows from continuing operations. These financial statements do not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary as a result of the above uncertainty. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Security Technology, Inc. ("STI"), and Ergo Systems, Inc. ("Ergo"). All significant inter-company balances and transactions have been eliminated in consolidation. F-11 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Cash and Cash Equivalents - ------------------------- For purposes of the consolidated statement of cash flows, the Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. At June 30, 2003, the Company had no cash equivalents. Accounts Receivable - ------------------- The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change. The Company has not experienced any losses in accounts receivable and has provided no allowance at June 30, 2003. Concentration of Credit Risk - ---------------------------- Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information about Financial Instruments With Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", requires disclosure of any significant off-balance-sheet and credit risk concentrations. The principal financial instrument that potentially subjects the Company to concentrations of credit risk is accounts receivable. The majority of the Company's revenues and accounts receivable are derived from an agency associated with the U.S. Government and a related party who are both not required to provide collateral for amounts owed to the Company. The Company does not believe that it is subject to any unusual credit risks, other than the normal level of risk attendant to operating its business. For the year ended June 30, 2003, two customers accounted for 83% and 17% (a related party) of total revenues, respectively. At June 30,2003, these two customers accounted for 64% and 36% (a related party) of accounts receivable, respectively. For the year ended June 30, 2002, there were no revenues or accounts receivable from either of these customers. F-12 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Research and Development - ------------------------ Research and development ("R&D") costs are charged to expense as incurred. The Company capitalizes costs related to acquired technologies that have achieved technological feasibility and have alternative uses. Acquired technologies, which are in-process at the date of acquisition or have no alternative uses are expensed as research and development costs. Included in research and development costs for the year ended June 30, 2003 is $300,000 payable to Syquest, a related party, for development costs related to a vehicle stopping technology (see Note 5). Fair Value of Financial Instruments - ----------------------------------- Management believes the carrying amounts reported in the consolidated balance sheets for cash, receivable and payment amounts and accrued expenses approximate fair value because of the short maturity of these financial instruments. The Company also believes that the carrying amounts of its secured convertible promissory note approximates fair value, as the interest rates approximate a rate that the Company could have obtained under similar terms at the balance sheet date. Loss Per Share - -------------- Basic net loss per common share has been computed based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of a secured convertible promissory note, Series A and D Convertible preferred stock and Series C 5% Cumulative Convertible preferred stock, discussed in the notes to consolidated financial statements, were not included in the calculation of the diluted loss per share because their inclusion would have had the effect of decreasing the loss per share otherwise computed. At June 30, 2003, as permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretation including Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. No stock-based employee compensation cost is reflected in operations, as there are no options outstanding. F-13 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Long Lived Assets - ----------------- Intangible Assets are stated at cost less appropriate valuation allowances and accumulated amortization. Amortization is provided on the straight-line method from the date the respective asset is placed into service until the shorter of the estimated useful life of the asset or the respective term of the related contracts or agreements. As of June 30, 2003, total amortization expense recorded by the Company amounted to $66,668. Impairment of Long-Lived Assets - ------------------------------- Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators or impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company's policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. Income Taxes - ------------ The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Reclassifications - ----------------- Certain prior year balances have been reclassified to conform to the current year presentation. F-14 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of Recently Issued Accounting Standards - ---------------------------------------------- In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in APB No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent that meets the criteria for classification as an extraordinary item. The Company adopted SFAS No. 145 in the first quarter of fiscal 2003. The adoption of the standard did not have a material impact on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. These costs include lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement. A fundamental conclusion reached by the FASB in this statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the standard did not have a material impact on the financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of WHEN-ISSUED securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The adoption of SFAS No. 149 is not expected to have an impact on the Company's' financial statements. F-15 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of Recently Issued Accounting Standards (Continued) - ---------------------------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of SFAS No. 150 will have on its results of operations and financial condition. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The Company adopted FIN 45 as of December 31, 2002 and during the quarter ended March 31, 2003. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its results of operations and financial condition. Revenue Recognition - ------------------- The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement, such as agreements, purchase orders or written requests, exists; 2) delivery has been completed and no significant obligations remain; 3) the Company's price to the buyer is fixed or determinable; and 4) collection is probable. The Company recognizes revenues at the time services are performed related to border security logistic support. F-16 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition (continued) - ------------------- During the year-ended June 30,2003, the Company produced revenues from contracts with the Department of Homeland Security("DHS") and ASI, a related party, to provide the following services: Engineering services related to the design and implementation of improvements to U.S. ports of entry, as well as, through the maintenance of booths at these ports of entry. ($423,013 for the year-ended June 30, 2003) Sale of Dedicated Commuter Lane ("DCL") transponders to the DHS. ($79,025 for the year ended June 30, 2003) Installation of the Vehicle Stopping System at a U.S. port of entry.($44,362 for the year ended June 30, 2003) Contract with related party to provide Plasma Antenna Device Research ($112,251 for the year ended June 30, 2003) NOTE 4 - TECHNOLOGY ACQUISITIONS Acoustic Core(TM) Technology - ---------------------------- On December 9, 2002, in connection with the Exchange Agreement dated as of December 9, 2002, by and among Eurotech, the Company, Crypto.com, Inc., ("Crypto" - a wholly-owned subsidiary of Eurotech), Security Technology, Inc. ("STI"), ipPartners, Inc., Market LLC and James LLC (the "Exchange"), Eurotech and Crypto agreed to license and transfer certain intellectual property to a newly-formed subsidiary of the Company, STI, in exchange for 239,927,344 shares of the Company's newly issued common stock (the "Exchange Shares"). The Exchange Shares constitute 80% of the Company's outstanding common stock making the Company a majority-owned subsidiary of Eurotech. Subsequent to year end the Company is no longer a majority-owned subsidiary of Eurotech due to the issuances of additional common stock. In addition, as part of the agreement, ipPartners was issued 29,990,917 shares of common stock in exchange for their forgiveness and discharge of certain obligations owed to ipPartners with respect to the property transferred to STI. Eurotech is a development-stage, Washington, D.C.-based, technology company, whose common stock is registered under the Exchange Act. Prior to the Exchange, Market LLC and James LLC controlled the Company. In connection with the Exchange, on December 9, 2002, the Company, Market LLC and James LLC agreed to a recapitalization of the Company, whereby $5,225,000 in stated value of a new series of preferred stock, designated Series C 5% Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") was issued by the Company, in exchange for $5,225,000 of convertible promissory notes, inclusive of accrued interest, as well as, for the agreement by James LLC and Market LLC to collectively surrender 269,918,261 shares of the Company's common stock prior to the consummation of the above Exchange agreement between the Company and Eurotech, among others. F-17 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued) Acoustic Core(TM) Technology (Continued) - ---------------------------- The rights licensed from Eurotech in the Exchange consist of certain proprietary technology known as Acoustic Core used to detect illicit substances, and certain cryptology technology held by Eurotech's subsidiary, Crypto. Since Eurotech owned 80% of the common stock of the Company on December 9, 2002, the technology acquired from Eurotech was recorded by the Company at Eurotech's carrying value of $1,300,000. Eurotech had purchased the rights to such technologies in 2001. The Company's technical employees and advisors concluded that as of December 2002, the Company has established technological feasibility for its ultimate security product to be marketed. Additional development services and testing are necessary to complete the product development. The Company will begin to amortize this asset over the economic useful life of five years when the technology is available for general release to its customers. The Company is engaged in a project with the U.S. Air Force to evaluate the Acoustic Core(TM) technology for use in the inspection of cargo. The technology utilizes acoustic waves to detect illicit materials and density changes. In addition, the Company is in the process of adapting such technology for use in the detection of concealed weapons on persons that cannot be detected by traditional metallic screeners. Acquisition of Ergo Systems, Inc. - --------------------------------- On January 14, 2003, the Company completed the acquisition of Ergo, a Virginia corporation from Ocean Data Equipment Corporation, a Delaware corporation ("ODEC") now called Syqwest, Inc.("Syqwest"). The Chairman of the Company is also the Chief Executive Officer of Syqwest. The Company agreed to pay Syqwest $400,000 in cash, payable without interest over a period of one year. This purchase price was later modified to require $50,000 due at closing, $150,000 due upon the completion of Phase I research efforts as they relate to the advancement of Acoustic Core technology in the inspection of cargo containers (of which $126,900 has been advanced to Syqwest as of June 30, 2003), $100,000 due upon completion on Phase 2 research efforts as they relate to cargo inspection, and a final payment of $100,000 due upon completion of Phase 3 research efforts as they relate to cargo inspection. At June 30, 2003, the Company was still in Phase 1 of this project (see Note 14c). The funds for this acquisition are expected to come from operating capital and future earnings. Ergo's assets consist of a U.S. Government General Services Administration contract to provide border security logistic support and product development services to the United States Government and related unpatented technology. The Company will continue to provide these support services to five U.S. Border ports of entry in the states of California, Texas, Michigan and New York. The government contract is renewable annually, unless cancelled by either party. F-18 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued) Acquisition of Ergo Systems, Inc. (Continued) - --------------------------------- The purchase price of $400,000 was allocated entirely to this contract. The contract is being amortized over a three-year period commencing with the date of the acquisition, January 14, 2003. Amortization expense related to the contract for the year ended June 30, 2003 was $66,668. Future amortization expense to be incurred on this contract is as follows: Years Ending June 30, Amount ----------- ---------- 2004 $ 133,336 2005 133,336 2006 66,660 ---------- $ 333,332 ========== The following summarized proforma (unaudited) information assumes the acquisition had occurred on July 1, 2001. For the Year For the Year Ended Ended June 30,2003 June 30,2002 ------------ ------------ Revenue $ 1,253,547 $ 729,896 Loss from continuing operations (4,050,099) (255,955) Gain (loss) from discontinued operations 998,713 (2,213,288) Net loss $(3,227,716) $(2,405,765) Loss per share $ (0.03) $ (0.01) Note: Results of operations of Ergo is included in consolidated financial statements commencing January 14, 2003 F-19 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued) Acquisition of Ergo Systems, Inc. (Continued) - --------------------------------- At June 30, 2003, the Company owes ODEC $273,100 related to the purchase of Ergo's assets. This liability is included in Accounts payable in the accompanying consolidated balance sheet (see Note 5). Agreement to Acquire ASI Technology Corporation Assets - ------------------------------------------------------ On March 19, 2003, the Company and ASI Technology Corporation, a Nevada corporation, ("ASI") entered into a Technology Purchase Agreement (the "Agreement"). Under the Agreement, ASI agreed to sell and the Company agreed to purchase certain assets relating to ASI's gas plasma antenna technology, including patents, patent applications, equipment, government contract rights and other intellectual property rights. The Chief Executive Officer of the Company was a significant employee of ASI during the two years prior to this agreement. The closing of the transaction will occur on the earlier of the date the last of the government contracts are assigned to Markland or ninety days after the date of the Agreement (June 17, 2003). The transaction did not close as of June 30, 2003 and management believes that it will close during the quarter ending December 31, 2003. No assurance can be given that the transaction will close. Under an interim arrangement, the Company will receive revenues from these contracts billed for periods after April 1, 2003 and will be obligated for all related costs. Markland has agreed to use its best efforts to manage and administer the contracts during this period prior to closing and to pay ASI a fee of $2,500 per month for administrative support. These fees amounted to $7,500 as of June 30, 2003. In consideration, the Company agreed to pay ASI $1,000,000, of which $150,000 is payable in cash, $10,000 of which was paid on execution of the Agreement and $10,000 of which is payable every thirty days following the date of execution of the Agreement until the closing, at which time the remaining balance is due and payable. In addition to the cash payment, the Company is required to issue to ASI, on closing, $850,000 worth of the Company's common stock at the then current market price (see Note 14 b). In the event that the Company fails to register such stock on behalf of ASI, or if a registration statement for the shares is delayed, the Company will have to issue an additional $150,000 worth of common stock to ASI. In connection with the Agreement, ASI and the Company entered into a registration rights agreement entitling ASI to include its shares of the Company's common stock in future registration statements filed by the Company under the Securities Act of 1933 in connection with public offerings of the Company's common stock. Also in connection with the Agreement, ASI and the Company entered into a sublicense agreement pursuant to which ASI has sublicensed to the Company the right to develop and sell products to certain government, military and homeland security customers in the United States and Canada using the Company's plasma sterilization and decontamination technology. Markland has agreed to pay ASI $5,000 per month for these rights for a period of 24 months, of which $20,000 has been paid to ASI under this agreement and is included in selling, general and administrative expenses for the year ended June 30, 2003. F-20 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - TECHNOLOGY ACQUISITIONS (continued) Agreement to Acquire ASI Technology Corporation Assets (continued) - ------------------------------------------------------ The closing of the purchase of the plasma antenna technology is subject to a number of conditions and the Agreement may be terminated prior to closing under certain circumstances. As of June 30, 2003, the Company has made total payments of $65,000 to ASI in connection with the Agreement, which was included in Advances on Purchase of ASI Technology in the accompanying consolidated balance sheet. As of June 30, 2003, this agreement has not yet been finalized. For the year ended June 30, 2003, the Company had total revenues of $112,251 and costs of revenues of $99,973 from this contract.(excludes administrative support and license fees) NOTE 5 - ACCOUNTS PAYABLE Included in accounts payable at June 30, 2003 are the following expenses: Research & Development costs - related party $ 300,000 Research & Development costs 222,657 Ergo purchase - related party (Note 4) 273,100 Border security logistics costs 207,229 Dividends payable 152,716 Legal and professional fees 131,243 General and administrative expenses 110,855 Sales and marketing expenses 43,836 ----------- $1,441,636 =========== NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Included in accrued expenses and other current liabilities at June 30, 2003 are the following expenses: Accrued border security logistics costs $ 72,520 Accrued expenses - other 30,000 Accrued Interest 16,750 ---------- $ 119,270 ========== F-21 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 -LINES OF CREDIT Secured Line of Credit - ---------------------- On May 28, 2002, the Company received a notice of default from its secured lender, Market LLC, relating to a loan and security agreement and a related secured convertible revolving credit note, due to the Company's failure to make payments of principal and interest due under the note. As settlement for this default, on June 4, 2002, the Company entered into a Debt Restructuring Agreement, whereby the Company agreed to transfer legal title to the Vidikron shares to the lender in partial satisfaction of the indebtedness in the amount of $50,000. In addition, on June 4, 2002, the Company entered into an Amended Secured Convertible Revolving Credit Note Agreement, whereby the Company could borrow up to $4,500,000. Interest under this agreement accrued at the annual interest rate of 6% per annum. The maturity date of this amended note was December 31, 2002 and was secured by various liens on the Company's assets. The balance outstanding at the date of this agreement was $4,163,300. On December 9, 2002, as part of the Company's recapitalization, in accordance with the Exchange Agreement entered between the Company and Market LLC, $3,812,000 representing principal and accrued interest under this line of credit was converted into 3,812 shares of the Company's newly issued Series C 5% Cumulative Convertible Preferred Stock (see Note 9). On December 10, 2002, the Company entered into a Restated and Amended Secured Convertible Revolving Credit Note Agreement for $500,000. Interest under this note accrues at the annual interest rate of 6% per annum. The principal and accrued interest under this note is due on June 30, 2004, however, may be prepaid by the Company at any time without penalty. As of June 30, 2003, approximately $16,750 of interest has been accrued on this note and is included in accrued expenses on the consolidated balance sheet. The note may be converted at any time, in whole or in part, into shares of the Company's common stock. The total number of shares of common stock issuable upon conversion will be determined by dividing the principal amount of this note being converted by 80% of the closing bid price of the common stock based on the average of the five trading days immediately preceding the date of conversion. The value of the beneficial conversion feature of $125,000 is being amortized as interest expense over the period ending June 30, 2004. Amortization of this debt discount for the year ended June 30, 2003 was $41,666. New Equity Line - --------------- On September 10, 2003 Markland entered into a Private Equity Credit Agreement with Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue and sell to Brittany up to $10,000,000 worth of its common stock over the next three years. Prior to any sales, the Company is required to file a registration statement with the Securities and Exchange Commission, relating to the shares to be issued, and to have such registration statement declared effective. F-22 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - SECURED LINE OF CREDIT (CONTINUED) New Equity Line (continued) - --------------- After the registration statement is declared effective, Markland would be able to put shares to Brittany according to the terms outlined in the agreement. The minimum put amount is $1,000,000 over the life of the agreement and $25,000 per put. Failure to satisfy the minimum put requirement over the life of the Private Equity Credit Agreement will result in a charge to Markland. Shares will be issued to Brittany, in connection with each put, at 92% of the average of the closing bid prices for the lowest (3) three (not necessarily consecutive) trading days during the (10) trading day period immediately following the put date. Under certain conditions, the Company will be required to issue additional shares and/or accrue financial penalties. There can be no assurances that the Company will receive any proceeds from this agreement. NOTE 8 - NOTES PAYABLE At June 30, 2002, notes payable consisted of a convertible note payable of $1,367,027, due to James LLC, which bore interest at 8% per annum. Principal and any accrued interest were due on December 31, 2002. The note payable was convertible into shares of common stock of the Company at a conversion price for each share of common stock equal to the current market price on the date of notice of conversion. On December 9, 2002, in accordance with the Exchange Agreement between the Company and James LLC, $1,413,000, including accrued interest of $45,973, was converted into 1,413 shares of the Company's newly issued Series C 5% Cumulative Convertible Preferred Stock in full settlement of the note (see Note 9). On December 4, 2002, the Company entered into a note payable agreement with Market LLC for the principal amount of $11,500. Principal, together with interest, which accrued at the rate of 10% per annum, were both due upon demand. This note was paid-off in full on March 6, 2003. In December 2002, the Company acquired one-year Directors and Officers Life Insurance Policy, effective December 9, 2002 through December 9, 2003. Terms include an option to extend the policy for an additional year at 200% of the current year's annual premium amount, which is $55,000. The Company is amortizing such amount into selling, general and administrative expense on a straight-line basis. At June 30, 2003, the total un-amortized premiums included in "prepaid insurance" in the accompanying consolidated balance sheet amounted to $22,917. F-23 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - NOTES PAYABLE (Continued) On December 31, 2002, the Company entered into a premium financing agreement with a lending institution to finance the aforementioned policy. Under the terms of the agreement, the Company made an initial payment of $11,000 and commencing January 2003, is required to make 10 additional monthly installment payments of $4,549, which includes principal and interest of 7.33% per annum. As of June 30, 2003, the Company has total principal outstanding under this note in the amount of $17,004, which is included in Note Payable in current liabilities in the accompanying consolidated balance sheet. NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY Preferred Stock - --------------- The Company is authorized to issue five million shares of preferred stock which may be issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined by the Board of Directors. Series A Non-Voting Redeemable Convertible Preferred Stock - ---------------------------------------------------------- On February 25, 2000, the Company entered into a Stock Purchase Agreement, effective March 1, 2000 to purchase CWTel, Inc. from Charles Wainer for the sum of $1,200,000. Of the purchase price $200,000 was paid at closing, $700,000 was paid by the issuance of 360,000 shares of the Company's restricted common stock and $300,000 was to be paid in three equal payments at 90 days, 180 days, and 270 days from closing. These payments were represented by a promissory note in the amount of $300,000, which were included in liabilities from discontinued operations at June 30, 2002 and were collateralized by 30,000 shares of Series A Non-Voting Redeemable Convertible Preferred Stock ("Series A Preferred Stock"). During the year ended June 30, 2003, the Company issued these shares to Charles Wainer pursuant to the stock purchase agreement in settlement of their obligation under this promissory note. The Series A Preferred Stock has no par value, is non-voting and has a stated value of $10 per share. The Preferred Stock is convertible at any time at the option of the Company, and cannot be converted by the holder. This stock is convertible at the rate of twenty (20) shares of common stock for each share of Series A Preferred Stock. This conversion rate may be adjusted at any time by the Company as a result of either the sale of the Company or as a result of a stock split or stock dividend that is issued by the Company while these shares remain outstanding. The Company shall have the right, but not the obligation to, at any time after the issuance of these shares to redeem all or any portion of the outstanding shares of Series A Preferred Stock from the holder in cash at the stated value of $10 per share by sending notice to the holder. The Series A Preferred Stock has a liquidation preference of $10 per share. This stock does not accrue dividends. F-24 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued) Series B Convertible Preferred Stock - ------------------------------------ On March 16, 2001, the Company issued 10 shares of its Series B convertible preferred stock to Market LLC in connection with the acquisition of Vidikron. The preferred stock was convertible into approximately 85% of the Company's outstanding common stock, on a non-diluted basis upon the effectiveness of a reverse stock split of the Company's outstanding common stock. The reverse stock split was effective June 21, 2001. The automatic conversion resulted in the Company's issuance of an aggregate of 254,911,356 shares of the Company's common stock to Market LLC on that date. As of June 30, 2003, there are no shares of Series B Preferred Stock issued and outstanding. Series C 5% Cumulative Redeemable Convertible Preferred Stock - ------------------------------------------------------------- On December 9, 2002, the Company entered into an Exchange Agreement, among the Company and Market LLC and James LLC who agreed to exchange their convertible notes payable in the amount of $3,812,000 and $1,413,000, respectively ($5,225,000 in value), inclusive of accrued interest for 5,225 shares ($1,000 stated value) of the Company's newly issued Series C Preferred Stock. The Series C Preferred Stock is non-voting and has a liquidation preference of $1,000 per share. The holders of the Series C Preferred Stock are entitled to receive dividends on each share of preferred stock, which shall accrue on a daily basis at the rate of 5% per annum on the sum of the liquidation preference plus all accumulated and unpaid dividends thereon. These dividends shall accrue whether or not they have been declared or there are legally available funds with which to pay them, and at the option of the holders are payable either in cash or in unrestricted common stock. During February 2003, the Company sold an additional 170 shares of Series C Preferred Stock to James LLC for $170,000. The Series C Preferred Stock is redeemable at any time by the Company, and cannot be converted by the holders without written permission for a period of 6 months following the issuance of the shares and then only 10% may be converted per month thereafter. The Series C Preferred Stock is convertible at the option of the holder at a conversion price ranging from 65% to 80% of the common stock's market price at the time of the conversion, subject to an adjustment pursuant to any stock split. The amount of the associated discount is dependent upon the market price at the time of the conversion. F-25 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued) Series C 5% Cumulative Redeemable Convertible Preferred Stock (Continued) - ------------------------------------------------------------- In accordance with EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," the Company calculated that as of the date of issuance there was a beneficial conversion feature in the amount of $1,367,821. The Company has recorded deemed dividends of $501,755, for the year ended June 30, 2003, relating to the accretion of these beneficial conversion features on the Preferred Stock. The deemed dividends increase the loss applicable to common stockholders in the calculation of basic and diluted net loss per common share and are included in stockholders' equity as a charge to accumulated deficit and a credit to additional paid-in capital. As the Series C Preferred Stock is convertible in stages over a period of 16 months, the Company will record the accrual of the deemed dividend of the beneficial conversion feature over this same period. In addition, the Company has determined that the maximum potential exposure under the beneficial conversion feature using the assumptions that the fair market value is $0.15 at the date of conversion and accordingly a conversion price at 65% of market value should be used, amounts to approximately $2,800,000. For the year ended June 30, 2003, dividends of $152,716 were accrued for the Series C Preferred Stock. The holders are not subject to any limitations on the number of conversions of Series C Preferred Stock or subsequent sales of the corresponding common stock that they can effect, other than a prohibition on any holder having a beneficial ownership of more than 9.999% of the outstanding shares of the Company's common stock. Series D Redeemable Convertible Preferred Stock - ----------------------------------------------- On June 17, 2003, the Company issued to Eurotech 16,000 shares of Series D Redeemable Convertible Preferred Stock in exchange for 100 million shares of the Company's common stock. The Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") has a stated value of $1,000 per share, and a total liquidation value of $16 million. These shares are non-voting and do not accrue dividends. The Series D Preferred Stock is convertible into shares of the Company's common stock at a variable percentage of the then current market price, subject to certain adjustments. If the market price of Markland common stock is less than or equal to $0.25, it is convertible at 80% of the market price. If the market price is greater than $0.25, but less than or equal to $0.50, it is convertible at 75% of the market value. If the market price is greater than $0.50, but less than or equal to $0.75, it is convertible at 70% of the market price. And if the market price is greater than $0.75, it is convertible at 65% of the market price. F-26 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued) Series D Redeemable Convertible Preferred Stock (Continued) - ----------------------------------------------- Markland can redeem the Series D Preferred Stock according to the following schedule. During the first 180 days after the closing it can be redeemed at 120% of the stated value and accrued dividends. From 181 days until 270 days it can be redeemed for 125% of the stated value and dividends. From 271 days and ending 360 days after the closing it can be redeemed for 135% of the stated value and dividends. In accordance with EITF 98-5, the Company calculated that as of the date of issuance there was a beneficial conversion feature in the amount of $4,000,000. The Company has recorded deemed dividends of $4,000,000 for the year ended June 30, 2003, relating to the accretion of these beneficial conversion features on the Series D Preferred Stock. The deemed dividends increase the loss applicable to common stockholders in the calculation of basic and diluted net loss per common share and are included in stockholders' equity as a charge to accumulated deficit and a credit to additional paid-in capital. The Series D Preferred Stock is convertible immediately. In addition, the Company has determined that the maximum potential exposure under the beneficial conversion feature using the assumptions that the fair market value of the common stock is $0.19 at the date of conversion and accordingly a conversion price at 65% of market value should be used, amounts to approximately $8,800,000. During the fourth quarter of fiscal 2003, the Company sold an additional 430 shares of Series D Preferred Stock to James LLC for net proceeds of $430,000. The Company has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $107,500. The Company has recorded deemed dividends of $107,500 for the year ended June 30, 2003, relating to the accretion of these beneficial conversion features on the Series D Preferred Stock. F-27 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued) Series D Redeemable Convertible Preferred Stock (Continued) - ----------------------------------------------- During June of 2003, the Company sold an additional 180 shares of Series D Preferred Stock for net proceeds of $180,000. This issuance of preferred stock is subject to the same rights and preferences as the other Series D Preferred Stock that was issued by the Company during the year. As a result, the Company has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $45,000. The Company has recorded deemed dividends of $45,000 for the year ended June 30, 2003, relating to the accretion of these beneficial conversion features on the Series D Preferred Stock. The deemed dividends increase the loss applicable to common stockholders in the calculation of basic and diluted net loss per common share and are included in stockholders' equity as a charge to additional paid-in capital and a credit to additional paid-in capital. The Series D Preferred Stock is convertible immediately. In addition, the Company has determined that the maximum potential exposure under the beneficial conversion feature at the date of conversion using the maximum possible conversion price at 65% of market value amounted to approximately $97,000. Common Stock - ------------ - - Private Placement of Common Stock --------------------------------- In December 2002, the Company entered into a private equity-financing agreement with two investors in order to raise $340,000 of new capital to finance operations. In exchange for the capital, the investors received an aggregate of 6,800,000 shares of the Company's common stock. - - Director's Compensation ----------------------- In December 2002, the Company issued an aggregate of 400,000 shares of its common stock to two of its former directors as compensation for services rendered while employed with the Company. In February 2003, the Company agreed to pay one of the aforementioned directors $5,000 in lieu of 100,000 shares of previously issued common stock. For the year ended June 30, 2003, a charge to compensation expense related to the above transactions amounted to $8,000. F-28 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued) Net Loss Per Share - ------------------ Securities that could potentially dilute basic earnings per share ("EPS") in the future, and that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consists of the following:
Shares Issuable at Assumed Average Market At June 30, Price at June 30, 2003 2003 ($0.06) ------------ ----------------- Convertible notes payable (Converted at 80% of market) $ 500,000 10,417,000 Series A Redeemable Convertible preferred stock 300,000 600,000 Series C 5% Cumulative Redeemable Convertible preferred stock (converted at 75% of market) 5,395,000 119,889,000 Series D Redeemable Convertible preferred stock (converted at 80% of market) 16,430,000 342,292,000 ------------ ------------ Total as of June 30, 2003 $22,625,000 473,198,000 ============ ============ Subsequent commitments after June 30, 2003: Common and potential common stock issued: Shares issued to consultants 1,500,000 Shares issued to ASI for purchase of assets 17,000,000 Shares issued to Syqwest, Inc. for unpaid services 45,000,000 360 shares of Series D preferred stock issued for cash (assumed average market price of $0.06 converted at 80% of market) 7,500,000 ------------ 71,000,000 ============ Common shares potentially issuable to management, directors and a consultant pursuant to compensation agreements 59,000,000 ============
F-29 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS Business Risks - -------------- The Company requires additional funds to commercialize its technologies and continue research and development efforts. The Company continues to incur substantial expenses and operating losses. No assurances can be given that the Company can complete development of any technology not yet completely developed or that, with respect to any technology that is fully developed, products incorporating the technology can be manufactured on a large scale or at a feasible cost. Further, no assurance can be given that any technology will receive market acceptance. The Company is subject to all of the risks inherent in the establishment of a new enterprise and the marketing and manufacturing of a new product, many of which are beyond the control of the Company. Compensation and Consulting Agreements - -------------------------------------- Effective January 2003, the Company entered into a one-year compensation agreement with an officer and three three-year agreements with an officer and two consultants to the Company, which provide for aggregate monthly remuneration of $47,500. One of these agreements provide for the issuance of 1.67% of the Company's outstanding common stock in three installments, 50% of the shares were issued on or about March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of the shares on or about October 1, 2003. If necessary, an additional issuance will occur on December 31, 2003, so that the total amount of shares issued up to December 31, 2003 will equal 1.67% of the outstanding common stock as of December 31, 2003. Based on approximately 220 million common shares outstanding as of June 30, 2003, a total of approximately 3,700,000 shares of common stock would be issuable under this compensation agreement, of which 2,596,760 were issued during the year ended June 30, 2003. The amount charged to operations related to this agreement for the year ended June 30, 2003 amounted to approximately $124,000. F-30 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS Compensation and Consulting Agreements (continued) - -------------------------------------- In addition, these three agreements, provide in total for the issuance of 5.01% of the Company's outstanding common stock in four installments on a fully diluted basis based upon certain performance criteria being met. Upon contract signing, the Company issued a number of shares of Common Stock then equivalent to 0.5% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares; on or about July 1, 2003, Company will issue to these Employee/Consultants a number of shares of Common Stock then equivalent to 0.5% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares if the Second Quarter gross revenue target has been met; and on or about October 1, 2003 Company will issue to these Employee/Consultants a number of shares of Common Stock then equivalent to 0.67% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares, minus the aggregate number of Shares issued to these parties in the first two installments if the Third Quarter gross revenue target has been met. If necessary, an additional issuance will occur in January 2004, so that the total amount of shares issued will equal 5.01% of the outstanding common stock calculated on a fully-diluted basis assuming the conversion of all convertible securities as of December 31, 2003. The Company determined that approximately 37,000,000 shares of common stock may be issuable under these compensation agreements, of which 6,748,465 were issued during the period ended June 30, 2003. The amount charged to operations related to these agreements for the year ended June 30, 2003 was approximately $513,000. The four agreements referred to above, also include a provision whereby each of these employees and consultants are eligible for an additional stock award which will be vested and issued after the first year anniversary of employment (such anniversary being January 1, 2004) equal to 0.6% of the Equity, then outstanding (2.4% in the aggregate). As of June 30, 2003, the Company has determined that the total number of shares which may issued under this award, amounts to approximately 18,000,000 shares, of which none have been issued during the year ended June 30, 2003. The amount charged to operations related to this award for the year ended June 30, 2003 amounted to approximately $1,100,000. During December 2002 and amended on January 18, 2003, the Company entered into a consulting agreement for six months with an option to renew for an additional six months for services relating to corporate communications. The agreement provides for monthly fees of $7,000, plus expenses, and 20,000 shares of the Company's common stock. For the year ended June 30, 2003, the Company has issued this consultant 140,000 shares of restricted common stock total and has charged approximately $30,000 to operations related to these stock issuances. During the months of February and March 2003, the Company entered into four new one-year consulting agreements, which provide for aggregate monthly remuneration of $3,000. In connection with those agreements, the Company issued 3,800,000 shares of restricted common stock. The shares were valued at $600,000, of which approximately $285,000 was charged to operations during the year ended June 30, 2003. F-31 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (continued) Litigation - ---------- The Quest Net Corp. and CWTel, Inc. were named defendants in a lawsuit filed in the Circuit Court in Broward County, Florida. The lawsuit alleges the Company has failed to pay a promissory note dated September 8, 2000 in the amount of $66,672 and issued a check as payment on the note that was returned due to insufficient funds. As of August 15, 2003 there has been no active litigation activity on the case for approximately twenty months. There have been some sporadic settlement discussions but no agreement has been reached at this time. No estimate can be given as to the ultimate loss which would be suffered by the Company should it lose this lawsuit. The Company is also subject to various matters of litigation during its normal course of operations. Management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. NOTE 11 - DISCONTINUED OPERATIONS The Company has treated the disposition of CWTel in March 2002 and Vidikron in May 2002 as discontinued operations. The following information summarizes the operating results and liabilities of the discontinued operations included in the consolidated financial statements: For the Year For the Year Ended Ended June 30, June 30, 2003 2002 ------------ ------------ Revenues $ - $ 1,887,927 ============ ============ Income (loss) from operations 998,713 (3,259,421) Gain on disposition - 1,046,133 ------------ ------------ Income (loss) from discontinued operations $ 998,713 $(2,213,288) ============ ============ The income from discontinued operations for the year ended June 30, 2003 of $998,713 is a result of management of the Company completing an analysis of various obligations related to the discontinued operations. Management determined that $297,404 of liabilities related to the discontinued operations were either three years old (past the statute of limitations) or represented an overestimate of an accrual. In addition, a real estate lease obligation, which had been recorded in previous years at $706,309, was settled for $5,000. F-32 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - DISCONTINUED OPERATIONS (Continued) During the year ended June 30, 2003, the Company converted a $300,000 promissory note related to the discontinued operations into 30,000 shares of Series A non-voting redeemable preferred stock (see Note 9). As of June 30, 2003, there were no assets or liabilities remaining from discontinued operations. The gain on disposition of discontinued operations for the year ended June 30, 2002 of $1,046,133 (net of $0 of income taxes) represented a gain from the discharge of indebtedness of the liabilities of CWTel, Inc. pursuant to a voluntary bankruptcy petition under Chapter 7, which was concluded in March 2002. NOTE 13 - INCOME TAXES The tax effects of temporary differences and net operating loss carry forwards that give rise to deferred tax assets or liabilities at June 30, 2003 are summarized as follows: Net operating loss carry forward $ 3,400,000 Valuation allowance on net deferred tax asset (3,400,000) ------------ Deferred Tax Asset, Net $ - ============ The Company has provided for a full valuation allowance on the net deferred tax asset due to the uncertainty of its realization. There were no provisions for income taxes during the years ended June 30, 2003 and 2002 due to the Company's net losses. The Company has estimated federal net operating loss carryforwards to be approximately $9,740,000, which are available to offset future taxable income, if any, expiring through 2023. These losses may be subject to substantial limitations as a result of IRC Section 382 rules governing changes in control. Further, the Company has not filed any federal, state or local income or franchise tax returns for the previous three years. Such failure may have a material adverse effect on the amount of any net operating loss carryforwards and may subject the Company to fines. F-33 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - SUBSEQUENT EVENTS a. In July 2003, the Company entered into a consulting agreement with Emerging Concepts, a California entity, whereby the Company issued to them 1,500,000 shares of its restricted common stock in exchange, for consulting services, which will be provided for a period of one year commencing on July 7 2003 and expiring on July 7 2004, unless terminated by either party, as defined in the agreement. b. On July 10, 2003, the Company issued 17,000,000 shares of common stock to ASI in settlement of their obligation to issue $850,000 worth of common stock in connection with the Company's purchase of ASI technology. (Note 4) c. On July 24, 2003, the Company entered into an Amended and Restated Exchange Agreement (the "Amended Exchange Agreement") with Syqwest, Inc., a Rhode Island corporation, and related party, formerly known as Ocean Data Equipment Corporation ("Syqwest"). Under this Amended Exchange Agreement, Syqwest agreed to receive 45,000,000 shares of the Company's restricted common stock, which was valued at $0.01 per share, as payment for $450,000 of unpaid services, which were performed by Syqwest in connection with the research efforts as it relates to the Vehicle Stopping Technology. (see Note 3). Pursuant to the Amended Exchange Agreement, the Company has the right at any time by written notice to repurchase from Syqwest these 45,000,000 shares of restricted common stock at a purchase price of $0.01 per share. d. During July and August 2003, the Company sold to a third party an additional 360 shares of Series D Preferred Stock for gross proceeds of $360,000. The Company has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $90,000. The Company will record this deemed dividend of $90,000 in the first quarter of 2003, relating to the accretion of these beneficial conversion features on the Series D Preferred Stock. The deemed dividends increase the loss applicable to common stockholders in the calculation of basic and diluted net loss per common share and are included in stockholders' equity as a charge to additional paid-in capital and a credit to additional paid-in capital. The Series D Preferred Stock is convertible immediately. The Company has determined that the maximum potential exposure under the beneficial conversion feature at the date of conversion using the maximum possible conversion price at 65% of market value amounted to approximately $129,000. e. On September 4, 2003, the Company signed a term sheet with Bay View Capital, LLC, a related party, in order to obtain a $1,400,000 bridge financing loan. This loan is not anticipated to cause any stock dilution and the proceeds from this loan will be used by the Company to fund the acquisitions of the Ergo and ASI assets (see Note 4). For consideration, the Company is required to make 24 monthly payments of principal and interest. Principal is calculated on a monthly basis using a "Cash Flow Recapture Mechanism" as defined in the agreement. Interest is payable at a rate of 12% per annum. The note is secured by, among other things, a first security interest in all assets of the Company. F-34 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - SUBSEQUENT EVENTS (Continued) f. On September 4, 2003, The Company's Board of Directors approved a resolution to affect a one-for-sixty reverse stock split. As a result, each sixty shares of common stock will be converted automatically into one share of common stock. To avoid the issuance of fractional shares of common stock, each fractional share resulting from the reverse split will be rounded up to a whole share. The reverse stock split does not reduce the 500,000,000 shares of common stock that the Company is authorized to issue. The resolution, which impacts shareholders of record as of September 5, 2003, is expected to become effective on or about October 26, 2003. g. On September 4, 2003, The Company's Board of Directors approved a resolution to cancel its Series B convertible preferred stock. h. During July 2003, 570 shares of Series C 5% Cumulative Redeemable Preferred Stock were converted into 12,500,000 shares of the Company's common stock. F-35 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES AND SCIENCE & TECHNOLOGY RESEARCH, INC. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma consolidated balance sheet aggregates the balance sheet of Markland Technologies, Inc. and Subsidiaries ("Markland") as of September 30, 2003 and the balance sheet of Science & Technology Research, Inc. ("STR") as of September 30, 2003, accounting for the transaction as a business combination pursuant to statement of Financial Accounting Standards No. 141 and using the assumptions described in the following notes, giving effect to Markland's acquisition of STR (see note 1 to pro forma consolidated financial statements), as if the transaction had occurred as of September 30, 2003. The following unaudited pro forma consolidated statement of operations combine the results of operations of Markland for the year ended June 30, 2003 and the pro forma results of operations of STR for the twelve months ended September 30, 2003 as if the transaction had occurred as of the beginning of the period. The pro forma results of operations for STR for the twelve months ended September 30, 2003 reflects the results of operations of STR for the nine months ended September 30, 2003, added to one fourth of the results of its operations for the year ended December 31, 2002. The pro forma consolidated financial statements should be read in conjunction with the separate historical financials statements of Markland, and the historical financial statements of STR appearing elsewhere herein. These pro forma financial statements are not necessarily indicative of the consolidated financial position, had the acquisition occurred on the date indicated above, or the consolidated results of operations which might have existed for the periods indicated or the results of operations as they may be in the future. For the purposes of preparing its consolidated financial statements, Markland will establish a new basis for the STR's assets and liabilities based upon the fair value thereof, including the costs of the acquisition. The unaudited pro forma condensed consolidated balance sheet and the statements of operations reflects Markland's best estimates of this allocation; however, the final allocation may differ from the pro forma amounts. F-36 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Pro forma Consolidated Balance Sheet September 30, 2003 - -------------------------------------------------------------------------------------------------------------------------
ASSETS ------ Markland Technologies Science & Inc. and Technology Pro forma Subsidiaries Research, Inc. Adjustments Pro forma ------------- ------------- ------------- ------------- (unaudited) (unaudited) CURRENT ASSETS - -------------- Cash $ 27,574 $ 215,830 (1) $ 1,189,000 $ 432,404 (1) (900,000) (1) (100,000) Accounts receivable 342,312 438,795 -- 781,107 Prepaid insurance and other current assets 11,028 129,032 -- 140,060 ------------- ------------- ------------- ------------- Total Current Assets 380,914 783,657 189,000 1,353,571 ------------- ------------- ------------- ------------- OTHER ASSETS - ------------ Intangible assets 2,599,998 -- (1) 6,006,808 8,606,806 Property and Equipment - net -- 53,467 -- 53,467 ------------- ------------- ------------- ------------- Total Other Assets 2,599,998 53,467 6,006,808 8,660,273 ------------- ------------- ------------- ------------- TOTAL ASSETS $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES - ------------------- Accounts payable $ 1,257,907 $ 131,351 $ -- $ 1,389,258 Accrued expenses and other current liabilities 141,191 237,581 -- 378,772 Note payable 13,600 -- (1) 296,875 310,475 ------------- ------------- ------------- ------------- Total Current Liabilities 1,412,698 368,932 296,875 2,078,505 ------------- ------------- ------------- ------------- LONG-TERM DEBT (1) 78,125 437,499 -- (1) 1,189,000 1,704,624 ------------- ------------- ------------- ------------- Total Liabilities 1,850,197 368,932 1,564,000 3,783,129 ------------- ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES - ----------------------------- STOCKHOLDERS' EQUITY - -------------------- Series A redeemable convertible preferred stock 300,000 -- -- 300,000 Series C 5% Cumulative redeemable convertible preferred sto1k 1 -- -- 1 Series D redeemable convertible preferred stock 2 -- -- 2 Common stock 498 120 (1) (120) (1) 154 652 Additional paid in capital 15,478,366 79,880 (1) 5,099,846 (1) (79,880) 20,578,212 Unearned compensation (3,963,481) -- (3,963,481) Retained Earnings (accumulated deficit) (10,684,671) 388,192 (1) (388,192) (10,684,671) ------------- ------------- ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 1,130,715 468,192 4,631,808 6,230,715 ------------- ------------- ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844 ============= ============= ============= ============= F-37
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 2003 - ------------------------------------------------------------------------------------------------------------------------------------
Markland Science & Technologies Technology Pro forma Inc. and Research, Inc. Adjustments Pro forma Subsidiaries (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------ REVENUES $ 658,651 $ 6,054,167 $ -- $ 6,712,818 COST OF REVENUES 445,218 5,235,812 -- 5,681,030 ------------ ------------ ------------ ------------ GROSS PROFIT 213,433 818,355 -- 1,031,788 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general and administrative 1,186,379 173,932 -- 1,360,311 Research and development 522,657 224,803 -- 747,460 Compensatory element of stock issuance for selling, general and administrative fees 2,051,822 -- -- 2,051,822 Amortization of intangible assets 66,668 -- -- 66,668 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 3,827,526 398,735 -- 4,226,261 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS (3,614,093) 419,620 -- (3,194,473) ------------ ------------ ------------ ------------ OTHER EXPENSES (INCOME), NET: Interest expenses 226,751 11,608 (2) 142,680 381,039 Other expense (income), net (5,250) (43) -- (5,293) ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSES (INCOME), NET 221,501 11,565 142,680 375,746 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,835,594) 408,055 (142,680) (3,570,219) Income taxes -- 175,460 (3) (175,460) 0 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS (3,835,594) 232,595 32,780 (3,570,219) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 -- -- 501,755 DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 -- -- 4,107,500 PREFERRED STOCK DIVIDEND - Series C 152,716 -- -- 152,716 ------------ ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(8,597,565) $ 232,595 $ 32,780 (8,332,190) ============ ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE: Loss from continuing operations $ (1.72) $ (1.27) ============ ============ Weighted Average Number of Common Shares Outstanding, as Adjusted for September, 2003 reverse stock split 5,002,724 1,539,779 6,542,503 ============ ============ ============ F-38
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 - ------------------------------------------------------------------------------------------------------------------------------------
Markland Science & Technologies Technology Pro forma Inc. and Research, Inc. Adjustments Pro forma Subsidiaries (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------ REVENUES $ 306,724 $ 503,654 $ -- $ 810,378 COST OF REVENUES 256,956 436,769 -- 693,725 ------------ ------------ ------------ ------------ GROSS PROFIT 49,768 66,885 -- 116,653 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general and administrative 497,812 44,731 -- 542,543 Research and development -- 67,924 -- 67,924 Compensatory element of stock issuance for selling, general and administrative fees 401,980 -- -- 401,980 Amortization of intangible assets 33,334 -- -- 33,334 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 933,126 112,655 -- 1,045,781 ------------ ------------ ------------ ------------ OPERATING LOSS FROM CONTINUING OPERATIONS (883,358) (45,770) -- (929,128) ------------ ------------ ------------ ------------ OTHER EXPENSES (INCOME), NET: Interest expenses 28,578 1,995 (2) 35,670 66,243 Other expense (income), net -- (6) -- (6) ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSES (INCOME), NET 28,578 1,989 35,670 65,237 ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (911,936) (47,759) (35,670) (995,365) Income taxes -- (20,059)(3) 20,059 -- ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (911,936) (27,700) (55,729) (995,365) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 90,000 -- -- 90,000 PREFERRED STOCK DIVIDEND - Series C 65,689 -- -- 65,689 ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS APPLICABLE TO COMMON STOCKHOLDERS $(1,067,625) $ (27,700) $ (55,729) (1,151,054) ============ ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE: Loss from continuing operations $ (0.23) $ (1.18) ============ ============ Weighted Average Number of Common Shares Outstanding, as Adjusted for September, 2003 reverse stock split 4,746,887 1,539,779 6,286,666 ============ ============ ============ F-39
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING Effective October 1, 2003, Markland completed the acquisition of 100% of the common stock of STR, by its subsidiary, Security Technology, Inc., a Delaware Corporation ("STI"), through a merger of STI with newly formed STR Acquisition Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy deploys the "man-portable" point detection system to detect all classic nerve and blister agents as well as other chemical warfare agent (CWA) vapors. The purchase price totaled $6,475,000 and consisted of $900,000 in cash, which was paid in October 2003, 1,539,779 shares of Markland common stock valued at $5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The promissory note bears no interest. Holders of the shares of common stock were granted piggy-back registration rights. The promissory note is collateralized by all of the assets of STR and 40% of the Common Stock of STR held by the Markland. The promissory note is payable on or about as follows: March 25, 2004 $ 93,750 May 24, 2004 125,000 July 23, 2004 78,125 October 26, 2004 78,125 --------- $375,000 ========= F-40 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING, (Continued) A summary of the allocation of the aggregate consideration for the merger to the fair value of the assets acquired and liabilities assumed is as follows: Fair value of net assets acquired: Current assets $ 783,657 Property and equipment 53,467 Liabilities assumed: Accounts payable & accrued expenses (368,932) ------------ Fair value of identifiable net assets 468,192 Intangibles (a) 6,006,808 ------------ Total Purchase Price $ 6,475,000 ============ Funding of Purchase Price Cash $ 900,000 Promissory note 375,000 Common Stock 5,100,000 Cash for acquisition costs 100,000 ------------ Total Purchase Price $ 6,475,000 ============ (a) Markland has currently hired an independent firm to perform an independent valuation of the above transaction. Since the outside valuation of the intangible assets was not completed as of the date of this filing, the pro forma financial statements assumed that all of the excess of the purchase price over the net tangible assets was allocated to Goodwill and accordingly, no amortization expense was included in the pro forma statements of operations. Depending on the outcome of the outside valuation and using an estimate of a five-year economic life for any amounts allocated to the amortizable intangible assets, future amortization expense could range from $0 to approximately $1,200,000 per year. The Company funded the cash portion of the acquisition from a loan provided by Bayview Capital, LLC, ("Bayview"). Robert Tarini, Markland's Chairman is affiliated with Bayview. The amount of the loan provided by Bayview was $1,189,000. The loan is collateralized by all of the assets of Markland, is due on October 27, 2005 and bears interest at a rate of 12% per annum. F-41 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - PRO FORMA INTEREST EXPENSE AND INCOME TAXES The Pro forma interest expense for the year ended September 30, 2003 and three months ended September 30, 2003, assuming the $1,189,000 loan was outstanding for this period amounts to $142,680 and $85,670, respectively. NOTE 3 - PRO FORMA INCOME TAXES STR's income tax expense for the year ended September 30, 2003 of $175,460 was eliminated as it is assumed that a consolidated tax return would have been filed utilizing the 2003 net operating loss of Markland against the taxable income of STR. STR's income tax benefit for the three months ended September 30, 2003 of $20,059 was eliminated. F-42 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2003 (UNAUDITED)
ASSETS ------ CURRENT ASSETS: Cash $ 118,977 Accounts receivable (including $337,461 due from related party) 1,763,210 Prepaid expenses and other current assets 152,734 ------------- TOTAL CURRENT ASSETS 2,034,921 ------------- OTHER ASSETS: Property and Equipment, net of accumulated depreciation of $72,771 51,212 Intangible assets - ERGO, net of amortization of $133,336 266,664 Intangible assets - ASI, net of amortization of $83,333 916,667 Technology rights (Acoustic Core) 1,300,000 Intangible assets - STR 6,314,037 ------------- TOTAL OTHER ASSETS 8,848,580 ------------- TOTAL ASSETS $ 10,883,501 ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES: Accounts payable (including $478,506 due to related party) $ 1,704,673 Accrued expenses and other current liabilities 251,235 Secured Convertible Promissory Note, less debt discount of $41,666 458,334 Note payable - Current 410,674 ------------- TOTAL CURRENT LIABILITIES 2,824,916 Note payable - net of current (related party) 1,197,769 ------------- TOTAL LIABILITIES 4,022,685 ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY: Series A redeemable convertible preferred stock - no par value; 30,000 authorized, issued and outstanding 300,000 Series C 5% cumulative convertible preferred stock - $.0001 par value; 8,000 authorized; 4,825 issued and outstanding; liquidation preference of $4,825,000 1 Series D 5% cumulative convertible preferred stock - $.0001 par value; 40,000 authorized; 16,790 issued and outstanding; liquidation preference of $16,790,000 2 Common stock - $.0001 par value; 500,000,000 authorized; 7,357,703 shares issued and outstanding 737 Additional paid-in capital 20,981,657 Unearned compensation (3,097,201) Compensatory stock to be issued 187,500 Accumulated deficit (11,511,880) ------------- TOTAL STOCKHOLDERS' EQUITY 6,860,816 ------------- TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 10,883,501 ============= See accompanying notes to condensed consolidated financial statements. F-43
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED)
2003 2002 ------------ ------------ REVENUES (including $225,210 of revenue from related parties) $ 3,563,495 $ -- COST OF REVENUES (Including $192,934 of costs 2,329,581 -- incurred to a related party) ------------ ------------ GROSS PROFIT 1,233,914 -- ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 1,126,966 171,552 Compensatory element of stock issuances for selling, general and administrative fees 1,539,142 -- Amortization of intangible assets 150,001 -- Depreciation and amortization 9,222 -- ------------ ------------ TOTAL OPERATING EXPENSES 2,825,331 171,552 ------------ ------------ OPERATING LOSS (1,591,417) (171,552) ------------ ------------ OTHER EXPENSES, NET: Interest expense 147,728 169,786 Other expense (income) -- (25,653) ------------ ------------ TOTAL OTHER EXPENSES, NET 147,728 144,133 ------------ ------------ NET LOSS (1,739,145) (315,685) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 186,250 48,380 PREFERRED STOCK DIVIDEND - SERIES C 130,540 15,989 ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(2,055,935) $ (380,054) ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.32) $ (0.04) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,463,757 4,999,857 ============ ============ See accompanying notes to condensed consolidated financial statements. F-44
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED)
2003 2002 ------------ ------------ REVENUES (including $116,618 of revenue from related parties) $ 3,256,771 $ -- COST OF REVENUES (Including $78,321 of costs Incurred to a related party) 2,072,625 -- ------------ ------------ GROSS PROFIT 1,184,146 -- ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 629,154 125,156 Compensatory element of stock issuances for selling, general and administrative fees 1,137,162 -- Amortization of intangible assets 116,667 -- Depreciation and amortization 9,222 -- ------------ ------------ TOTAL OPERATING EXPENSES 1,892,205 125,156 ------------ ------------ OPERATING LOSS (708,059) (125,156) ------------ ------------ OTHER EXPENSES, NET: Interest expense 119,150 63,354 Other expense (income) -- (8,453) ------------ ------------ TOTAL OTHER EXPENSES, NET 119,150 54,901 ------------ ------------ NET LOSS (827,209) (180,057) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 96,250 48,380 PREFERRED STOCK DIVIDEND - SERIES C 64,851 15,989 ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (988,310) $ (244,426) ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.18) $ (0.04) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,156,120 4,999,857 OUTSTANDING ============ ============ See accompanying notes to condensed consolidated financial statements. F-45
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
Series A Convertible Common Stock Preferred Stock ------------------------ ------------------------ Shares Amount Shares Amount ---------- ---------- ---------- ---------- (1) Balance - July 1, 2003 3,671,573 $ 367 30,000 $ 300,000 Issuance of Series D convertible preferred stock -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- Conversion of Series C convertible preferred stock into common stock 208,333 21 -- -- Stock issued in connection with settlement of liabilities to a related party 750,000 75 -- -- Stock issued in connection with consulting agreement 1,000 -- -- -- Stock issued in connection with acquisition of ASI assets 283,333 28 -- -- Stock issued in connection with consulting agreements 30,000 3 -- -- Additional stock issued in connection with employee/consulting agreements 801,350 81 -- -- Variable accounting adjustment of prior/ Unearned compensation -- -- -- -- Preferred stock dividend - Series C ($12.50 per share) -- -- -- -- Stock issued in connection with consulting agreement 60,826 7 -- -- Stock issued in connection with employment agreement 11,509 1 -- -- Acquisition of Science and Technology Research Corporation, Inc. 1,539,779 154 -- -- Amortization of employment/ and consulting agreements -- -- -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balance - December 31, 2003 7,357,703 $ 737 30,000 $ 300,000 ========== ========== ========== ========== (1) Share amounts have been restated to reflect the 1-for-60 reverse stock split effected on October 27, 2003. See accompanying notes to condensed consolidated financial statements. F-46
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
Series C Convertible Series D Convertible Preferred Stock Preferred Stock ---------------------- --------------------- Shares Amount Shares Amount -------- -------- -------- -------- Balance - July 1, 2003 5,395 $ 1 16,430 $ 2 Issuance of Series D convertible preferred stock -- -- 745 -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- Conversion of Series C convertible preferred stock into common stock (570) -- -- -- Stock issued in connection with settlement of liabilities to a related party -- -- -- -- Stock issued in connection with consulting agreement -- -- -- -- Stock issued in connection with acquisition of ASI assets -- -- -- -- Stock issued in connection with consulting agreements -- -- -- -- Additional stock issued in connection with employee/consulting agreements -- -- -- -- Variable accounting adjustment of prior unearned compensation -- -- -- -- Preferred stock dividend - Series C ($12.50 per share) -- -- -- -- Stock issued in connection with consulting agreement -- -- -- -- Stock issued in connection with employment agreement -- -- -- -- Acquisition of Science and Technology Research Corporation, Inc. -- -- -- -- Amortization of employment/ and consulting agreements -- -- -- -- Net loss -- -- -- -- --------- --------- --------- --------- Balance - December 31, 2003 4,825 $ 1 17,175 $ 2 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. F-47
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
Additional Compensatory Unearned Paid-in Stock Compensation Capital to be Issued ------------- ------------- ------------ Balance - July 1, 2003 $ (4,381,379) $ 13,900,104 $ -- Issuance of Series D convertible preferred stock -- 745,000 -- Preferred stock dividend - beneficial conversion feature - Series D -- 186,250 -- Preferred stock dividend - beneficial conversion feature - Series D -- (186,250) -- Conversion of Series C convertible preferred stock into common stock -- (21) -- Stock issued in connection with settlement of liabilities to a related party -- 449,925 -- Stock issued in connection with consulting agreement (11,400) 11,400 -- Stock issued in connection with acquisition of ASI assets -- 849,972 -- Stock issued in connection with consulting agreements (123,000) 122,996 -- Additional stock issued in connection with employee/consulting agreements -- (81) -- Variable accounting adjustment of prior unearned compensation 273,633 (273,633) -- Preferred stock dividend - Series C ($12.50 per share) -- (130,541) -- Stock issued in connection with consulting agreements (350,000) 173,894 187,500 Stock issued in connection with employment agreements -- 32,796 -- Acquisition of Science and Technology Research Corporation, Inc. -- 5,099,846 -- Amortization of employment/and consulting agreements 401,980 -- -- Net loss -- -- -- ------------- ------------- ------------ Balance - September 30, 2003 $ (3,097,201) $ 20,981,657 $ 187,500 ============= ============= ============ See accompanying notes to condensed consolidated financial statements. F-48
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED) Total Accumulated Stockholders' Deficit Equity ------------ ------------ Balance - July 1, 2003 $ (9,772,735) $ 46,360 Issuance of Series D convertible preferred stock -- 745,000 Preferred stock dividend - beneficial conversion feature - Series D -- 186,250 Preferred stock dividend - beneficial conversion feature - Series D -- (186,250) Conversion of Series C convertible preferred stock into common stock -- -- Stock issued in connection with settlement of liabilities to a related party -- 450,000 Stock issued in connection with consulting agreement -- -- Stock issued in connection with acquisition of ASI assets -- 850,000 Stock issued in connection with consulting agreements -- -- Additional stock issued in connection with employee/consulting agreements -- -- Variable accounting adjustment of prior unearned compensation -- (130,541) Preferred stock dividend - Series C ($12.50 per share) -- 11,400 Stock issued in connection with consulting agreement -- 32,797 Stock issued in connection with employment agreement -- -- Acquisition of Science and Technology Research Corporation, Inc. -- 5,100,000 Amortization of employment/and consulting agreements -- 1,494,867 Net loss (1,739,145) (1,739,145) ------------- ------------- Balance - September 30, 2003 $(10,566,286) $ 7,806,717 ============= ============= See accompanying notes to condensed consolidated financial statements. F-49 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED) For the Six Months Ended December 31, 2003 2002 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,739,145) $ (315,685) Adjustment to reconcile net loss to net cash used in operating activities: Amortization of intangible assets 150,001 -- Amortization of debt discount 41,668 -- Compensatory stock issuances 1,539,142 4,000 Depreciation 2,255 -- Changes in operating assets and liabilities: Accounts Receivable (1,448,988) -- Prepaid expenses and other current assets assets 25,454 21,750 Accounts payable and accrued expenses 545,299 249,655 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (884,314) (40,280) ------------ ------------ CASH USED IN INVESTING ACTIVITIES: Purchase of ASI Assets (85,000) -- Purchase of STR (784,170) -- ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (869,170) -- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on note payable -premium financing (17,004) -- Proceeds from Note Payable - Bay View 1,400,000 -- Repayments to Note Payable - Bay View (261,000) -- Proceeds from sale of preferred stock 745,000 -- Proceeds from sale of common stock in private placement -- 340,000 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,866,996 340,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 113,512 299,720 CASH - BEGINNING 5,465 4,911 ------------ ------------ CASH - ENDING $ 118,977 $ 304,631 ============ ============ See accompanying notes to condensed consolidated financial statements. F-50 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - ------------------------------------------------- 2003 2002 ------------ ------------ Cash paid during the years for: Interest $ -- $ -- ============ ============ Taxes $ -- $ -- ============ ============ Non-cash investing and financing activities: Conversion of notes payable and accrued interest into preferred stock $ -- $ 5,225,000 ============ ============ Conversion of accounts payable into common stock $ 450,000 $ -- ============ ============ Acquisition of ASI assets by issuance of common stock $ 850,000 $ -- ============ ============ Acquisition of technology rights by issuance of common stock $ -- $ 1,300,000 ============ ============ Acquisition of STR by issuance of common stock $ 5,100,000 $ -- ============ ============ Promissory note issued as part of STR acquisition $ 375,000 $ -- ============ ============ Deemed dividend preferred stock - beneficial conversion feature $ 186,250 $ 48,380 ============ ============ Dividends on preferred stock $ 273,633 $ 15,989 ============ ============ See accompanying notes to condensed consolidated financial statements. F-51 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited condensed consolidated financial statements of Markland Technologies, Inc. and Subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operation results for the six months and thru months ended December 31, 2003 are not necessarily indicative of the result that may be expected for the year ending June 30, 2004. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company's 10-KSB for the year ended June 30, 2003 filed with the Securities and Exchange Commission. In December 2002, Markland purchased an acoustic core technology (`Acoustic Core"), in January 2003, Markland purchased the assets of Ergo Systems, Inc. ("Ergo"), in September 2003, Markland purchased the intangible assets of ASI Technology Corporation ("ASI") and in October 2003, Markland completed a business combination with Science and Technology Research Corporation, Inc. ("STR"). As a result of these transactions, Markland began to provide end-to-end solutions to the Department of Homeland Security ("DHS"). Markland's principal end customer is the United States Government. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred net losses of $1,739,145 and $315,685 for the six months ended December 31, 2003 and 2002, respectively. Additionally, the Company had a working capital deficiency of $789,995 at December 31, 2003. The Company has limited finances and requires additional funding in order to market and license its products. There is no assurance that the Company can reverse its operating losses, or that it can raise additional capital to allow it to continue its planned operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern remains dependent upon the ability to obtain additional financing or through the generation of positive cash flows from continuing operations. These financial statements do not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary as a result of the above uncertainty. F-52 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. REVERSE STOCK SPLIT / LOSS PER SHARE ------------------------------------ Share amounts and per share data have been restated to reflect a 1 for 60 reverse stock split effective as of October 27, 2003. Basic net loss per common share has been computed based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of a secured convertible promissory note, Series A and D Convertible preferred stock and Series C 5% Cumulative Convertible preferred stock, discussed in the notes to consolidated financial statements, were not included in the calculation of the diluted loss per share because their inclusion would have had the effect of decreasing the loss per share otherwise computed. At December 31, 2003, as permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretation including Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. No stock-based employee compensation cost is reflected in operations, as there are no options outstanding. 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ---------------------------------------------- In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The adoption of SFAS No. 149, which became effective for contracts entered into or modified after June 30, 2003, did not have any impact on the Company's' financial position, results of operations or cash flows. F-53 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued) ---------------------------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on the Company's consolidated results of operations, financial condition or cash flows. In January 2003, the FASB issued Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides guidance for identifying a controlling interest in a variable interest entity ("VIE") established by means other than voting interests. FIN No. 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. In December 2003, the FASB completed its deliberations regarding the proposed modification to FIN No. 46 and issued Interpretation Number 46(R), "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN No. 46(R)"). The decisions reached included a deferral of the effective date and provisions for additional scope exceptions for certain types of variable interests. Application of FIN No. 46(R) is required in financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after December 15, 2004. The adoption of FIN No. 46(R) is not expected to have an impact on the Company's consolidated financial position, results of operations or cash flows. F-54 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ACQUISITIONS PURCHASE OF INTANGIBLE ASSETS OF ASI TECHNOLOGY CORPORATION ----------------------------------------------------------- On March 19, 2003, the Company and ASI Technology Corporation, a Nevada corporation, ("ASI") closed its Technology Purchase Agreement (the "Agreement"). Under the Agreement, ASI agreed to sell and the Company agreed to purchase certain assets relating to ASI's gas plasma antenna technology, including patents, patent applications, equipment, government contract rights and other intellectual property rights. The Chief Executive Officer of the Company was a significant employee of ASI during the two years prior to this agreement. Under an interim arrangement, the Company had received revenues from these contracts billed for periods after April 1, 2003 and was obligated for all related costs. Markland had agreed to use its best efforts to manage and administer the contracts during this period prior to closing and to pay ASI a fee of $2,500 per month for administrative support. These fees amounted to $15,000 as of December 31, 2003. The closing of this transaction occurred on September 30, 2003. In consideration, the Company paid $150,000 in cash of which $65,000 was paid by June 30, 2003 and $85,000 was paid by December 31, 2003. In addition to the cash payment, the Company issued to ASI, on closing, 283,333 shares of its common stock valued at $850,000. In connection with the Agreement, ASI and the Company entered into a registration rights agreement entitling ASI to include its shares of the Company's common stock in future registration statements filed by the Company under the Securities Act of 1933 in connection with public offerings of the Company's common stock. In the event that the Company fails to register such stock on behalf of ASI, or if a registration statement for the shares is delayed, the Company will have to issue an additional $150,000 worth of common stock to ASI. Also in connection with the Agreement, ASI and the Company entered into a sublicense agreement pursuant to which ASI has sublicensed to the Company the right to develop and sell products to certain government, military and homeland security customers in the United States and Canada using the Company's plasma sterilization and decontamination technology. Markland has agreed to pay ASI $5,000 per month for these rights for a period of 24 months, of which $30,000 has been paid to ASI under this agreement and is included in selling, general and administrative expenses for the six months ended December 31, 2003. F-55 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ACQUISITIONS - Continue PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc. ------------------------------------------------- On October 27, 2003, the Company completed the acquisition of 100% of the common stock of Science and Technology Research Corporation, Inc., a Maryland corporation ("STR"), by its subsidiary, Security Technology, Inc., a Delaware Corporation ("STI"), through a merger of STI with newly formed STR Acquisition Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy deploys the "man-portable" point detection system to detect all classic nerve and blister agents as well as other chemical warfare agent (CWA) vapors. The Company acquired STR for the reason that it has a contract with United States Navy and it can potential generate revenues for this contract in excess of $35 million. The purchase price for the STR totaled $6,475,000 and consisted of $900,000 in cash, which was paid in October 2003, 1,539,779 shares of common stock valued at $5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The promissory note bears no interest. Holders of the shares of common stock were granted piggy-back registration rights. The promissory note is collateralized by all of the assets of STR and 40% of the Common Stock of STR held by the Company. The promissory note is payable on or about as follows: March 25, 2004 $ 93,750 May 24, 2004 125,000 July 23, 2004 78,125 October 26, 2004 78,125 --------- $375,000 ========= F-56 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ACQUISITIONS - Continue PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc. - Continue ------------------------------------------------- A summary of the allocation of the aggregate consideration for the merger to the fair value of the assets acquired and liabilities assumed is as follows: Cash $ 900,000 Promissory note 375,000 Common Stock (a) 5,100,000 Acquisition costs 100,000 ----------- Total Purchase Price $6,475,000 ----------- Fair value of net assets acquired: Current assets $ 326,427 Property and equipment 53,467 Liabilities assumed: Accounts payable & accrued expenses 218,931 Fair value of identifiable net assets acquires 160,963 ----------- Intangibles 6,314,037 Total Purchase Price 6,475,000 ----------- (a) 1,539,779 shares of common stock based upon the average closing price ten days after 10/8/03 ($4.254 per share). The company has currently hired an independent firm to perform an independent valuation of the above transaction. The results of operations of STR have been included in the Company's condensed consolidated Statements of operations commencing October 1, 2003. Proforma financial information has not have been included as financial information for STR not available at this time. The Company has not completed its 8-K audit or STR and is considered late. The Company funded the cash portion of the acquisition from a loan provided by Bay View Capital, LLC, ("Bay View"). Robert Tarini, Markland's Chairman is affiliated with Bay View. The entire amount of the loan provided by Bay View was $1,400,000. F-57 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. AMORTIZATION OF INTANGIBLE ASSETS --------------------------------- The purchase price of $400,000 related to the January 2003 acquisition of Ergo was allocated entirely to a contract with the United States Government. The contract is being amortized over a three-year period commencing with the date of the acquisition, January 14,2003. Amortization expense related to the contract for the six months ended December 31,2003 was $66,668. The intangible assets acquired from ASI on September 30, 2003 totaled $1,000,000. These assets are being amortized over a three-year period commencing October 1,2003. Amortization expense related to this contract for the six months ended December 31,2003 was $83,333. Future amortization expense related to the above-acquired intangible assets is as follows: Years Ending June 30, Amount ---------------- ----------- 2004 (6 months) $ 233,335 2005 466,669 2006 399,993 2007 83,334 ----------- $1,183,331 =========== The intangible assets entitled "Acoustic Core" which has a carrying value of $1,300,000 are not available for commercial sale as of December 31, 2003. Accordingly, no amortization expense has been recorded through December 31, 2003. F-58 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SECURED LINE OF CREDIT ---------------------- On December 10, 2002, the Company entered into a Restated and Amended Secured Convertible Revolving Credit Note Agreement for $500,000. Interest under this note accrues at the annual interest rate of 6% per annum. The principal and accrued interest under this note is due on June 30, 2004, however, may be prepaid by the Company at any time without penalty. As of December 31, 2003, approximately $15,000 of interest has been accrued on this note and is included in accrued expenses on the consolidated balance sheet. The note may be converted at any time, in whole or in part, into shares of the Company's common stock. The total number of shares of common stock issuable upon conversion will be determined by dividing the principal amount of this note being converted by 80% of the closing bid price of the common stock based on the average of the five trading days immediately preceding the date of conversion. The value of the beneficial conversion feature of $125,000 is being amortized as interest expense over the period ending June 30, 2004. Amortization of this debt discount for the six months ended December 31, 2003 was $41,668. 7. NEW EQUITY LINE --------------- On September 10, 2003, Markland entered into a Private Equity Credit Agreement with Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue and sell to Brittany up to $10,000,000 worth of its common stock over the next three years. Prior to any sales, the Company is required to file a registration statement with the Securities and Exchange Commission, relating to the shares to be issued, and to have such registration statement declared effective. After the registration statement is declared effective, Markland would be able to put shares to Brittany according to the terms outlined in the agreement. The minimum put amount is $1,000,000 over the life of the agreement and $25,000 per put. Failure to satisfy the minimum put requirement over the life of the Private Equity Credit Agreement will result in a charge to Markland. Shares will be issued to Brittany, in connection with each put, at 92% of the average of the closing bid prices for the lowest (3) three (not necessarily consecutive) trading days during the (10) trading day period immediately following the put date. Under certain conditions, the Company will be required to issue additional shares and/or accrue financial penalties. There can be no assurances that the Company will receive any proceeds from this agreement. As of December 31, 2003 the Company has not drawn down on this equity line. F-59 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. NOTES PAYABLE ------------- Note Payable - NPAI - ------------------- In December 2003, the Company renewed the Directors and Officers Life Insurance Policy, for one year effective December 9, 2003 through December 9, 2004. The Company is amortizing such amount into selling, general and administrative expense on a straight-line basis. At December 31 2003, the total un-amortized premiums included in "prepaid insurance" in the accompanying consolidated balance sheet amounted to $40,976. Note Payable - Bay View - ---------------------- On September 4, 2003, the Company signed a term sheet with Bay View Capital, LLC, a related party, and received in October, 2003 a $1,400,000 bridge-financing loan of which the Company immediately repaid 211,000. The proceeds from this loan were used by the Company to fund the acquisition of STR (Note 6). The loan agreement provides for the Company to make 24 monthly payments of principal and interest. Principal is calculated on a monthly basis using a "Cash Flow Recapture Mechanism" as defined in the agreement. Interest is payable at a rate of 12% per annum payable monthly in arrears. The note requires monthly payments in the amount equal to twenty five percent of the gross revenue of STR for the immediately preceding calendar month. The entire principal amount together with any unpaid interest is payable in full on October 27, 2005. If the monthly payments relating to the gross monthly revenues are not paid there is a 5% percent penalty and the interest will change to 18% for the reminder of the loan. The note is secured by, among other things, a security interest in all assets of the Company. The balance due Bay View Capital at December 31, 2003 was $1,197,769 and is currently classified as a long term liability. 9. STOCKHOLDERS'EQUITY --------------------------------- Preferred Stock - --------------- Series B Convertible Preferred Stock - ------------------------------------ On September 4, 2003, the Company's board of directors approved a resolution to cancel its Series B convertible preferred stock. F-60 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued) --------------------------------- Series C 5% Cumulative Redeemable Convertible Preferred Stock - ------------------------------------------------------------- During July 2003, 570 shares of Series C 5% Cumulative Redeemable Preferred Stock were converted into 208,333 shares of the Company's common stock. As of December 31, 2003, accumulated dividends of $273,633 were accrued for the Series C Preferred Stock. Series D Redeemable Convertible Preferred Stock - ----------------------------------------------- During the six months ended December 31,2003, the Company sold to a third party 745 shares of Series D Preferred Stock for gross proceeds of $745,000. The Company has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $186,250. The Company recorded this deemed dividend of $186,250 during the six months ended December 31, 2003, relating to the accretion of these beneficial conversion features on the Series D Preferred Stock. The deemed dividends increases the loss applicable to common shareholders in the calculation of basic and diluted net loss per common share and is included in stockholders' equity as a charge to additional paid-in capital and a credit to additional paid-in capital. The Series D Preferred Stock is convertible immediately. Reverse Stock Split - ------------------- On September 4, 2003, the Company's board of directors approved a resolution to effect a one-for-sixty reverse stock split. As a result, each sixty shares of common stock was converted automatically into one share of common stock. To avoid the issuance of fractional shares of common stock, each fractional share resulting from the reverse split was rounded up to a whole share. The reverse stock split did not reduce the 500,000,000 shares of common stock that the Company is authorized to issue. The resolution, which impacts shareholders of record as of September 5, 2003 became effective on October 27, 2003. Common Stock Issuances - ---------------------- In July 2003, the Company entered into a consulting agreement with Emerging Concepts, a California entity, whereby the Company issued to them 25,000 shares of its common stock in exchange for consulting services which will be provided for a period of one year commencing on July 7 2003 and expiring on July 7 2004, unless terminated by either party, as defined in the agreement. F-61 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued) ---------------------------------- Common Stock Issuances - continue - ---------------------- On July 24, 2003, the Company entered into an Agreement (the "Agreement") with Syqwest, Inc., a Rhode Island corporation, and related party, formerly known as Ocean Data Equipment Corporation ("Syqwest"). Under this Agreement, Syqwest agreed to receive 750,000 shares of the Company's restricted common stock as full consideration for $450,000 of unpaid services, which were performed by Syqwest in connection with the research efforts as it relates to the Vehicle Stopping Technology. Pursuant to the Agreement, the Company has the right at any time by written notice to repurchase from Syqwest these 750,000 shares of restricted common stock at a purchase price of $0.60 per share. Based on this redemption right and the restriction on the sale of such securities, the Company has valued these shares at the redemption price of $450,000. During September and October 2003, the Company issued to a consultant a bonus of 5,000 shares of common stock valued at $20,500. These shares were issued for enhanced media and corporate communications programs between June and December 2003. In Addition, the Company issued 1,000 shares of it common stock valued at $11,400, as part of the consultants quarterly compensation. In November 2003, the Company entered into an agreement with MarketShare Recovery, Stuart Siller, and George Martin to perform certain services with regard to investor relations for the Company. In consideration for these services, the Company agreed to issue a cumulative total of 90,908 shares of its common stock of which 22,727 shares were issue valued at $62,500 during the quarter ended December 31, 2003. In November 2003, the Company entered into an agreement with Research Works to prepare an equity research report. In consideration for these services, the Company issued Research Works a total of 37,099 shares valued at $100,000. During the six months ended December 31, 2003 the Company also awarded three non-officer employees of the company a total of 11,509 shares valued at $34,020 for services rendered during the period. F-62 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. NET LOSS PER SHARE ------------------ Securities that could potentially dilute basic earnings per share ("EPS") in the future, and that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consists of the following:
Shares Issuable at Assumed At Average Market December 31, Price at December 31, 2003 2003 ($2.46) ------------ ------------------- Convertible notes payable (Converted at 80% of market) $ 500,000 254,065 Series A Redeemable Convertible Preferred stock $ 30,000 10,000 Series C 5% Cumulative Redeemable Convertible preferred stock plus accrued dividends (converted at 80% of market) $ 5,103,027 2,590,570 Series D Redeemable Convertible preferred stock (converted at 80% of market) $17,175,000 8,727,133 ------------ ------------ Total as of December 31, 2003 $22,808,027 11,581,768 ============ ============
F-63 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. COMPENSATION AND CONSULTING AGREEMENTS -------------------------------------- Effective January 2003, the Company entered into a one-year compensation agreement with an officer and three three-year agreements with an officer and two consultants to the Company, which provide for aggregate monthly remuneration of $47,500. One of these agreements provide for the issuance of 1.67% of the Company's outstanding common stock in three installments, 50% of the shares were issued on or about March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of the shares on or about October 1, 2003. If necessary, an additional issuance will occur on December 31, 2003, so that the total amount of shares issued up to December 31, 2003 will equal 1.67% of the outstanding common stock as of December 31, 2003. The three three-year compensation agreements provide in total for the issuance of 5.01% of the Company's outstanding common stock in four installments on a fully diluted basis based upon certain performance criteria being met. The amount charged to operations related to this agreement for the six months ended December 31, 2003 amounted to approximately $914,000. The Company has also entered into a one year consulting agreement with the former President and principal of the acquired company STR ("Consultant"). In consideration for the consulting services to be rendered by Consultant, the Company shall pay to Consultant the sum of $285,000 (the "FEE"). The Fee shall be payable as follows: $61,250 shall be payable on March 15, 2004, a second payment in the amount of $81,500, shall be due May 15, 2004, a third payment in the amount of $51,125 shall be on July 15, 2004, the fourth and final payment in the amount of $91,125, shall be on October 15, 2004. 12. LITIGATION ---------- The Quest Net Corp. and CWTel, Inc. were named defendants in a lawsuit filed in the Circuit Court in Broward County, Florida. The lawsuit alleges the Company has failed to pay a promissory note dated September 8, 2000 in the amount of $66,672 and issued a check as payment on the note that was returned due to insufficient funds. As of August 15, 2003 there has been no active litigation activity on the case for approximately twenty months. There have been some sporadic settlement discussions but no agreement has been reached at this time. No estimate can be given as to the ultimate loss which would be suffered by the Company should it lose this lawsuit. The Company is also subject to various matters of litigation during its normal course of operations. Management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. F-64 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. SUBSEQUENT EVENT ----------------- Conversion of Series C Preferred Stock. Subsequent to December 31, 2003 the holders of the Series C Preferred Stock converted all of the shares of Series C Preferred stocks plus accrued dividends for 5,194,218 shares of Markland common stock. Sale of Series D Preferred Stock. Subsequent to December 31, 2003, the Company sold 2,921 shares of Series D Preferred Stock and received net proceeds of $2,657,000. Conversion of Convertible Secured Debt. Subsequent to December 31, 2003, a secured lender converted the principal amount of $500,000 and all accrued interest into 404,265 shares of Markland's common stock. PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004 Pursuant to a private placement transaction completed on April 2, 2004, Markland issued the following: o 3,333,333 shares of Markland common stock; o 3,333,333 shares of Markland common stock to be obtained by exercising three-year common stock purchase warrants with an exercise price of $1.00 per share; o 333,333 shares of Markland common stock to be obtained by exercising three-year common stock purchase warrants with an exercise price of $1.40 per share that were issued as finder's compensation. Markland agreed to register for resale 150% of the 3,333,333 shares of its common stock in this offering and 110% of the 3,333,333 shares of its common stock that are issuable to certain stockholders upon exercise of the warrants to cover the shares of its common stock, if any, issuable to certain selling stockholders as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 2, 2004 or the Registration Rights Agreement dated as of April 2, 2004. Markland also agreed to register 110% of the 333,333 shares of its common stock that are issuable to certain stockholders upon exercise of the warrants issued as finder's fee. Markland received gross proceeds of $2,000,000 and net proceeds of $1,750,000 (after deducting finders' fees and transaction costs) from this private placement. PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004 Pursuant to a private placement transaction completed on April 16, 2004, Markland issued the following: o 2,500,000 shares of Markland common stock; o 2,500,000 shares of Markland common stock to be obtained by exercising three-year common stock purchase warrants with an exercise price of $1.50 per share; o 25,000 shares of Markland common stock to be obtained by exercising three-year common stock purchase warrants with an exercise price of $2.00 per share that were issued as finder's compensation. Markland agreed to register for sale 150% of the 2,500,000 shares of its common stock sold to certain selling stockholders pursuant to the Securities Purchase Agreement dated April 16, 2004 and 110% of the 2,500,000 shares of its common stock that are issuable to certain stockholders upon exercise of the warrants sold in this private placement, to cover the shares of its common stock, if any, issuable to certain selling stockholders as liquidated damages for breach of certain covenants contained in or as a result of adjustments contemplated by certain provisions of the Securities Purchase Agreement dated as of April 16, 2004 or the Registration Rights Agreement dated as of April 16, 2004. Markland received gross proceeds of $2,000,000 and net proceeds of $1,890,000 (after deducting finders' fees and transaction costs) from this private placement. PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004 Pursuant to a private placement transaction completed on May 3, 2004, Markland issued the following: o 7,098,750 shares of its common stock; o 7,098,750 shares of its common stock to be obtained by exercising three-year redeemable common stock purchase warrants with an exercise price of $1.50 per share; o 529,800 shares of its common stock to be obtained by exercising three-year redeemable common stock purchase warrants with an exercise price of $1.50 per share. Markland received gross proceeds of $5,679,000 and net proceeds of $5,133,860 (after deducting finders' fees and transaction costs) from this private placement Under certain conditions, Markland can redeem the warrants issued in the May 3, 2004 private placement at a price of $.0001 per warrant. Note Payable - Bay View Capital Subsequent to December 31, 2003, the Company paid in the full balance of a note payable to Bay View Capital of $1,197,769 and all accrued interest. F-65 SCIENCE & TECHNOLOGY RESEARCH, INC. FINANCIAL STATEMENTS For the Nine Months Ended September 30, 2003 and the Year Ended December 31, 2002 F-66 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Stockholder of Science & Technology Research, Inc. We have audited the accompanying balance sheet of Science & Technology Research, Inc. as of September 30, 2003, and the related statements of operations, changes in stockholder's equity, and cash flows for the nine-month period ended September 30, 2003 and the year ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Science & Technology Research, Inc. as of September 30, 2003, and the results of its operations and cash flows for the nine month period ended September 30, 2003 and the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, effective October 1, 2003, Science & Technology Research, Inc. was acquired by Markland Technologies, Inc., a publicly traded company. /s/ Marcum & Kliegman LLP February 25, 2004 New York, New York F-67 SCIENCE & TECHNOLOGY RESEARCH, INC. BALANCE SHEET September 30, 2003 - --------------------------------------------------------------------------------------------------
ASSETS ------ CURRENT ASSETS - -------------- Cash $ 215,830 Accounts receivable - long-term contracts 438,795 Inventoried costs relating to long-term contracts in process net of progress payments 96,530 Other current assets 32,502 ------------- Total Current Assets $ 783,657 PROPERTY AND EQUIPMENT, Net 53,467 - ---------------------- ------------- TOTAL ASSETS $ 837,124 ============= LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ CURRENT LIABILITIES - ------------------- Accounts payable $ 131,351 Income taxes payable 150,000 Accrued expenses and other current liabilities 87,581 ------------- TOTAL LIABILITIES $ 368,932 ------------- COMMITMENTS AND CONTINGENCIES - ----------------------------- STOCKHOLDER'S EQUITY - -------------------- Common stock, par value $.01; 100,000 shares authorized; 12,000 shares issued and outstanding 120 Additional paid in capital 79,880 Retained earnings 388,192 ------------- TOTAL STOCKHOLDER'S EQUITY 468,192 ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 837,124 ============= The accompanying notes are an integral part of these financial statements. F-68
SCIENCE & TECHNOLOGY RESEARCH, INC. STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 2003 and Year Ended December 31, 2002 - -------------------------------------------------------------------------------- 2003 2002 ------------ ------------ NET SALES $ 5,502,455 $ 2,206,849 - --------- CONTRACT COSTS 4,771,784 1,856,113 - -------------- ------------ ------------ GROSS PROFIT 730,671 350,736 ------------ ------------ OPERATING EXPENSES - ------------------ Research and development expenses 203,775 84,114 General and administrative expenses 134,194 150,923 ------------ ------------ TOTAL OPERATING EXPENSES 337,969 235,037 ------------ ------------ OPERATING INCOME 392,702 115,699 ------------ ------------ OTHER INCOME (EXPENSE) - ---------------------- Interest income 17 104 Interest expense (5,986) (22,487) ------------ ------------ TOTAL OTHER EXPENSE (5,969) (22,383) ------------ ------------ INCOME BEFORE INCOME TAXES 386,733 93,316 INCOME TAXES 169,095 33,487 - ------------ ------------ ------------ NET INCOME $ 217,638 $ 59,829 ============ ============ The accompanying notes are an integral part of these financial statements. F-69 SCIENCE & TECHNOLOGY RESEARCH, INC. STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY - ----------------------------------------------------------------------------------------------
Common Stock Additional ---------------------- Paid-In Retained Shares Amount Capital Earnings Total --------- --------- --------- --------- --------- BALANCE - January 1, 2002 12,000 $ 120 $ 79,880 $110,725 $190,725 Net income -- -- -- 59,829 59,829 --------- --------- --------- --------- --------- BALANCE - December 31, 2002 12,000 120 79,880 170,554 250,554 Net income -- -- -- 217,638 217,638 --------- --------- --------- --------- --------- BALANCE - September 30, 2003 12,000 $ 120 $ 79,880 $388,192 $468,192 ========= ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. F-70
SCIENCE & TECHNOLOGY RESEARCH, INC. STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2003 and Year Ended December 31, 2002 - ------------------------------------------------------------------------------------------------
2003 2002 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES - ------------------------------------ Net income $ 217,638 $ 59,829 ------------- ------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 12,172 13,928 Changes in operating assets and liabilities: Accounts receivable (68,583) 166,471 Inventoried costs, net 260 (26,320) Prepaid expenses and other current assets (25,136) 11,273 Accounts payable 22,237 (96,597) Income tax payable 116,513 33,487 Accrued expenses and other current liabilities 12,547 50,169 ------------- ------------- TOTAL ADJUSTMENTS 70,010 152,411 ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 287,648 212,240 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Purchases of property and equipment (26,800) -- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES $ (26,800) $ -- ------------- ------------- The accompanying notes are an integral part of these financial statements. F-71
SCIENCE & TECHNOLOGY RESEARCH, INC. STATEMENTS OF CASH FLOWS, Continued For the Nine Months Ended September 30, 2003 and Year Ended December 31, 2002 - -------------------------------------------------------------------------------------
2003 2002 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Repayment of note payable (32,083) (23) Repayment of advances from affiliates (137,750) (216,365) ------------- ------------- NET CASH USED IN FINANCING ACTIVITIES (169,833) (216,388) ------------- ------------- NET INCREASE (DECREASE) IN CASH 91,015 (4,148) CASH - Beginning 124,815 128,963 ------------- ------------- CASH - Ending $ 215,830 $ 124,815 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - ------------------------------------------------- Cash paid during the periods for: Interest $ 5,986 $ 22,456 Income taxes $ 52,582 $ -- The accompanying notes are an integral part of these financial statements. F-72
SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - Nature of Operations and Merger ------------------------------- Science & Technology Research, Inc. (the "Company") was incorporated on November 14, 1988, under the laws of the State of Maryland. Effective October 1, 2003, Markland Technologies, Inc., a publicly-traded Florida corporation, ("Markland") completed the acquisition of the Company, through a merger of STI with newly formed STR Acquisition Corporation, a Maryland Corporation. Markland agreed to pay the stockholder of the Company $6,375,000 which consisted of $900,000 in cash, $5,100,000 worth of Markland common stock, and a promissory note of $375,000. As a result of this transaction, the Company became a wholly owned subsidiary of STI effective October 1, 2003. The Company provides a full range of electrical and mechanical engineering support as well as fabrication and assembly of electrical and mechanical systems. The Company is a producer of the United States Navy's Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy deploys the "man-portable" point detection system to detect all classic nerve and blister agents as well as other chemical warfare agent (CWA) vapors. The Company has three contracts with the United States Navy in the aggregate of approximately $15,368,000. One of these contracts commenced in the year 2000. The Company is subject to risks common to companies in the Homeland Defense Technology industry, including but not limited to, development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and loss of significant customers. Since the U.S. Navy represents substantially all of the Company's current revenue, the loss of this customer would have a material adverse effect on the Company's future operations. NOTE 2 - Summary of significant Accounting Policies ------------------------------------------ Use of Estimates in Preparation of Financial Statements ------------------------------------------------------- The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates that are particularly susceptible to change are those assumptions used in determining the allowance for doubtful accounts receivable and capitalized contract costs and related gross margins. Cash ---- The Company has cash balances in banks in excess of the maximum amount insured by the FDIC as of September 30, 2003. F-73 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Summary of Significant Accounting Policies, continued ------------------------------------------ Allowance for Doubtful Accounts ------------------------------- The allowance for doubtful accounts reflects management's best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance based on known trouble accounts, historical experience and other currently available evidence. The Company's receivables are from government contracts. The Company has not experienced any losses in accounts receivable and has provided no allowance at September 30, 2003. Inventoried Costs ----------------- Inventoried costs relating to long-term contracts are stated at the actual production costs, including factory overhead, allocable general and administrative costs, initial tooling and other related non-recurring costs, incurred to date reduced by amounts attributed to with revenue recognized on units delivered. Inventoried costs relating to long-term contracts are reduced by charging any amounts in excess of estimated realizable value to cost of sales. Property and Equipment ---------------------- Property and equipment are valued at cost and are being depreciated using the straight-line method for financial reporting. Upon sale or retirement, the asset cost and its related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is recognized in income. Routine maintenance and repairs are charged to expense as incurred. Expenditures, which materially increase the value or extend useful lives, are capitalized. Revenue Recognition/Concentration of Credit Risk ------------------------------------------------ The Company's accounts receivable and revenue for the periods covered by these financial statements are substantially all from three fixed-price contracts with the United States Navy. One contract for approximately $4.6 million was completed during December 2002. Another contract for approximately $8.4 million had approximately $2.9 million remaining to be billed (backlog) as of September 30, 2003. The third contract has no revenue to date and had approximately $2.3 million remaining to be billed (backlog) as of September 30, 2003. Under these three contacts, the Company recognizes revenue under the units-of-delivery method. At the time the units are shipped to the warehouse of the United States Navy, the Company recognizes as revenue the contract price of each unit and recognizes the applicable cost of each unit shipped. F-74 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Summary of Significant Accounting Policies, continued ------------------------------------------ Fair Value of Financial Instruments ----------------------------------- The financial statements include various estimated fair value information at September 30, 2003, as required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that statement and does not purport to represent the aggregate net fair value to the Company. The carrying amounts of current assets and current liabilities approximate their fair market values. Advertising Costs ----------------- Advertising costs are expensed as incurred. For the nine months ended September 30, 2003 and the year ended December 31, 2002 advertising and promotion expenses were approximately $700 and $1,100, respectively. Shipping Costs -------------- Delivery and shipping costs are included in contract costs in the accompanying statements of operations. Research and Development ------------------------ Research and development costs are charged to expense as incurred. The Company capitalizes costs related to acquired technologies that have achieved technological feasibility and have alternative uses. Acquired technologies, which are in process at the date of acquisition or have no alternative uses are expensed as research and development costs. Income Taxes ------------ Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 employs an asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. As of September 30, 2003, there were no significant temporary differences and accordingly, there were no deferred tax assets or deferred tax liabilities. F-75 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Summary of Significant Accounting Policies, continued ------------------------------------------ Income Taxes, continued ----------------------- The components of income tax expense are as follows: For the nine months For the year ended ended September 30, 2003 December 31, 2002 ------------------ ----------------- Federal $122,687 $ 25,459 State 46,408 8,028 --------- --------- $169,095 $ 33,487 ========= ========= New Pronouncements ------------------ In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 requires that long-lived assets to be disposed of by sale, including discontinued operations, be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting requirements of discontinued operations to include all components of an entity that have operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 did not have a material effect on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent that meet the criteria for classification as an extraordinary item. Adoption of SFAS No. 145 did not have a material effect on the Company's financial position or results of operations. F-76 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Summary of Significant Accounting Policies, continued ------------------------------------------ New Pronouncements, continued ----------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Adoption of SFAS No. 146 did not have a material effect on the Company's financial position or results of operations. On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, `Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123, or the intrinsic value method of APB Opinion 25. The Company will continue to account for stock-based compensation according to APB 25, while its adoption of SFAS No. 148 requires the Company to provide prominent disclosures about the effect of SFAS No. 123 on reported income and will require the Company to disclose these effects in the interim financial statements as well. No stock-based employee compensation cost is reflected in operations, as there are no options or other common stock equivalents outstanding. In November 2002, the FASB issued Interpretation No. 45, ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002 and adoption of the disclosure requirements are effective for the Company as of December 31, 2002. The adoption of FIN 45 did not have a significant impact on the Company's financial position or results of operations. F-77 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Summary of Significant Accounting Policies, continued ------------------------------------------ New Pronouncements, continued ----------------------------- In January 2003, as amended in December 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2004. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its results of operations and financial condition. Impairment of Long-Lived Assets ------------------------------- Pursuant to SFAS No. 144, the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators or impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company's policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. F-78 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - Accounts Receivable ------------------- The accounts receivable at September 30, 2003 consists of the following: United States Government: Amount billed $ 78,795 Accrued profit on units delivered 360,000 ---------- Total $ 438,795 ========== Accrued profit represents revenue recognized on units delivered to the U.S. Navy for which the Company was reimbursed only its recoverable costs. The amount representing the accrued profit is payable at the end of the applicable contract. It is anticipated that such accrued accounts receivable from the U.S. Navy at September 30, 2003 will be paid within the near term. NOTE 4 - Inventoried Costs ----------------- Inventoried cost relating to long-term contracts include the as following: Inventoried costs relating to U.S. Government contracts, net of amounts attributed to revenues recognized to date $3,881,510 Progress billings 3,784,980 ----------- Net $ 96,530 =========== The Company receives progress payments on a monthly basis equal to 95% of the allowable costs incurred for each month. Under the contracts, the United States Navy has ownership of the inventory when the progress payments are remitted to the Company. The aggregate amounts of general and administrative costs incurred during the nine months ended September 30, 2003 and the year ended December 31, 2002 were $356,003 and $486,723, respectively. As stated in Note 2, the Company allocates general and administrative costs to certain types of Government contracts. The amounts of general and administrative costs remaining in inventoried costs at September 30, 2003 are estimated at $233,000. Such estimates assume that the costs have been removed from inventories on a basis proportional to the amounts of each cost element expected to be charged to cost of sales. F-79 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - Property and Equipment ---------------------- Property and equipment at September 30, 2003 consists of the following: Estimated Amount useful lives ---------- ------------- Office equipment and computers $ 79,724 5 - 7 years Furniture and fixtures 23,631 5 - 7 years Laboratory equipment 20,628 5 years ---------- 123,983 Less: Accumulated depreciation (70,516) ---------- Property and Equipment, Net $ 53,467 ========== Depreciation expense for the nine months ended September 30, 2003 and the year ended December 31, 2002 was $12,172 and $13,928, respectively. NOTE 6 - Loan Payable - Bank ------------------- The Company entered into a loan agreement with a bank during September 2000. The agreement provides for a loan that the Company used to finance the acquisition of equipment and furniture. The loan required monthly principal payments of $917 and the remaining outstanding balance was due at August 28, 2005. The loan carried an interest rate of Prime plus 2%. The loan was collateralized by the equipment and furniture. During August 2003 the loan was paid in full. As of September 30, 2003 and December 31, 2002 the outstanding loan payable on this loan was $0 and $32,083, respectively. NOTE 7 - Loan Payable - Officer ---------------------- An officer and sole stockholder has made advances to the Company through the normal course of business. The loan was non-interest bearing and had no defined repayment terms. As of September 30, 2003 and December 31, 2002 the outstanding loan payable on this loan was $0 and $137,750, respectively. F-80 SCIENCE & TECHNOLOGY RESEARCH, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - Commitments ----------- Facility Rental --------------- The Company leases its primary location in Fredericksburg, Virginia, on a month-to-month basis without a formal agreement. Rent expense relating to this location for the nine months ended September 30, 2003 and the year ended December 31, 2002 was $68,191 and $90,283, respectively. Employee Benefit Plan --------------------- The Company has a 408(k) plan covering all eligible employees of the Company. Contributions to the plan are at the discretion of the Company, up to 3% and not less than 1% of the employees' contribution. For the nine months ended September 30, 2003 and the year ended December 31, 2002, the Company contributed $12,897 and $9,864 to the plan, respectively. F-81 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 607.0850 the Florida Business Corporation Act permits the indemnification of directors and officers of Florida corporations. Our charter provides that we shall indemnify our directors and officers to the fullest extent permitted by Florida law. Under Florida law, we have the power to indemnify our directors and officers against claims arising in connection with their service to us except when an director's or officer's conduct involves: (a) violations of criminal laws, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) deriving an improper personal benefit from a transaction; (c) voting for or assenting to an unlawful distribution or (d) willful misconduct or conscious disregard for our best interests in a proceeding by or in the right of a shareholder. In addition, we have entered into employment agreements with our directors and officers that contain provisions requiring us to indemnify them to the fullest extent permitted by Florida law. The indemnification agreements require us to indemnify our directors and officers to the extent permitted by our charter and to advance their expenses incurred in connection with a proceeding with respect to which they are entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers or persons in control pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the act and is therefore unenforceable. Article II, Section 4 of our bylaws limits the liability of current and former directors for monetary damages if they have acted in good faith and conformed to a standard of reasonable care. Furthermore, and notwithstanding anything to the contrary in our charter or bylaws, Section 607.0831 of the Florida Business Corporation Act limits the liability of directors for monetary damages for any statement, vote, decision or failure to act relating to management or policy of us unless he or she breached or failed to perform her duties as a director, and the breach or failure constitutes: (a) a violation of criminal law, unless the director had reasonable cause to believe the conduct was lawful or had no reasonable cause to believe it was unlawful; (b) a transaction from which the director derived an improper personal benefit; (c) an unlawful distribution; (d) in a proceeding by or in the right of us or one or more of our shareholders, conscious disregard for our best interests or willful misconduct; or (e) in a proceeding brought by someone other than us or one or more of our shareholders, recklessness or an act or omission committed in bad faith, with malicious purpose, or in a manner exhibiting willful disregard of human rights, safety or property. We have purchased insurance with respect to, among other things, the liabilities that may arise under the statutory provisions referred to above. Our directors and officers are also insured against certain liabilities, including certain liabilities arising under the Securities Act of 1933, which might be incurred by them in such capacities and against which they are not indemnified by us. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS. The following table provides information regarding the various anticipated expenses payable by Markland in connection with the issuance and distribution of the securities being registered. We are paying the expenses incurred in registering the shares, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders. All amounts shown are estimates except the Securities and Exchange Commission registration fee. NATURE OF EXPENSE AMOUNT ---------------------------------------------------- ---------- SEC registration fee ............................... $5,534.95 Accounting fees and expenses ....................... 75,000 Legal fees and expenses ............................ 150,000 Transfer agent fees ................................ 1,500 Printing and related fees .......................... 25,000 Miscellaneous ...................................... 50,000 ---------- Total .............................................. $172,035 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. We have issued the following unregistered securities within the last three years. The following information regarding our securities has been adjusted to reflect a 1-for-40 reverse stock split effected on June 21, 2001 and a 1-for-60 reverse stock split effected on October 27, 2003. 2001 On March 16, 2001, we issued 10 shares of our Series B Convertible Preferred Stock to Vidikron of America, Inc. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 31, 2001, we issued a promissory note to James LLC, a Cayman Island limited liability company, in the amount of $1,314,367. The issuance of this security was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. 2002 On December 9, 2002, we entered into an Exchange Agreement with James LLC, a Cayman Island limited liability company, and Market LLC, a Cayman Island limited liability company, wherein we issued to them an aggregate of 5,225 shares of our Series C Convertible Preferred Stock (with a stated value of $1,000 per share) in exchange for the cancellation of promissory notes in the aggregate amount of $5,250,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 9, 2002, we executed an Exchange Agreement with Eurotech, Ltd., a District of Columbia corporation, and Crypto.com, Inc., a Delaware corporation, wherein we issued 3,998,789 shares of our common stock in exchange II-2 for certain assets related to the Acoustic Core(TM) technology for illicit material detection. In addition, we issued 499,848 shares of our common stock to ipPartners, Inc., a Rhode Island corporation, in connection with this acquisition of assets. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 10, 2002, we issued a convertible promissory note to Market LLC, a Cayman Island limited liability company, in the amount of $500,000. The issuance of this security was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. 2003 At various times during 2003, we issued to our employees, directors and consultants the following number of shares of our common stock on the following dates as compensation for their services. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. NAME NUMBER OF SHARES Commonwealth Acquisitions, Inc. (1) 16,667 David Danovitch (1) 3,334 Dean Denuccio 280,000 Rodney Dodd 7,937 ECON Investor Relations, Inc. (1) 12,049 Oscar Hayes 21,035 Edward Kessler 7,937 Delmar Kintner (2) 119,303 MarketShare Recovery, Inc. (1) 27,272 George Martin (1) 4,546 Ernie Mercier (1) 8,334 Jo-Ann Nichols (2) 3,571 Joe O'Niell (1) 8,334 John Readey 65,000 Lawrence Shatsoff (1) 1,667 II-3 Stuart Siller (1) 13,636 The Research Works, Inc. (1) 37,099 - --------------------- (1) Acquired shares in consideration of consulting services. (2) Acquired shares pursuant to an employment agreement. On February 11, 2003, we issued 170 shares of our Series C Preferred stock to James LLC, a Cayman Island limited liability company, for a purchase price of $170,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On March 19, 2003, we executed a Technology Purchase Agreement with ASI Technology Corporation, a Nevada corporation, wherein we acquired certain gas plasma antenna assets for 283,333 shares of our common stock. In connection with this acquisition, we also issued On May 4, 2004, we announced, on a preliminary and unaudited basis, revenues of $1,600,000 for the quarter ended March 31, 2004.shares of our common stock to Patriot Scientific Corporation. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On March 27, 2003, we executed an Exchange Agreement with Eurotech, Ltd. wherein we issued 16,000 shares of our Series D preferred stock in exchange for 1,666,666 shares of our common stock. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. In July 2003, we entered into a consulting agreement with Emerging Concepts. As consideration for the consulting services, we issued 25,000 shares of our common stock to Emerging Concepts in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, for transactions by an issuer not involving any public offering. On July 24, 2003, we issued 750,000 shares of our common stock to Syqwest, Inc., a Rhode Island corporation formerly known as Ocean Data Equipment Corporation, for unpaid services valued at $450,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On September 30, 2003, we executed an Agreement and Plan of Merger with Science and Technology Research, Inc. In connection with the merger, we issued 1,539,779 shares of our common stock and a promissory note in the amount of $375,000 to George Yang, the sole stockholder of Science and Technology Research, Inc. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On each of October 1, 2003, November 3, 2003 and December 1, 2003, we sold to James LLC, a Cayman Island limited liability company, an aggregate of 385 shares of our Series D preferred stock for an aggregate purchase price of $385,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On November 12, 2003, we issued 37,099 shares of our common stock to Research Works, Inc., a New Jersey corporation, for the preparation of an equity research report. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. II-4 2004 On February 2, 2004, we sold 277 shares of our Series D preferred stock to James LLC, a Cayman Island limited liability company, for $152,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On ten different occasions between August 2003 and March 2004, we issued an aggregate of 4,096 shares of our Series D Preferred Stock to a single institutional investor for an aggregate consideration of $4,096,000. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 2, 2004, we issued 3,333,333 shares of our common stock and warrants to purchase 3,333,333 shares of our common stock at $1.00 per share to three institutional investors for consideration of $200,000. We also issued a warrant to purchase 333,333 share of our common stock and paid $200,000 to a finder in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 16, 2004, we issued 2,500,000 shares of our common stock and warrants to purchase 2,500,000 shares of our commons stock at $1.50 per share to ten institutional investors for consideration of $2,000,000. We also issued warrants to purchase 25,000 shares of our common stock at $2.00 per share and paid $100,000 to a finder in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 20, 2004, we issued in the aggregate 300,000 shares to the three investors in our April 2, 2004 private placement in consideration of their consent to permit us to proceed with a private placement that was subsequently consummated on May 3, 2004. We also issued warrants to purchase 50,000 shares of our common stock to counsel for these investors in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On May 3, 2004 and May 7, 2004, we issued and aggregate of 7,098,750 shares of our common stock and redeemable warrants to purchase 7,098,750 shares of our common stock at $1.50 per share to 26 institutional investors 8 individual investors for consideration of $5,679,000. We also issued redeemable warrants to purchase an aggregate of 529,800 shares of our common stock and paid an aggregate of $545,140 to five finders in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. II-5 ITEM 27. EXHIBITS. INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 3.1 Articles of Incorporation of Quest Net 8-K March 20, 2000 1.3 Corp., filed with the Florida Secretary of State on December 28, 1998 3.2 Articles of Merger filed with the Florida 8-K March 20, 2000 1.2 Secretary of State on March 15, 2000 3.3 Articles of Amendment to the Articles of 8-K April 10, 2001 3.1 Incorporation of Quest Net Corp., filed with the Florida Secretary of State on April 4, 2001 3.4 Articles of Amendment to the Articles of 8-K April 10, 2001 3.3 Incorporation of Quest Net Corp., filed with the Florida Secretary of State on June 21, 2001 3.5 Articles of Amendment to the Articles of X Incorporation of Markland Technologies, Inc. filed with the Florida Secretary of State on December 21, 2001 3.6 Articles of Amendment to the Articles of 10-KSB October 14, 2003 3.6 Incorporation of Markland Technologies, Inc. filed with the Florida Secretary of State on September 16, 2003 3.7 Certificate of Designations of Rights and 10-KSB October 14, 2003 3.7 Preferences of the Series A Non-Voting Convertible Preferred Stock 3.8 Certificate of Designations of Rights and 8-K December 20, 2002 3.5 Preferences of the Series C Cumulative Convertible Preferred Stock 3.9 Certificate of Designations of Rights and 10-KSB October 14, 2003 3.5 Preferences of the Series D Cumulative Convertible Preferred Stock 3.10 Amended and Restated By-Laws 8-K March 20, 2000 1.4 4.1 Form of common stock certificate of 10-QSB February 14, 2003 4.1 Markland Technologies, Inc. 4.2 Registration Rights Agreement between X Markland Technologies, Inc., Montana View Corporation, Elite Properties, Ltd., Sparrow Ventures, Inc., dated April 2, 2004 4.3 Form of Common Stock Purchase Warrant dated X April 2, 2004 II-6 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 4.4 Form of Common Stock Purchase Warrant dated X April 16, 2004 4.5 Form of Common Stock Purchase Warrant dated X May 3, 2004 4.6 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.10 19, 2003, by and between ASI Technology Corporation and Markland Technologies, Inc. 4.7 Registration Rights Agreement by and 10-KSB October 14, 2003 10.17 between Markland Technologies, Inc. and Brittany Capital Management limited, dated September 10, 2003. 4.8 Consulting Agreement by and between 8K November 12, 2003 10.3 Markland Technologies, Inc. and George Yang, dated September 30, 2003. 4.9 Consulting Agreement by and between X Markland Technologies, Inc. and Commonwealth Acquisitions, Ltd., dated March 24, 2003. 4.10 Consulting Agreement by and between ECON X Investor Relations, Inc., dated January 18, 2003. 4.11 Consulting Agreement by and between X Markland Technologies, Inc. and Marketshare Recovery, Inc., dated October 29, 2003 4.12 Consulting Agreement by and between 10-QSB February 23, 2004 10.4 Markland Technologies, Inc. and Emerging Concepts, Inc., dated July 7, 2003 4.13 Research Agreement by and between Markland X Technologies, Inc. and The Research Works, Inc., dated October 29, 2003 4.14 Employment Agreement by and between X Markland Technologies, Inc. and Jo-Ann Nichols, dated October 27, 2003. 5.1 Opinion of Foley Hoag LLP * 10.1 Securities Purchase Agreement, between X Markland Technologies, Inc., Montana View Corporation, Elite Properties, Ltd., and Sparrow Ventures, Inc., dated April 2, 2004 II-7 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 10.2 Securities Purchase Agreement by and among X Markland Technologies, Inc. and the Investors named therein, dated April 16, 2004 10.3 Securities Purchase Agreement by and X between Markland Technologies, Inc. and the Investors named therein, dated May 3, 2004 10.4 Agreement and Plan of Merger by and among 8K November 12, 2003 10.1 Markland Technologies, Inc. and STR Acquisition Corp., Security Technology, Inc., Science and Technology Research, Inc., and George Yang, dated September 30, 2003. 10.5 Promissory Note made by Markland 8K November 12, 2003 10.4 Technologies, Inc., in favor of George Yang, dated September 30, 2003. 10.6 Security Agreement by and between Markland X Technologies, Inc. and George Yang, dated September 30, 2003. 10.7 Guaranty by Markland Technologies, Inc. in X favor of George Yang, dated September 30, 2003. 10.8 Amendment and Payment Extension Agreement X by and between Markland Technologies, Inc. and George Yang, dated March 17, 2004. 10.9 Loan Agreement by and between Security 8K November 12, 2003 10.2 Technology, Inc. and Bay View Capital LLC, dated September 30, 2003. 10.10 Promissory Note by and among Markland 8K November 12, 2003 10.5 Technologies, Inc., Security Technology, Inc., and Bay View Capital LLC, dated September 30, 2003. 10.11 Security Agreement by and between Security X Technology, Inc. and Bay View Capital LLC, dated September 30, 2003. 10.12 Security Agreement by and between Markland X Technologies, Inc. and Bay View Capital LLC. 10.13 Sublicense Agreement by and between X Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2004. II-8 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 10.14 SBIR Government Grant * 10.15 SBIR Government * 10.16 SBIR Government Grants * 10.17 Stock Purchase Agreement by and among Ocean 8-K January 28, 2003 10.1 Data Equipment Corporation, Ergo Systems, Markland Technologies, and Security Technology, Inc., dated December 9, 2002, 10.18 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.4 by and among Markland Technologies, Inc., Market LLC, and James LLC. 10.19 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.5 by and among Eurotech, Ltd., Crypto.com Inc., Markland Technologies, Inc., Security Technology, Inc. ipPartners, Inc., Market LLC, and James LLC. 10.20 First Amendment to Exchange Agreement, 10-QSB February 14, 2003 10.6 dated December 9, 2002, by and among Eurotech, Ltd., Crypto.com Inc., Markland Technologies, Inc., Security Technology, Inc. ipPartners, Inc., Market LLC, and James LLC. 10.21 Restated and Amended Convertible Revolving 10-QSB February 14, 2003 10.2 Credit Note Agreement, dated December 10, 2002, by and between Markland Technologies, Inc. and Market LLC. 10.22 Letter from Sherb & Co., LLP to the 8-K March 17, 2003 16.1 Commission, dated March 12, 2003, concerning change in certifying accountant. 10.23 Technology Purchase Agreement between 8-K April 4, 2003 10.1 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2003. 10.24 Exchange Agreement, dated March 27, 2003, 8-K April 4, 2003 10.2 by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.25 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.12 27, 2003, by and between Eurotech, Ltd. and Markland Technologies, Inc. II-9 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 10.26 Amended and Restated Exchange Agreement, 8-K July 30, 2003 10.1 dated July 24, 2003, by and between Markland Technologies, Inc. and Syqwest, Inc. 10.27 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.14 and between Markland Technologies, Inc. and James LLC, dated February 2, 2003, relating to the issuance of 170 shares of Series C 5% Convertible Preferred Stock. 10.28 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.15 and between Markland Technologies, Inc., and James LLC, dated April 1, 2003, relating to the issuance of Series D Convertible Preferred Stock. 10.29 Private Equity Credit Agreement by and 10-KSB October 14, 2003 10.16 between Markland Technologies, Inc. and Brittany Capital Management Limited, dated September 10, 2003. 10.30 Employment and consulting agreements, dated 10-KSB October 14, 2003 10.18 December 5, 2002, for Delmar Kintner, Kenneth Ducey, Robert Tarini, and Verdi Consulting. 10.31 Nonexclusive License Agreement by and Science & Technology Research , Inc. and the Secretary of the Day, dated 11/4/03 10.32 International Distribution Agreement X between Markland Technologies, Inc. and Tradeways, Ltd. 10.33 Science & Technology Research contract Naval Surface Warfare Center, dated January 31, 2003 X 10.34 Subcontract Agreement by and between ERCO Systems, Inc. and computer sciences corporation ,dated December 8, 2003 X 10.36 Lease for Property in Fredricksburg, * Virginia 10.37 Lease for Property in Ridgefield, CT * 10.38 Co-Operative Research and Development * Agreement between Markland Technologies and the U.S. Air Force. 23.1 Consent of Foley Hoag LLP (included in Exhibit 5.1) On May 4, 2004, we announced, on a preliminary and unaudited basis, revenues of $1,600,000 for the quarter ended March 31, 2004. II-10 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION SB-2 FORM FILING DATE NO. - ---------- ------------------------------------------- ----------- --------- ------------------ ------- 23.2 Consent of Sherb & Co., LLP X 23.3 Consent of Marcum & Kliegman LLP X 24.1 Power of Attorney (contained on the signature page of this registration statement)
* To be filed with Amendment No. 1 to Form SB-2. + We have requested Confidential Treatment with respect to certain portions of this Exhibit and we have indicated at the appropriate place in the material publicly filed that that the confidential portion has been so omitted. An unredacted version of this Exhibit has been filed separately with the Securities and Exchange Commission. II-11 ITEM 28. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act: (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. II-12 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Ridgefield State of Connecticut on May 11, 2004. MARKLAND TECHNOLOGIES, INC. By: /s/ Kenneth P. Ducey, Jr. ------------------------------------- Kenneth P. Ducey, Jr. President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Kenneth P. Ducey and Robert Tarini, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits and schedules thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, which they, or either of them, may deem necessary or advisable to be done in connection with this Registration Statement, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes or any of them, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated: SIGNATURE TITLE DATE - --------------------------------------------------------------------------------------------- /s/ Robert Tarini Chief Executive Officer and Chairman May 11, 2004 - ------------------------- of the Board of Directors Robert Tarini /s/ Kenneth P. Ducey, Jr. President, Chief Financial Officer May 11, 2004 - ------------------------- and Director Kenneth P. Ducey, Jr.
II-13 EX-3.5 2 markland_sb2ex3-5.txt EXHIBIT 3.5 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF MARKLAND TECHNOLOGIES, INC. The undersigned does hereby certify that, pursuant to the authority conferred upon the Board of Directors of MARKLAND TECHNOLOGIES, INC. (the "Corporation"), a corporation organized and existing under the Florida Business Corporation Act, by Florida Statute 607.0821 and pursuant to (a) a Board of Directors meeting held on October 9, 2001, whereby (a) all of the members of the Corporation's Board of Directors voted to increase the number of shares of its common stock, par value $0.0001 per share (the "Common Stock," or the "Shares"), authorized for issuance from 3,000,000 to 5,000,000 (the "Authorized Share Increase"), and (b) the approval of the Authorized Share Increase by the Holders of at least 50% of issued and shares of Common Stock, at the 2001 Annual Meeting of Shareholders held on November 29, 2001, the Corporation's Articles of Incorporation are hereby further amended as follows: ARTICLE I The name of the corporation is Markland Technologies, Inc. ARTICLE II The amendment alters or changes Article V of the original Articles of Incorporation and the full text of such provision altered is as follows: The corporation is authorized to issue 500,000,000 shares of common stock, $0.0001 par value and 5,000,000 shares of preferred stock, par value $0.0001, the rights and preferences of which shall be established by the corporation's Board of Directors. ARTICLE III These Articles of Amendment were adopted by the stockholders of the Corporation on November 29, 2001. ARTICLE IV The number of shares outstanding was 299,909,713, all of which were entitled to vote on this amendment. The number of shares voted for the amendment was 299,751,929; and the number of shares voted against the amendment was 11,002. Dated this the 20th day of December, 2001. MARKLAND TECHNOLOGIES, INC. a Florida corporation, /S/ LAWRENCE SHATSOFF --------------------- Lawrence Shatsoff President EX-4.2 3 markland_sb2ex4-2.txt EXHIBIT 4.2 ANNEX IV TO SECURITIES PURCHASE AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 2, 2004 (this "Agreement"), is made by and between MARKLAND TECHNOLOGIES, INC., a Florida corporation with headquarters located at #207, 54 Danbury Road, Ridgefield, CT 06877 (the "Company"), and each entity named on a signature page hereto (each, an "Initial Investor") (each agreement with an Initial Investor being deemed a separate and independent agreement between the Company and such Initial Investor, except that each Initial Investor acknowledges and consents to the rights granted to each other Initial Investor under such agreement). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Securities Purchase Agreement, dated as of April 2, 2004, between the Initial Investor and the Company (the "Securities Purchase Agreement"; capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement), the Company has agreed to issue and sell to the Initial Investors the Purchased Shares and the Warrants; and WHEREAS, the Warrant Shares may be issued upon the exercise of the Warrants; and WHEREAS, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), with respect to the Registrable Securities (as defined below); NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Initial Investor hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "Company Counsel" means Foley Hoag LLP. "Effective Date" means the date the SEC declares a Registration Statement covering Registrable Securities and otherwise meeting the conditions contemplated hereby to be effective. -1- "Held Shares Value" means, on the relevant date, the amount equal to (i) the number shares of Purchased Shares still held by the Holder, multiplied by (ii) the Per Share Purchase Price. "Investor" means the Initial Investor and any permitted transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof and who holds Purchased Shares, Warrants or Warrant Shares. "Payment Shares" means shares of Common Stock issued by the Company as provided in Section 2(b) below. "Permitted Suspension Period" means up to two periods during any consecutive 12-month period during which the Holder's right to sell Registrable Securities under the Registration Statement is suspended, each of which suspension period shall neither (i) be for more than ten (10) days nor (ii) begin less than ten (10) business days after the last day of the preceding suspension (whether or not such last day was during or after a Permitted Suspension Period). "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the SEC. "Registrable Securities" means, collectively, the Purchased Shares, the Warrant Shares, the Additional Shares and the Payment Shares. "Registration Statement" means a registration statement of the Company under the Securities Act covering Registrable Securities on Form SB-2, if the Company is then eligible to file using such form, and if not eligible, on Form S-1 or other appropriate form. "Required Effective Date" means, initially, the Initial Required Effective Date or the Increased Required Effective Date (as those terms are defined below), as the case may be. -2- "Restricted Sale Date" means the first date, other than a date during a Permitted Suspension Period (as defined below), on which the Investor is restricted from making sales of Registrable Securities covered by any previously effective Registration Statement. 2. REGISTRATION. (a) MANDATORY REGISTRATION. (i) The Company shall prepare and file with the SEC, as soon as practicable after the Closing Date but no later than forty-five (45) days after the Closing Date (the "Required Filing Date"), a Registration Statement registering for resale by the Investor a sufficient number of shares of Common Stock for the Initial Investors to sell the Registrable Securities. Notwithstanding the requirement to register all Registrable Securities, the Company's obligation to register the Registrable Securities shall initially be satisfied by the registration of the Initial Number of Shares to Be Registered (as defined below). The "Initial Number of Shares to Be Registered" is a number of shares of Common Stock which is at least equal to the sum of (x) one hundred fifty percent (150%) of the number of Purchased Shares and (y) one hundred ten percent (110%) of the number of Warrant Shares covered by the Warrants (assuming for such purposes that all the Warrants had been issued, had been eligible to be exercised and had been exercised for the issuance of Warrant Shares in accordance with their terms, whether or not such issuance, eligibility or exercise had in fact occurred as of such date). Unless otherwise specifically agreed to in writing in advance by the Initial Investor, the Registration Statement (W) shall include only (1) the Registrable Securities, (2) the shares issuable on exercise of warrants issued to the Finder in connection with the transactions contemplated by the Transaction Agreements, and (3) the shares listed under the heading "Reg Rights" on Exhibit 1 to Schedule 10 hereto, and (X) shall also state that, in accordance with Rule 416 and 457 under the Securities Act, it also covers such indeterminate number of additional shares of Common Stock as may become issuable to prevent dilution resulting from stock splits, or stock dividends. (ii) The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (the "Initial Required Effective Date") which is no later than the earlier of (Y) five (5) Trading Days after oral or written notice by the SEC that it may be declared effective or (Z) ninety (90) days after the Closing Date. (iii) If at any time (an "Increased Registered Shares Date"), the number of shares of Common Stock represented by the Registrable Securities issued or to be issued as contemplated by the Transaction Agreements, exceeds ninety percent (90%) of the aggregate number of shares of Common Stock then registered or sought to be registered in a Registration Statement which has not yet been declared effective, the Company shall either (X) amend the relevant Registration Statement filed by the Company pursuant to the preceding provisions of this Section 2, if such Registration Statement has not been declared effective by the SEC at that time, to register the Increased Number of Shares to Be Registered (as defined below). The "Increased Number of Shares to Be -3- Registered" is a number of shares of Common Stock which is at least equal to the sum of (I) one hundred fifty percent (150%) of the number of Purchased Shares and Additional Shares, if any, previously issued or currently issuable, plus (II) one hundred ten percent (110%) of the adjusted number of shares issued or still issuable upon exercise of the Warrants (assuming for such purposes that all the Warrants had been issued, had been eligible to be exercised and had been exercised for the issuance of Warrant Shares in accordance with their terms, whether or not such issuance, eligibility or exercise had in fact occurred as of such date), plus (III) the number of Payment Shares, if any, previously issued or currently issuable, or (Y) if such Registration Statement has been declared effective by the SEC at that time, file with the SEC an additional Registration Statement (an "Additional Registration Statement") to register the number of shares equal to the excess of the Increased Number of Shares to Be Registered over the aggregate number of shares of Common Stock already registered. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (each, an "Increased Required Effective Date") which is no later than (q) with respect to a Registration Statement under clause (X) of this subparagraph (ii), the Initial Required Effective Date and (r) with respect to an Additional Registration Statement, the earlier of (I) five (5) Trading Days after notice by the SEC that it may be declared effective or (II) thirty (30) days after the Increased Registered Shares Date. (b) PAYMENTS BY THE COMPANY. (i) If the Registration Statement covering the Registrable Securities is not filed as contemplated by this Agreement with the SEC by the Required Filing Date, the Company will make payment to the Initial Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (ii) If the Registration Statement covering the Registrable Securities is not effective by the relevant Required Effective Date or if there is a Restricted Sale Date, then the Company will make payments to the Initial Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (iii) The amount (the "Periodic Amount") to be paid by the Company to the Initial Investor shall be determined as of each Computation Date (as defined below) and such amount shall be equal to the Periodic Amount Percentage (as defined below) of the Purchase Price for all Purchased Shares for the period from the date following the relevant Required Filing Date or the Required Effective Date or a Restricted Sale Date, as the case may be, to the first relevant Computation Date (each, a "First Period"), and thereafter to each subsequent Computation Date (each, a "Subsequent Period"). The "Periodic Amount Percentage" means two percent (2%) of the Purchase Price for each such period (and pro rata for any period less than thirty days). Anything in the preceding provisions of this paragraph (iii) to the contrary notwithstanding, after the -4- relevant Effective Date the Purchase Price shall be deemed to refer to the Held Shares Value. By way of illustration and not in limitation of the foregoing, if the Registration Statement is filed on or before the Required Filing Date, but is not declared effective until seventy-five (75) days after the Initial Required Effective Date, the Periodic Amount will aggregate five percent (5%) of the Purchase Price (2% for days 1-30, plus 2% for days 31-60, plus 1% for days 61-75). (iv) Each Periodic Amount, if any, will be payable by the Company, except as provided in the other provisions of the immediately succeeding subparagraph (v), in cash or other immediately available funds to the Investor (1) on the day after the Required Filing Date, the Required Effective Date or a Restricted Sale Date, as the case may be, and (2) on the earlier of (A) each thirtieth day thereafter, (B) the third business day after the date the Registration Statement is filed or is declared effective, or (C) the third business day after the Registration Statement has its restrictions removed after the relevant Effective Date, in each case without requiring demand therefor by the Investor. (v) Notwithstanding the provisions of the immediately preceding subparagraph (A) at the option of the Company, exercisable in its discretion on the date the Periodic Amount is due; provided, however, that the Company may exercise this discretion if, but only if the Effective Date is within one hundred eighty-five (185) days after the Closing Date and the Registration Statement covering the Payment Shares is then effective(1); or (B) at the option of the Investor, exercisable in its sole and absolute discretion by written notice to the Company at any time before the Periodic Amount is paid, all or a portion of the Periodic Amount shall be paid by the issuance of additional shares of Common Stock to the Investor ("Payment Shares") in an amount equal to the Periodic Amount being paid thereby divided by the then Applicable Per Share Purchase Price Per Share (as defined below); provided, further that the delivery date for the Payment Shares shall be three (3) - -------------------- (1) If the Investor requests payment of any accrued Periodic Amount on any date which is earlier than one hundred eighty-five (185) days after the Closing Date but prior to the Effective Date, and if, prior to the payment thereof, the Investor does not elect to have such payment made in shares as provided in clause (B) of this paragraph, the Company shall either pay such amount to the Investor or deposit such amount in escrow with the Company Counsel with a statement that it will issue shares to the Investor pursuant to this clause (A) if the conditions provided herein are met. If such amount is paid in escrow, it shall be held until such date or the earlier issuance of shares pursuant to such election in accordance with such terms. If the shares are not issued or issuable by such date, the Company Counsel shall release the funds to the Investor. If the shares are duly issued to the Investor, as confirmed by the Investor, the funds held in escrow may be released to the Company. -5- business days after the date the Investor or the Company, as the case may be, gives the notice contemplated by this subparagraph. The term "Applicable Per Share Purchase Price" means the lower of the Per Share Purchase Price or the Adjusted Per Share Purchase Price, if any (in each case subject to adjustment in the same manner as the Exercise Price of the Warrant is adjusted). (vi) The parties acknowledge that the damages which may be incurred by the Investor if the Registration Statement is not filed by the Required Filing Date or the Registration Statement has not been declared effective by a Required Effective Date, including if the right to sell Registrable Securities under a previously effective Registration Statement is suspended or the shares of the Company's stock are not listed on the Principal Trading Market, may be difficult to ascertain. The parties agree that the amounts payable pursuant to the foregoing provisions of this Section 2(b) represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of such damages. (vii) Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable to the extent any delay in the filing or effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Initial Investor or its counsel. (viii) "Computation Date" means (A) the date which is the earlier of (1) thirty (30) days after the Required Filing Date, the Required Effective Date or a Restricted Sale Date, as the case may be, or (2) the date after the Required Filing Date, the Required Effective Date or Restricted Sale Date on which the Registration Statement is filed (with respect to payments due as contemplated by Section 2(b)(i) hereof) or is declared effective or has its restrictions removed or the shares of the Company's stock are listed on the Principal Trading Market (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be, and (B) each date which is the earlier of (1) thirty (30) days after the previous Computation Date or (2) the date after the previous Computation Date on which the Registration Statement is filed (with respect to payments due as contemplated by Section 2(b)(i) hereof) or is declared effective or has its restrictions removed or the shares of the Company's stock are listed on the Principal Trading Market (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be. (ix) Anything in the preceding provisions of this Section 2(b) to the contrary notwithstanding, if, but only if, the Registration Statement is declared effective within thirty-five (35) days following the Initial Required Effective Date or five (5) Trading Days after oral or written notice by the SEC that it may be declared effective, whichever is earlier, (A) the provisions of Section 2(b)(i) shall not apply; and (B) the provisions of Section 2(b)(ii) shall not apply to the fact that the Registration Statement was initially declared effective after the -6- Initial Required Effective Date; and the Company will not have any obligation to pay any Periodic Amount to the Investor with respect thereto; provided, however, that the provisions of Section 2(b)(ii) shall continue to apply to all other events described therein. 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall do each of the following: (a) Prepare promptly, and file with the SEC by the Required Filing Date a Registration Statement with respect to not less than the number of Registrable Securities provided in Section 2(a) above, and thereafter use its reasonable best efforts to cause such Registration Statement relating to Registrable Securities to become effective by the Required Effective Date and keep the Registration Statement effective at all times other than during Permitted Suspension Periods during the period (the "Registration Period") continuing until the earlier of (i) the date when the Investors may sell all Registrable Securities under Rule 144 without volume or other restrictions or limits (the "Unrestricted Sale Date") or (ii) the date the Investors no longer own any of the Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) Permit a single firm of counsel designated by the Initial Investors (which, until further notice, shall be deemed to be Krieger & Prager LLP, Attn: Ronald Nussbaum, Esq., which firm has requested to receive such notification; each, an "Investor's Counsel") to review the Registration Statement and all amendments and supplements thereto a reasonable period of time (but not less than three (3) business days) prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects; (d) Notify each Investor and the Investor's Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than three (3) business days prior to such filing) and (if requested by any such person) confirm such notice in writing no later than one (1) business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) whenever the SEC notifies the Company whether there will be a "review" of such Registration Statement; (C) whenever the Company receives (or a representative of the Company receives on its behalf) any oral or written comments from the SEC in respect of a Registration Statement (copies or, in the case of oral comments, summaries of such comments shall be promptly furnished by -7- the Company to the Investors); and (D) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any proceedings for that purpose; (iv) if at any time any of the representations or warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose; and (vi) of the occurrence of any event that to the best knowledge of the Company makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In addition, the Company shall communicate with the Investor's Counsel with regard to its proposed written responses to the comments contemplated in clause (C) of this Section 3(d), so that, to the extent practicable, the Investors shall have the opportunity to comment thereon; (e) Furnish to each Investor and to Investor's Counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one (1) copy of the Registration Statement, each preliminary prospectus and prospectus, and each amendment or supplement thereto, and (ii) such number of copies of a prospectus, and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (f) As promptly as practicable after becoming aware thereof, notify each Investor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement or other appropriate filing with the SEC to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (g) As promptly as practicable after becoming aware thereof, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time; -8- (h) Comply with Regulation FD or any similar rule or regulation regarding the dissemination of information regarding the Company, and in furtherance of the foregoing, and not in limitation thereof, not disclose to the Investor any non-public material information regarding the Company; (i) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the Investors in writing that the effectiveness of the Registration Statement is suspended for any reason, whether due to a Potential Material Event or otherwise, the Investors shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of such notice until such Investor receives written notice from the Company that such the effectiveness of the Registration Statement has been restored, whether because the Potential Material Event has been disclosed to the public or it no longer constitutes a Potential Material Event or otherwise; PROVIDED, HOWEVER, that the Company may not so suspend the right to such holders of Registrable Securities during the periods the Registration Statement is required to be in effect other than during a Permitted Suspension Period (and the applicable provisions of Section 2(b) shall apply with respect to any such suspension other than during a Permitted Suspension Period); (j) Use its reasonable efforts to secure and maintain, if and to the extent required or contemplated by the rules or regulations of the Principal Trading Market, the designation of all the Registrable Securities covered by the Registration Statement on the Principal Trading Market within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on the Principal Trading Market; (k) Provide a transfer agent ("Transfer Agent") and registrar, which may be a single entity, for the Registrable Securities not later than the initial Effective Date; (l) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts as the case may be, as the Investors may reasonably request, and, within five (5) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the Transfer Agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and opinion of such counsel, which shall include, without limitation, directions to the Transfer Agent to issue certificates of Registrable Securities(including certificates for Registrable Securities to be issued after the Effective Date and replacement certificates for Registrable Securities previously issued) without legends or other restrictions, subject to compliance with applicable law and other rules and regulations, including, without limitation, prospectus delivery requirements; and -9- (m) Take all other reasonable administrative steps and actions (including the participation of Company counsel) necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement; provided, however, that the foregoing does not require that the Company take any steps whatsoever regarding the identification or selection of a broker to sell the Registrable Securities, the identification of buyers of the Registrable Securities, or the negotiation of the sale terms of the Registrable Securities. 4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder and, without limiting the generality of the foregoing, each Investor shall promptly, but in any event, within ten (10) Trading Days of a request from the Company, provide all such information requested by the SEC concerning such Investor or its beneficial owners, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement (in which event the Company shall have no further obligations to the Investor under Section 2 of this Agreement); and (b) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f), (g) or (i) above, such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f), (g) or (i), and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. EXPENSES OF REGISTRATION. All reasonable expenses (other than underwriting discounts and commissions of the Investor) incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company shall be borne by the Company. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, and each Buyer Control Person (each, an "Indemnified Party"), against any losses, -10- claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively referred to as "Violations"). Subject to clause (b) of this Section 6, the Company shall reimburse the Investors, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (I) apply to any Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such Indemnified Party expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(b) hereof; (II) be available to the extent such Claim is based on a failure of the Investor to deliver or cause to be delivered the prospectus made available by the Company or the amendment or supplement thereto made available by the Company; (III) be available to the extent such Claim is based on the delivery of a prospectus by the Investor after receiving notice from the Company under Section 3(f), (g) or (i) hereof (other than a notice regarding the effectiveness of the Registration Statement or any amendment or supplement thereto), or (IV) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. The Investor will indemnify the Company and its officers, directors and agents (each, an "Indemnified Party") against any claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such Investor, expressly for use in connection with the preparation of the Registration Statement or the amendment or supplement thereto or that arises out of or in connection with the failure by the Investor to meet the prospectus delivery requirements of the Securities Act, subject to such limitations and conditions as are applicable to the indemnification provided by the Company to this Section 6. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. -11- (b) In case any such action is brought against any Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Party under this Section 6 for any legal or other reasonable out-of-pocket expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and reasonable out-of-pocket expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Party provided such counsel is of the opinion that all defenses available to the Indemnified Party can be maintained without prejudicing the rights of the indemnifying party. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation; and (c) except where the seller has committed fraud (other than a fraud by reason of the information included or omitted from the Registration Statement as to which the Company has not given notice as contemplated under Section 3 hereof) or intentional misconduct, contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER SECURITIES ACT AND EXCHANGE ACT. With a view to making available to Investor the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit Investor to sell securities of the Company to the public without Registration ("Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; -12- (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) until the Unrestricted Sale Date, furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) if not available on the SEC's EDGAR system, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without Registration; and (d) at the request of any Investor holding Registrable Securities (a "Holder"), give its Transfer Agent instructions (supported by an opinion of Company counsel, if required or requested by the Transfer Agent) to the effect that, upon the Transfer Agent's receipt from such Holder of (i) a certificate (a "Rule 144 Certificate") certifying (A) that the Holder's holding period (as determined in accordance with the provisions of Rule 144) for the shares of Registrable Securities which the Holder proposes to sell (the "Securities Being Sold") is not less than (1) year and (B) as to such other matters as may be appropriate in accordance with Rule 144 under the Securities Act, and (ii) an opinion of counsel acceptable to the Company (for which purposes it is agreed that the initial Investor's Counsel shall be deemed acceptable if not given by Company Counsel) that, based on the Rule 144 Certificate, Securities Being Sold may be sold pursuant to the provisions of Rule 144, even in the absence of an effective Registration Statement, the Transfer Agent is to effect the transfer of the Securities Being Sold and issue to the buyer(s) or transferee(s) thereof one or more stock certificates representing the transferred Securities Being Sold without any restrictive legend and without recording any restrictions on the transferability of such shares on the Transfer Agent's books and records (except to the extent any such legend or restriction results from facts other than the identity of the Holder, as the seller or transferor thereof, or the status, including any relevant legends or restrictions, of the shares of the Securities Being Sold while held by the Holder). If the Transfer Agent reasonably requires any additional documentation at the time of the transfer, the Company shall deliver or cause to be delivered all such reasonable additional documentation as may be necessary to effectuate the issuance of an unlegended certificate. 9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investor to any transferee of the Registrable Securities or other Securities (such transfer or assignment being subject to the provisions of Section 4(a) of the Securities Purchase Agreement) only if the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or -13- assignee and (b) the securities with respect to which such registration rights are being transferred or assigned. 10. NO INCONSISTENT AGREEMENTS. Except as and to the extent specifically set forth in Schedule 10 attached hereto, neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company nor any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as and to the extent specifically set forth in Schedule 10 attached hereto, neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. 11. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a eighty (80%) percent interest of the Registrable Securities (as calculated by the number of Purchased Shares then held by the Investors). Any amendment or waiver effected in accordance with this Section 11 shall be binding upon each Investor and the Company. 12. MISCELLANEOUS. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be given in the manner contemplated by the Securities Purchase Agreement, (i) if to the Company or to the Initial Investor, to their respective address contemplated by the Securities Purchase Agreement, and (ii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 12(b). (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. -14- (d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions. (e) The Company and the Investor hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with this Agreement or any of the other Transaction Agreements. (f) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (g) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (h) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (i) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (j) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (k) The Company acknowledges that any failure by the Company to perform its obligations under Section 3(a) hereof, or any delay in such performance could result in loss to the Investors, and the Company agrees that, in addition to any other liability the Company may have by reason of such failure or delay, the Company shall be liable for all direct damages caused by any such failure or delay, unless the same is the result of force majeure. Neither party shall be liable for consequential damages. (l) This Agreement (including to the extent relevant the provisions of other Transaction Agreements) constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -15- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. COMPANY: MARKLAND TECHNOLOGIES, INC. By: ________________________________ Name:_______________________________ Title:______________________________ INITIAL INVESTOR: ____________________________________ [PRINT NAME OF INITIAL INVESTOR] By: ________________________________ Name:_______________________________ Title:______________________________ -16- Schedule 10 Attached as Exhibit 1 hereto is a schedule of shareholders and shares registered in their names or which they have rights to acquire from the Company, by way of conversion or otherwise. For each such shareholder, the shares listed under the heading "Reg Rights" on the schedule may also be included in the Registration Statement. The Investors understand and agree that, anything in section 10 or elsewhere in the Agreement to the contrary notwithstanding, the Company may file a registration statement for its equity line concurrently with or promptly after the registration statement referred to in the Agreement. -17- EX-4.3 4 markland_sb2ex4-3.txt EXHIBIT 4.3 ANNEX I TO SECURITIES PURCHASE AGREEMENT (PROTOTYPE FOR EACH ISSUANCE) FORM OF WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. MARKLAND TECHNOLOGIES, INC. COMMON STOCK PURCHASE WARRANT 1. ISSUANCE. Inconsideration of good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by MARKLAND TECHNOLOGIES, INC., a Florida corporation (the "Company"), _________________________________________ or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on _______________, 200__(1) (the "Expiration Date"), ______________________ Thousand (_____________)(2) fully paid and nonassessable shares of the Company's Common Stock, $0.0001 par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price") of $1.00 per share, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Securities Purchase Agreement, dated as of April 2, 2004 (the "Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in t he - ------------------ (1) Insert date which is the last calendar day of the month in which the third anniversary of the Closing Date occurs. (2) Insert number equal to the number of the Purchased Shares. Agreement. This Warrant was originally issued to the Holder or the Holder's predecessor in interest on , 2004(3) (the "Issue Date"). 2. EXERCISE OF WARRANTS. 2.1 GENERAL. (a) This Warrant is exercisable in whole or in part at any time and from time to time commencing on the Commencement Date (as defined below). Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant Certificate) as provided in this paragraph. The date such Notice of Exercise is faxed to the Company shall be the "Exercise Date," provided that, if such exercise represents the full exercise of the outstanding balance of the Warrant, the Holder of this Warrant tenders t his Warrant Certificate to the Company within five (5) business days thereafter. The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate the number of shares then being purchased pursuant to such exercise. (b) The Exercise Price per share of Common Stock for the shares then being exercised shall be payable to the Company in cash or by certified or official bank check or by wire transfer in accordance with instructions provided by the Company at the request of the Holder. (c) Upon the appropriate payment of the Exercise Price for the shares of Common Stock purchased, together with the surrender of this Warrant Certificate (if required), the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. (d) The Holder shall be deemed to be the holder of the shares issuable to it in accordance with the provisions of this Section 2.1 on the Exercise Date. 2.2 LIMITATION ON EXERCISE. Notwithstanding the provisions of this Warrant, the Agreement or of the ot her Transaction Agreements, in no event (except (i) as specifically provided in this Warrant as an exception to this provision, (ii) during the forty-five (45) day period prior to the Expiration Date, or (iii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock) shall the Holder be entitled to exercise - ------------------ (3) Insert the Closing Date. 2 this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrants or other rights to purchase Common Stock or through the ownership of the unconverted portion of convertible securities), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such exercise). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of such sentence. The Holder, by its acceptance of this Warrant, further agrees that if the Holder transfers or assigns any of the Warrants to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this Section 2.2 as if such transferee or assignee were the original Holder hereof. 2.3 COMMENCEMENT DATE. The term "Commencement Date" means the earlier of (i) the date which is sixty-five (65) days after the Issue Date, or (ii) the Effective Date. 3. RESERVATION OF SHARES. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant one hundred ten percent (110%) of the Warrant Shares. 4. MUTILATION OR LOSS OF WARRANT. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. PROTECTION AGAINST DILUTION AND OTHER ADJUSTMENTS. 3 6.1 ADJUSTMENT MECHANISM. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of shares of Common Stock as will cause (i) (x) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant following such adjustment, multiplied by (y) the adjusted Exercise Price per share, to equal the result of (ii) (x) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment, multiplied by (y) the total Exercise Price before adjustment.(4) 6.2 CAPITAL ADJUSTMENTS. In case of any stock split or reverse stock split, stock dividend, or reclassification of the Common Stock, the provisions of this Section 6 shall be applied as if such capital adjust ment event had occurred immediately prior to the date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. By way of illustration, and not in limitation, of the foregoing, (i) if the Company effectuates a 2:1 split of its Common Stock, thereafter, with respect to any conversion for which the Company issues shares after the record date of such split, the Exercise Price shall be deemed to be one-half of what it had been immediately prior to such split; (ii) if the Company effectuates a 1:10 reverse split of its Common Stock, thereafter, with respect to any exercise for which the Company issues shares after the record date of such reverse split, the Exercise Price shall be deemed to be ten times what it had been calculated to be immediately prior to such split; and (iii) if the Company declares a stock dividend of one share of Common St ock for every 10 shares outstanding, thereafter, with respect to any exercise for which the Company issues shares after the record date of such dividend, the Exercise Price shall be deemed to be such amount multiplied by a fraction, of which the numerator is the number of shares (10 in the example) for which a dividend share will be issued and the denominator is such number of shares plus the dividend share(s) issuable or issued thereon (11 in the example). 6.3 ADJUSTMENT FOR MERGERS AND SALES. If the Company enters into a merger (other than where the Company is the surviving entity) or consolidation with anot her corporation or other entity or a sale or transfer of all or subst ant ially all of the assets of the - ------------- (4) Example: Assume 10,000 shares remain under Warrant at original stated Exercise Price of $1.00. Total exercise price (clause (y) in text) is (i) 10,000 x (ii) $1.25, or $10,000. Company effects 2:1 stock split. Exercise Price is adjusted to $0.50. Number of shares covered by Warrant is adjusted to 20,000, because (applying clause (x) in text) (i) 20,000 x (ii) $0.50 = $10,000. 4 Company to another person (collectively, a "Sale"), the Company will require, in the agreements reflecting such transaction, that the surviving entity expressly assume the obligations of the Company hereunder. Notwithstanding the foregoing, if the Company enters into a Sale and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such Sale, the Company and any such successor, purchaser or transferee will agree that this Warrant may thereafter be exercised on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Common Stock into which this Warrant might have been exercised immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable. In the event of any such proposed Sale, (i) the Holder hereof shall have the right to exercise this Warrant by delivering a Notice of Exercise to the Company within fifteen (15) days of receipt of notice of such Sale from the Company, except that Section 2.2 shall not apply to such conversion. 6.4 ADJUSTMENT FOR SPIN OFF. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a material part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares, multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants. 6.5 ADJUSTMENT FOR CERTAIN TRANSACTIONS. Reference is made to the provisions of Section 4(g) of the Agreement, the terms of which are incorporated herein by reference. The number of shares covered by this Warrant and the Exercise Price shall be adjusted as provided in the applicable provisions of said Section 4(g) of the Agreement. 7. TRANSFER TO COMPLY WITH THE SECURITIES ACT; REGISTRATION RIGHTS. 5 7.1 TRANSFER. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 REGISTRATIONRIGHTS. (a) ReferenceismadetotheRegistration Rights Agreement. The Company's obligations under the Registration Rights Agreement and the other terms and conditions thereof with respect to the Warrant Shares, including, but not necessarily limited to, the Company's commitment to file a registration statement including the Warrant Shares, to have the registration of the Warrant Shares completed and effective, and to maintain such registration, are incorporated herein by reference. (b) In addition to the registration rights referred to in the preceding provisions of Section 7.2(a), effective after the expiration of the effectiveness of the Registration Statement as contemplated by the Registration Rights Agreement, the Holder shall have piggy-back registration rights with respect to the Warrant Shares then held by the Holder or then subject to issuance upon exercise of this Warrant (collectively, the "Remaining Warrant Shares"), subject to the conditions set forth below. If, at any time after the Registration Statement has ceased to be effective, the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock (other than a registration on Form S-8 or on Form S-4), the Company shall give writ t en not ice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) business days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Remaining Warrant Shares in such registration statement. If the Holder exercises such election, the Remaining Warrant Shares so designated shall be included in the registration statement at no cost or expense to the Holder (other than any costs or commissions which would be borne by the Holder under the terms of the Registration Rights Agreement). The Holder's rights under this Section 7 shall expire at such time as the Holder can sell all of t he Remaining Warrant Shares under Rule 144 without volume or other restrictions or limit. 8. NOTICES. Any notice required or permitted hereunder shall be given in manner provided in the Section headed "NOTICES" in the Agreement, the terms of which are incorporated herein by reference. 6 9. SUPPLEMENTS AND AMENDMENTS; WHOLE AGREEMENT. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. GOVERNING LAW. This Warrant shall be deemed to be a contract made under the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such p roceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. 11. JURY TRIAL WAIVER. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against the other in respect of any matter arising out or in connection with this Warrant. 12. COUNTERPARTS. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Balance of page intentionally left blank] 7 13. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the day of , 200__. MARKLAND TECHNOLOGIES, INC. By: _______________________ ___________________________ (Print Name) ___________________________ (Title) 8 NOTICE OF EXERCISE OF WARRANT TO: MARKLAND TECHNOLOGIES, INC. VIA FAX: (203) 286-1608 #207 Attn: CFO 54 Danbury Road Ridgefield, CT 06877 The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of , 20, to purchase shares of the Common Stock, $0.0001 p ar value, ofM ARKLAND TECHNOLOGIES, INC. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. [ ] CASH: $_________________________ = (Exercise Price x Exercise Shares) Payment is being made by : [ ] enclosed check [ ] wire transfer [ ] other____________________ It is the intention of the Holder to comply with the provisions of Section 2.2 of the Warrant regarding certain limits on the Holder's right to exercise thereunder. Based on the analysis on Part II of the attached Worksheet Schedule, the Holder believe this exercise comp lies with the provisions of said Section 2.2. Nonetheless, to the extent that, pursuant to the exercise effected hereby, the Holder would have more shares than permitted under said Section, this notice shouldbe amended and revised, ab initio, to refer to the exercise which would result in the issuance of shares consistent with such provision. Any exercise above such amount is hereby deemed void and revoked. As contemplated by the Warrant, this Notice of Conversion is being sent by facsimile to the telecopier number and officer indicated above. If this Notice of Exercise represents the full exercise of the outstanding balance of the Warrant, the Holder either (1) has previously surrendered the Warrant to the Company or (2) will surrender (or cause to be surrendered) the Warrant to the Company at the address indicated above by express courier within five (5) business days after delivery or facsimile transmission of this Notice of Exercise. The certificates representing the Warrant Shares should be transmitted by the Company to the Holder [ ] via express courier, or [ ] by electronic transfer after receipt of this Notice of Exercise (by facsimile transmission or otherwise) to: _________________________________ _________________________________ _________________________________ Dated:__________________________ ________________________________ [Name of Holder] By:_____________________________ 2 NOTICE OF EXERCISE OF WARRANT WORKSHEET SCHEDULE Part I STATUS OF OUTSTANDING WARRANT ----------------------------- 1.1 Original number of shares subject to exercise of this Warrant(1) ___________ 1.2 Warrant Shares being exercised currently ___________ 1.3 Warrant Shares previously exercised(1) ___________ 1.4 Total Warrant Shares exercised [sum of Lines 1.2 and 1.3] ___________ 1.5 Warrant Shares remaining after current exercise [Line 1.1 less Line 1.4] ___________ [Continue on next page] - ---------------- (1) Adjusted for any adjustments contemplated by this Warrant Part II SECTION 2.2 ANALYSIS -------------------- 2.1. Current Common Stock holdings of Holder and Affiliates ____________ 2.2. Warrant Shares to be issued on current exercise ____________ 2.3. Other shares to be issued on other current exercise(s) and other current conversion(s)(2) ____________ 2.4. Other shares eligible to be acquired within next 60 days without restriction 2.5. Total [sum of Lines 2.1 through 2.4] ____________ 2.6. Outstanding shares of Common Stock(3) ____________ 2.7. Adjustments to Outstanding ____________ a. Shares known to Holder as previously issued to Holder or others but not included in Line 2.6 ____________ b. Shares to be issued per Line(s) 2.2 and 2.3 ____________ c. Total Adjustments [Lines 2.7a and 2.7b] ____________ 2.8. Total Adjusted Outstanding [Lines 2.6 plus 2.7c] ____________ 2.9. Holder's Percentage [Line 2.5 divided by Line 2.8] ___________% - --------------- (2) Includes shares issuable on conversion of convertible securities (including assumed payment of interest or dividends) or exercise of other rights, including other warrants or options (3) Based on latest SEC filing by Company or information provided by executive officer of Company, counsel to Company or transfer agent [Note: Line 2.9 not to be above 4.99%] EX-4.4 5 markland_sb2ex4-4.txt EXHIBIT 4.4 THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO THE DISTRIBUTION HEREOF OR OF THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SALE OF THE SECURITIES UNDER THE SECURITIES ACT OF 1933 OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO Markland Technologies, Inc. AS TO AN EXEMPTION THEREFROM. Warrant to Subscribe for [________] Shares STOCK PURCHASE WARRANT To Subscribe for and Purchase Stock of MARKLAND TECHNOLOGIES, INC. ---------- 1. ISSUE; NUMBER OF SHARES SUBJECT TO WARRANT. THIS CERTIFIES that, for value received, [INSERT NAME OF HOLDER], or registered assigns is entitled to subscribe for and purchase from Markland Technologies, Inc., a Florida corporation (the "COMPANY"), at the warrant purchase price (as hereinafter defined) at any time during the period from the earlier of (i) sixty five (65) days after the Close or (ii) the date a registration statement covering the Common Shares (as defined below) is declared effective (the "COMMENCEMENT DATE") to and including the close of business on April 16, 2007 up to [_______] fully paid and nonassessable shares (the "COMMON SHARES") of the Common Stock, $.0001, par value per share ("COMMON STOCK"), of the Company for $ 2.00 per share (the "PURCHASE PRICE"); SUBJECT, HOWEVER, to the provisions and upon the terms and conditions hereinafter set forth. 2. EXERCISE; ISSUE DATE; DELIVERY OF COMMON SHARES; UNEXERCISED PORTION. (a) The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part (but not as to a fractional Common Share), by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company, at #207, 54 Danbury Road, Ridgefield, Connecticut 06877 (or such other office or agency of the Company, as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Company) together with payment to the Company by certified or bank cashier's check of the purchase price for the Common Shares issuable upon such exercise. The Company agrees that the Common Shares so purchased shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such Common Shares. Certificates for the Common Shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten (10) days, after the rights represented by this Warrant shall have been so exercised, and unless this Warrant has expired, a new Warrant exercisable for the number of Common Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. (b) Notwithstanding the provisions of this Warrant, in no event shall the holder be entitled to exercise this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrants or other rights o purchase Common Stock or through the ownership of the unconverted portion of convertible securities), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than [4.99% / 9.99%] of the outstanding shares of Common Stock (after taking into account the shares to be issued to the holder upon exercise). For purposes of this proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934,a s amended (the "1934 ACT")except as otherwise provided in clause (1) of such sentence. (c) If a registration statement covering the Common Shares is not declared effective within one (1) year from the date this Warrant is issued or if it ceases to be effective for any period of time after one (1) year from the date this Warrant is issued, then the holder may surrender this Warrant to the Company together with a notice of net exercise, in which event the Company shall issue to the holder a number of Common Shares (the "ISSUED SHARES") equal to the total number of Common Shares issuable hereunder LESS the number of Common Shares having an aggregate market value (defined as the average closing sale price of the Common Stock for the five (5) trading days immediately prior to the Exercise Date as reported by Bloomberg Information Systems, Inc. or any successor to its function of reporting stock prices) equal to the aggregate exercise price of the Issued Shares. The Holder may not exercise this Warrant pursuant to the terms of this Section 2(c) at any time there is a registration statement covering the resale of the Common Shares with a current prospectus available. 3. COMMON SHARES FULLY PAID; RESERVATION OF COMMON SHARES; LISTING. The Company covenants and agrees that all Common Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, -2- and reserved, a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant, and will at its expense upon each such issuance of shares use its best efforts to procure the listing thereof (subject to issuance or notice of issuance) on all public trading markets on which the Common Stock of the Company is then listed. 4. TAXES. The issue of stock certificates on any exercise of this Warrant shall be made without charge to the holder of the Warrant for any documentary stamp tax in respect of the issue thereof. The Company shall not, however, be required to pay any documentary stamp tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of the Warrant and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid. 5. FRACTIONAL SHARES. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrant, but in respect of any fraction of a share of Common Stock, it will made a payment in cash based on the then excess of the Fair Market Value (as hereinafter defined) of a share of Common Stock over the warrant Purchase Price. "Fair Market Value" means the last reported closing price of the Common Stock on the NASDAQ Stock Market or any national securities exchange on which the Common Stock is traded on the date of exercise of this Warrant, or, if the Common Stock is not traded on the NASDAQ Stock Market or a national securities exchange, the mean of the reported high bid and low asked prices of the Common Stock in the over-the-counter bulletin board on the date of exercise of this Warrant, or, if not so traded, as determined in good faith by, or at the direction of, the Board of Directors of the Company. 6. ADJUSTMENTS TO PURCHASE PRICE. The above provisions are, however, subject to the following: (a) The Purchase Price shall be subject to adjustment from time to time as hereinafter provided. The term "PURCHASE PRICE" shall mean, unless and until any such adjustment shall occur, the Purchase Price resulting from such adjustment and any other previous adjustments. Upon each adjustment of the Purchase Price resulting from (i) the declaration of a dividend upon, or the making of any distribution in respect of, any stock of the Company payable in Common Stock (and subject to the provisions of PARAGRAPH (D) below) or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES"), or (ii) the reclassification, subdivision or combination of the Common Stock into a greater or smaller number of shares (and subject to the provisions of PARAGRAPH (E) below), the holder of this Warrant shall thereafter be entitled to purchase, at the Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Purchase Price resulting from such adjustment. -3- (b) If and whenever the Company shall issue or sell any shares of its Common Stock (except for Excluded Shares [as hereinafter defined]) for a consideration per share less than the Purchase Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Purchase Price shall be reduced to a price (calculated to the nearest cent) determined by dividing (1) an amount equal to the sum of (aa) the number of shares of Common Stock outstanding, on a fully diluted basis, immediately prior to such issue or sale multiplied by the then existing warrant price, and (bb) the consideration, if any, received by the Company upon such issue or sale, by (2) the total number of shares of Common Stock outstanding, on a fully diluted basis, immediately after such issue or sale. No adjustment of the Purchase Price however shall be made in an amount less than $.05 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.05 per share or more. For the purposed of this PARAGRAPH (B), the following PROVISIONS (I) TO (VI), inclusive, shall also be applicable. (i) In case at any time after the date hereof the Company shall in any manner grant any rights to subscribe for or purchase, or any options (other than as provided in PARAGRAPH (b) above), rights, or warrants to subscribe for, purchase or otherwise acquire Common Stock ("Options"), whether or not any such Options are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options (determined by dividing ((1) the total amount, if any, received or receivable by the Company as consideration for the grant, issue or sale of such Options, plus the minimum aggregated amount of additional consideration payable to the Company upon the exercise of such Options, plus the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange thereof, by (2) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the exercise, conversion or exchange of all exercisable, convertible, or exchangeable securities issuable upon the exercise of such Options) shall be less than the Purchase Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon exercise, conversion or exchange of the total maximum amount of such exercisable, convertible or exchangeable securities issuable upon the exercise of such Options shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued for such price per share. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or upon exercise of such Options, except as otherwise provided in PROVISION (iii) below. -4- (ii) In case at any time after the date hereof the Company shall in any manner grant, issue, or sell any evidences of indebtedness, shares of capital stock, or other securities, directly or indirectly, exercisable for, convertible into, or exchangeable for Common Stock ("CONVERTIBLE SECURITIES"), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the grant, issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share; PROVIDED THAT, except as otherwise specified in PROVISION (iii) below, (aa) no further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock upon exercise, conversion or exchange of such Convertible Securities, and (bb) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Purchase Price have been or are to be made pursuant to PROVISION (i) above, no further adjustment of the Purchase Price shall be made by reason of such issue or sale. (iii) Upon the happening of any of the following events, namely, if the purchase price provided for in any rights or options referred to in PROVISION (i) above, the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in PROVISIONS (i) OR (ii) above or the rate at which any Convertible Securities referred to in PROVISIONS (i) OR (ii) above are convertible into or exchangeable for Common Stock shall change (other than under or by reason of provisions designed to protect against dilution), the Purchase Price in effect at the time of such event shall forthwith be readjusted to the Purchase Price which would have been in effect at such time had such Options or Convertible Securities still outstanding at such time been initially granted, issued or sold and the Purchase Price initially adjusted as provided in PROVISIONS (i) OR (ii) above, whichever was applicable, except that the minimum amount of additional consideration payable and the total maximum number of shares issuable shall be determined after giving effect to such event (and any prior event or events); and on the expiration, without exercise, of any such Option or the termination, without exercise, of any such right to exercise, convert or exchange such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be increased to the Purchase Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities never been issued. (iv) In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock, Options, or Convertible Securities, any Common Stock, Options, or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. -5- (v) In case any shares of Common Stock, Options, or Convertible Securities or any rights or options to purchase any such Common Stock, Options, or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred, or any underwriting commissions or concessions paid or allowed, by the Company in connection therewith. In case any shares of Common Stock, Options, or Convertible securities or any rights or options to purchase any such Common Stock, Options, or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company, without deduction of any expenses incurred, or any underwriting commissions or concessions paid or allowed, by the company in connection therewith. (vi) In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options, or in Convertible Securities, or (b) to subscribe for or purchase Common Stock, Options, or Convertible securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (vii) The number of shares of Common Stock outstanding at any given time shall not include issued shares owned or held by or for the account of the Company, and the disposition of any such shares so owned or held shall be considered an issue or sale of Common Stock for the purposes of this PARAGRAPH (b). (viii) The term "EXCLUDED SHARES" shall mean shares issued other than for capital raising purposes including: (A) Common Stock issued pursuant to a transaction of the nature described in the second paragraph of PARAGRAPH (A) hereof, and (B) Common Stock issuable or issued to directors, officers or employees of the Company pursuant to stock option, bonus or benefit plans available generally to employee executives including employee directors, and (C) Common Stock issued or issuable pursuant to options, warrants, or securities convertible into or exercisable for Common Stock outstanding on the original issue date of this Warrant, and (D) Common Stock issuable pursuant to an equity line agreement in effect on the date hereof., and -6- (E) Common Stock, warrants, option and/or securities convertible into or exercisable for Common Stock issued in connection with business acquisitions and combinations. (c) In case the Company shall declare a dividend upon the Common Stock payable otherwise than out of earnings or surplus (other than paid-in surplus) or otherwise than in Common Stock or Convertible Securities, the Warrant Purchase Price per share of the Common Stock shall be adjusted as determined in good faith by the Board of Directors of the Company. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or surplus (other than paid-in surplus) only to the extent that such earnings or surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board of Directors of the Company. Such reductions shall take effect as of the date on which a record is taken for the purpose of such dividend, or, if a record is not taken, the date as of which the holders of Common Stock of record entitled to such dividend are to be determined. (d) In case the Company shall at any time issue shares of Common Stock in a stock dividend, stock distribution, or subdivision, the Purchase Price in effect immediately prior to such issuance shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined or consolidated into a smaller number of shares by reclassification or otherwise, the Purchase Price in effect immediately prior to such combination shall be proportionately increased. (e) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger or amalgamation of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, amalgamation or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the Common Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, (i) such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger, amalgamation or sale not taken place, and (ii) if such consolidation, merger, sale, transfer or other disposition is with any person (or any affiliate of such person) who shall have made a purchase, tender or exchange offer which was accepted by the holders of more than ninety percent (90%) of the outstanding shares of Common Stock, the holder of this Warrant shall have been given a reasonable opportunity then to elect to receive, either (x) the stock, securities, cash or properties he would have received pursuant to CLAUSE (i) immediately preceding or (y) the -7- stock, securities, cash or properties issued to previous holders of the Common Stock in accordance with such offer, or the equivalent thereof. In any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustment of the Purchase Price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, amalgamation or sale, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or amalgamation or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to the registered holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. The above provisions of this paragraph shall similarly apply to successive reorganizations, reclassification, consolidations, mergers, sales, transfers or other dispositions. (f) Upon any adjustment of the Purchase Price or the number of shares of Common Stock purchasable pursuant to this Warrant, then and in each such case the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the warrant purchase price resulting from such adjustment and or the increase or decrease, if any, in the number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (g) In case at any time: (1) The Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends out of earned surplus) to the holders of its Common Stock; (2) The Company shall offer for subscription pro rata to the holders of its Common stock any additional shares of stock of any class or other rights; (3) There shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger or amalgamation of the Company with, or sale of all or substantially all of its assets to, another corporation; or (4) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to the holder of this Warrant (aa) at least twenty days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, amalgamation, dissolution, liquidation or winding up, and (bb) in the case of any such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding up, at least twenty days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (aa) shall also specify, in the -8- case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (bb) shall also specify the date on which the holders of Common stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company. (h) The Company and the holder intend for this Warrant to comply with the provisions of the Limited Consent of Buyers to Certain New Transactions which is Annex VII to the Securities Purchase Agreement, dated April 2, 2004, by and among the Company and the Investors named therein (the "LIMITED CONSENT"), and to the extent any terms of this Section 6 or any other part of this Warrant conflicts with such Limited Consent then the Limited Consent will control. 7. NO RIGHTS AS A STOCKHOLDER. The Warrant shall not entitle the holder hereof to any rights as a stockholder of the Company, including, without limitation, voting rights. This Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company referred to in the second paragraph hereof by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until each transfer on such books, the Company may treat the registered holder hereof as the owner hereof for all purposes. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at such office or agency of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by such holder hereof at the time of such surrender. -9- IN WITNESS WHEREOF, Markland Technologies, Inc. has caused this Warrant to be signed by its duly authorized officers under its corporate seal, and this Warrant to be dated ______________. ATTEST: Markland technologies, inc. By: ___________________________ ________________________________ Secretary Name: _________________________ Title: ________________________ -10- SUBSCRIPTION AGREEMENT Date______________________ To The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase Common Shares covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by this Warrant. Signature__________________ Address____________________ _______________ ASSIGNMENT FOR VALUE RECEIVED ___________________ hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of Common Shares Thereby covered set forth hereinbelow unto: NAME OF ASSIGNEES ADDRESS NO. OF SHARES ----------------- ------- ------------- Dated:__________________, 19__ Signature__________________ Address____________________ -11- EX-4.5 6 markland_sb2ex4-5.txt EXHIBIT 4.5 THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO THE DISTRIBUTION HEREOF OR OF THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SALE OF THE SECURITIES UNDER THE SECURITIES ACT OF 1933 OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MARKLAND TECHNOLOGIES, INC. AS TO AN EXEMPTION THEREFROM. Warrant to Subscribe for ______ Shares REDEEMABLE STOCK PURCHASE WARRANT To Subscribe for and Purchase Stock of MARKLAND TECHNOLOGIES, INC. ---------- 1. ISSUE; NUMBER OF SHARES SUBJECT TO WARRANT. THIS CERTIFIES that, for value received, [NAME OF WARRANT HOLDER] or registered assigns is entitled to subscribe for and purchase from MARKLAND TECHNOLOGIES, INC., a FLORIDA corporation (the "COMPANY"), at the warrant purchase price (as hereinafter defined) at any time during the period from the date hereof to and including the close of business on April __, 2007 up to [NUMBER OF SHARES SUBJECT TO WARRANT] fully paid and nonassessable shares (the "COMMON SHARES") of the Common Stock, $.0001, par value per share ("COMMON STOCK"), of the Company for $1.50 per share (the "PURCHASE PRICE"); SUBJECT, however, to the provisions and upon the terms and conditions hereinafter set forth. 2. EXERCISE; ISSUE DATE; DELIVERY OF COMMON SHARES; UNEXERCISED PORTION. The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part (but not as to a fractional Common Share), by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company, at #207 54 Danbury Road, Ridgefield, CT, 06877 (or such other office or agency of the Company, as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Company) together with payment to the Company by certified bank or cashier's check of the purchase price for the Common Shares issuable upon such exercise. The Company agrees that the Common Shares so purchased shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such Common Shares. Certificates for the Common Shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding five (5) trading days, after the rights represented by this Warrant shall have been so exercised, and unless this Warrant has expired, a new Warrant exercisable for the number of Common Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. (b) Notwithstanding the provisions of this Warrant, except in the event that this Warrant is redeemed pursuant to Section 7, in no event shall the holder be entitled to exercise this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrants or other rights to purchase Common Stock or through the ownership of the unconverted portion of convertible securities), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than [4.99% / 9.99%] of the outstanding shares of Common Stock (after taking into account the shares to be issued to the holder upon exercise). For purposes of this proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 ACT") except as otherwise provided in clause (1) of such sentence. (c) If a registration statement covering the Common Shares is not declared effective within one (1) year from the date this Warrant is issued or if it ceases to be effective for any period of time after one (1) year from the date this Warrant is issued, then the holder may surrender this Warrant to the Company together with a notice of net exercise, in which event the Company shall issue to the holder a number of Common Shares (the "ISSUED SHARES") equal to the total number of Common Shares issuable hereunder LESS the number of Common Shares having an aggregate market value (defined as the average closing sale price of the Common Stock for the five (5) trading days immediately prior to the Exercise Date as reported by Bloomberg Information Systems, Inc. or any successor to its function of reporting stock prices) equal to the aggregate exercise price of the Issued Shares. The Holder may not exercise this Warrant pursuant to the terms of this Section 2(c) at any time there is a registration statement covering the resale of the Common Shares with a current prospectus available. 3. COMMON SHARES FULLY PAID; RESERVATION OF COMMON SHARES; LISTING. The Company covenants and agrees that all Common Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that during the period within which the rights represented -2- by this Warrant may be exercised, the Company will at all times have authorized, and reserved, a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant, and will at its expense expeditiously upon each such issuance of shares use its best efforts to procure the listing thereof (subject to issuance or notice of issuance) on all public trading markets on which the Common Stock of the Company is then listed. 4. TAXES. The issue of stock certificates on any exercise of this Warrant shall be made without charge to the holder of the Warrant for any documentary stamp tax in respect of the issue thereof. The Company shall not, however, be required to pay any documentary stamp tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of the Warrant and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid. 5. FRACTIONAL SHARES. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrant, but in respect of any fraction of a share of Common Stock, it will made a payment in cash based on the then excess of the Fair Market Value (as hereinafter defined) of a share of Common Stock over the warrant Purchase Price. "Fair Market Value" means the last reported closing price of the Common Stock on the NASDAQ Stock Market or any national securities exchange on which the Common Stock is traded on the date of exercise of this Warrant, or, if the Common Stock is not traded on the NASDAQ Stock Market or a national securities exchange, the mean of the reported high bid and low asked prices of the Common Stock in the over-the-counter bulletin board on the date of exercise of this Warrant, or, if not so traded, as determined in good faith by, or at the direction of, the Board of Directors of the Company. 6. ADJUSTMENTS TO PURCHASE PRICE. The above provisions are, however, subject to the following: (a) The Purchase Price shall be subject to adjustment from time to time as hereinafter provided. The term "Purchase Price" shall mean, unless and until any such adjustment shall occur, the Purchase Price resulting from such adjustment and any other previous adjustments. Upon each adjustment of the Purchase Price resulting from (i) the declaration of a dividend upon, or the making of any distribution in respect of, any stock of the Company payable in Common Stock (and subject to the provisions of PARAGRAPH (D) below) or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES"), or (ii) the reclassification, subdivision or combination of the Common Stock into a greater or smaller number of shares (and subject to the provisions of PARAGRAPH (E) below), the holder of this Warrant shall thereafter be entitled to purchase, at the Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Purchase Price resulting from such adjustment. -3- (b) If and whenever the Company shall issue or sell any shares of its Common Stock (except for Excluded Shares [as hereinafter defined]) for a consideration per share less than the Purchase Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Purchase Price shall be reduced to a price (calculated to the nearest cent) determined by dividing (1) an amount equal to the sum of (aa) the number of shares of Common Stock outstanding, on a fully diluted basis, immediately prior to such issue or sale multiplied by the then existing warrant price, and (bb) the consideration, if any, received by the Company upon such issue or sale, by (2) the total number of shares of Common Stock outstanding, on a fully diluted basis, immediately after such issue or sale. No adjustment of the Purchase Price however shall be made in an amount less than $.05 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.05 per share or more. For the purposed of this PARAGRAPH (b), the following PROVISIONS (i) TO (vi), inclusive, shall also be applicable. (i) In case at any time after the date hereof the Company shall in any manner grant any rights to subscribe for or purchase, or any options (other than as provided in PARAGRAPH (b) above), rights, or warrants to subscribe for, purchase or otherwise acquire Common Stock ("Options"), whether or not any such Options are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options (determined by dividing ((1) the total amount, if any, received or receivable by the Company as consideration for the grant, issue or sale of such Options, plus the minimum aggregated amount of additional consideration payable to the Company upon the exercise of such Options, plus the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange thereof, by (2) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the exercise, conversion or exchange of all exercisable, convertible, or exchangeable securities issuable upon the exercise of such Options) shall be less than the Purchase Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon exercise, conversion or exchange of the total maximum amount of such exercisable, convertible or exchangeable securities issuable upon the exercise of such Options shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued for such price per share. No further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock or upon exercise of such Options, except as otherwise provided in PROVISION (iii) below. (ii) In case at any time after the date hereof the Company shall in any manner grant, issue, or sell any evidences of indebtedness, shares of capital stock, or other securities, directly or indirectly, exercisable for, convertible into, or exchangeable for Common Stock ("CONVERTIBLE SECURITIES"), -4- whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the grant, issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share; PROVIDED THAT, except as otherwise specified in PROVISION (iii) below, (aa) no further adjustments of the Purchase Price shall be made upon the actual issue of such Common Stock upon exercise, conversion or exchange of such Convertible Securities, and (bb) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Purchase Price have been or are to be made pursuant to PROVISION (i) above, no further adjustment of the Purchase Price shall be made by reason of such issue or sale. (iii) Upon the happening of any of the following events, namely, if the purchase price provided for in any rights or options referred to in PROVISION (i) above, the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in PROVISIONS (i) OR (ii) above or the rate at which any Convertible Securities referred to in PROVISIONS (i) OR (ii) above are convertible into or exchangeable for Common Stock shall change (other than under or by reason of provisions designed to protect against dilution), the Purchase Price in effect at the time of such event shall forthwith be readjusted to the Purchase Price which would have been in effect at such time had such Options or Convertible Securities still outstanding at such time been initially granted, issued or sold and the Purchase Price initially adjusted as provided in PROVISIONS (i) OR (ii) above, whichever was applicable, except that the minimum amount of additional consideration payable and the total maximum number of shares issuable shall be determined after giving effect to such event (and any prior event or events); and on the expiration, without exercise, of any such Option or the termination, without exercise, of any such right to exercise, convert or exchange such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be increased to the Purchase Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities never been issued. (iv) In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock, Options, or Convertible Securities, any Common Stock, Options, or Convertible Securities, as the case may be, -5- issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (v) In case any shares of Common Stock, Options, or Convertible Securities or any rights or options to purchase any such Common Stock, Options, or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred, or any underwriting commissions or concessions paid or allowed, by the Company in connection therewith. In case any shares of Common Stock, Options, or Convertible securities or any rights or options to purchase any such Common Stock, Options, or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company, without deduction of any expenses incurred, or any underwriting commissions or concessions paid or allowed, by the company in connection therewith. (vi) In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options, or in Convertible Securities, or (b) to subscribe for or purchase Common Stock, Options, or Convertible securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (vii) The number of shares of Common Stock outstanding at any given time shall not include issued shares owned or held by or for the account of the Company, and the disposition of any such shares so owned or held shall be considered an issue or sale of Common Stock for the purposes of this PARAGRAPH (b). (viii) The term "EXCLUDED SHARES" shall mean shares issued other than for capital raising purposes including: (A) Common Stock issued pursuant to a transaction of the nature described in the second paragraph of PARAGRAPH (a) hereof, and (B) Common Stock issuable or issued to directors, officers or employees of the Company pursuant to stock option, bonus or benefit plans available generally to employee executives including employee directors, and (C) Common Stock issued or issuable pursuant to options, warrants, or securities convertible into or exercisable for Common Stock outstanding on the original issue date of this Warrant, and (D) Common Stock issuable pursuant to an equity line agreement in effect on the date hereof, and -6- (E) Common Stock, warrants, option and/or securities convertible into or exercisable for Common Stock issued in connection with business acquisitions and combinations. (c) In case the Company shall declare a dividend upon the Common Stock payable otherwise than out of earnings or surplus (other than paid-in surplus) or otherwise than in Common Stock or Convertible Securities, the Warrant Purchase Price per share of the Common Stock shall be adjusted as determined in good faith by the Board of Directors of the Company. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or surplus (other than paid-in surplus) only to the extent that such earnings or surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board of Directors of the Company. Such reductions shall take effect as of the date on which a record is taken for the purpose of such dividend, or, if a record is not taken, the date as of which the holders of Common Stock of record entitled to such dividend are to be determined. (d) In case the Company shall at any time issue shares of Common Stock in a stock dividend, stock distribution, or subdivision, the Purchase Price in effect immediately prior to such issuance shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined or consolidated into a smaller number of shares by reclassification or otherwise, the Purchase Price in effect immediately prior to such combination shall be proportionately increased. (e) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger or amalgamation of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, amalgamation or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the Common Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, (i) such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger, amalgamation or sale not taken place, and (ii) if such consolidation, merger, sale, transfer or other disposition is with any person (or any affiliate of such person) who shall have made a purchase, tender or exchange offer which was accepted by the holders of more than ninety percent (90%) of the outstanding shares of Common Stock, the holder of this Warrant shall have been given a reasonable opportunity then to elect to receive, either (x) the stock, securities, cash or properties he would have received pursuant to CLAUSE (i) immediately preceding or (y) the stock, securities, cash or properties issued to previous holders of the Common Stock in accordance with such offer, or the equivalent thereof. In any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustment of the Purchase Price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, amalgamation or sale, -7- unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or amalgamation or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to the registered holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. The above provisions of this paragraph shall similarly apply to successive reorganizations, reclassification, consolidations, mergers, sales, transfers or other dispositions. (f) Upon any adjustment of the Purchase Price or the number of shares of Common Stock purchasable pursuant to this Warrant, then and in each such case the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the warrant purchase price resulting from such adjustment and or the increase or decrease, if any, in the number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (g) In case at any time: (1) The Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends out of earned surplus) to the holders of its Common Stock; (2) The Company shall offer for subscription pro rata to the holders of its Common stock any additional shares of stock of any class or other rights; (3) There shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger or amalgamation of the Company with, or sale of all or substantially all of its assets to, another corporation; or (4) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to the holder of this Warrant (aa) at least twenty days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, amalgamation, dissolution, liquidation or winding up, and (bb) in the case of any such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding up, at least twenty days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (aa) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (bb) shall also specify the date on which the holders of Common stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company. -8- 7. REDEMPTION OF WARRANTS. The Company may redeem this Warrant at any time after the Common Stock of the Company shall have had a Closing Price (as hereinafter defined) of not less than $2.25 per share for a period of 20 consecutive trading days after a registration statement providing for the sale by the holder of this Warrant of the Common Stock issuable upon the exercise of this Warrant shall have been declared effective by the Securities and Exchange Commission. The Company shall pay the holder of this Warrant $.0001 for each share of Common Stock subject to this Warrant at the time of redemption that is not exercised prior to redemption. Notice of redemption shall be mailed to the holder of this Warrant at his or her address of record not less than thirty days prior to the effective date of the redemption, which date shall be set forth in such notice (the "Effective Date of the Redemption"). The right to exercise this Warrant shall expire on the close of business in Boston, MA, on the Effective Date of the Redemption. Within five (5) trading days after the Effective Date of the Redemption, the Company shall cause the redemption price to be paid by check to the holder of this warrant at his or her address of record. "Closing Price" shall mean (i) if the Common Stock is not listed on a national securities exchange, (A) the closing bid price of the Common Stock on the Nasdaq National Market or the Nasdaq Small Cap Market, as applicable or (B) if the Common Stock is not so quoted in the over the counter market as reported by Bloomberg's or other equivalent service, or (ii) if the Common Stock is quoted on a national securities exchange the last reported sale price on the principal exchange where the Common Stock is traded. 8. NO RIGHTS AS A STOCKHOLDER. The Warrant shall not entitle the holder hereof to any rights as a stockholder of the Company, including, without limitation, voting rights. This Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company referred to in the second paragraph hereof by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until each transfer on such books, the Company may treat the registered holder hereof as the owner hereof for all purposes. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at such office or agency of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by such holder hereof at the time of such surrender. -9- IN WITNESS WHEREOF, MARKLAND TECHNOLOGIES, INC. has caused this Warrant to be signed by its duly authorized officers under its corporate seal, and this Warrant to be dated ______________. ATTEST: MARKLAND TECHNOLOGIES, INC. __________________________ By: ___________________________ Secretary Name: _________________________ Title: ________________________ -10- SUBSCRIPTION AGREEMENT Date _______________________ To The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase Common Shares covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by this Warrant. Signature__________________ Address____________________ _________________ ASSIGNMENT FOR VALUE RECEIVED ___________________ hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of Common Shares Thereby covered set forth hereinbelow unto: NAME OF ASSIGNEES ADDRESS NO. OF SHARES ----------------- ------- ------------- Dated:_____________________, 19__ Signature__________________ Address____________________ -11- EX-4.10 7 markland_sb2ex4-10.txt EXHIBIT 4.10 eCon investor relations ================================================================================ Mr. Robert Tarini Markland Technologies http://www.marklandtech.com/home.html tarini oceandata.com Dear Sirs: RE: CONSULTING AGREEMENT between Markland Technologies (MKLD) AND ECON INVESTOR RELATIONS INC. (ECON) - -------------------------------------------------------------------------------- Further to the discussion between ECON Corporate Relations Inc. and your Company we are pleased to set out the terms of the Company engaging our services as Corporate Communications Consultants. AMENDED AGREEMENT ----------------- Effective Date on the 18th day of January 2003 by Markland Technologies, a corporation with an office located in Fairfax, VA (the "Company") and ECON Investor Relations Inc., a Province of British Columbia corporation with offices located in Delta, British Columbia and Point Roberts, WA (the "Consultant"), for the provision of consulting services. CONSULTING SERVICES 1. The Company hereby retains the services of the Consultant to render corporate communications, planning and strategy consultation and financial public relations services with respect to the Company's securities or such other services as the Company and the Consultant may agree upon from time to time during the term of this Agreement, including but not limited to the following: i. ECON will write and MARKLAND TECHNOLOGIES will approve all corporate profiles, news releases and other corporate literature for the Company for dissemination to shareholders, brokers and investors on the aim investor internet site, as well as email, fax and mail. ii. Subject to applicable securities laws, assist in raising capital or negotiating and presenting acquisition opportunities for the Company. Separate finders fee agreements are required, based on acceptable industry standards. iii. Jointly develop and maintain computer database of media, shareholders, analysts, investors and brokers for the Company Agreement cont. Page 2 iii. Develop fax, email list for the Company and manage dissemination of news releases through fax, email, mail, and internet; iv. Posting of company information and participation in Internet newsgroups and investor chat rooms on behalf of the Company; and all company information on the appropriate media sites specific to MARKLAND TECHNOLOGIES's industry segment. v. Initiate and maintain telephone contact with media, investors, analysts, shareholders and brokers to keep them informed of the Company's progress; and vi. Initiate and update coverage on the Company in the Investor Incite Information Newsletter, as well as the http://www.investorideas.com web site. vii. ECON will hire personnel to allocate full-time to developing a retail following for the Company for both internet and phone. 2. The Consultant hereby accepts such retention on the terms and conditions herein set forth and agrees to use its best efforts to perform these services at the request of the Company. 3. On an ongoing basis the Consultant will forward to the Company names and addresses of individuals and brokers that have requested information on the Client. The Consultant will also provide updated fax lists, email lists and mail lists at the Company's request. 4. Consultant recognizes and confirms that some of the information to be provided by the Company is either non-public, confidential or proprietary in nature. Consultant hereby agrees that such information will be kept confidential and will not, without the prior consent of the Company, be disclosed by them, their agents or employees, except as otherwise required by law. 5. Before Consultant releases any information referring to the Company or which uses the Company's name in a manner that may result in public dissemination thereof, Consultant shall furnish copies of all documents (including any digital or "streaming" transmissions) presentations, or prepared oral statements to the Company. TERM The term of this Agreement shall be commencing January 18, 2003 for six months with an option to renew for an additional six months. Both parties have the right to terminate this agreement based on 90 days written notice. Agreement cont. Page 3 COMPENSATION In full consideration and compensation for the consulting services to be rendered to the Company by the Consultant, the Consultant shall be remunerated as follows: 1. The Company shall pay ECON, a reduced fee of $7000.00 US Funds per month for the services rendered by ECON on the Company's behalf. 2. In addition to the fees set out above, the Company shall forthwith request the Client to grant shares to the Consultant, under the following terms and conditions: i. The Company will issue 20,000 shares per month for the 1St 90 days based on today's prices. At the end of the 90 day period, the share agreement and structure will be reviewed based on share price and completion of the reverse merger (will remain as per original agreement dated December 2002). ii. Shares will be registered for free trading in the next registration (piggy back rights) document to be filed by the Company within a minimum of 90 days. iii. Consultant agrees to disclose its compensation as required by U.S., Canadian, "Blue Sky" Securities Laws or as mandated by any forum in which the Company's securities are traded. iv. Company agrees to pay finders fees of 5% for introduction acting as finder only resulting in financing for the Company. EXPENSES The Company agrees to reimburse the Consultant for reasonable expenses in connection with the services stated above, including advertisement placement and travel expenses. Expenses that are billed to the Consultant on behalf of the Company are subject to a 10% surcharge to cover the Consultant's administrative costs and liability. Expenses over $100 are subject to approval by the Company. Expenses are expected to include phone, mailings & fax, while MARKLAND TECHNOLOGIES will incur all News Wire Distribution Costs. All travel in the future related to MARKLAND TECHNOLOGIES must be pre-approved and agreed upon. Agreement cont. Page 4 COMPANY'S OBLIGATIONS The Company shall make available to the Consultant all information concerning the business, assets, operations and financial condition of the Company, which the Consultant reasonably requests in connection with the performance of its obligations. The Consultant may rely on the accuracy of all such information without independent verification. The Company shall provide the personnel and materials necessary to prepare and send information to investors and brokers as required by the Consultant. CONSULTANT'S OBLIGATIONS The Consultant warrants that it has all the applicable licenses and qualifications to do business in the United States and Canada. The Consultant agrees to comply with all Laws and regulations of the United States of America and of the specific states and Canada and provinces regarding all of its activities in representing the Company, including but not limited to, general public relations activities, advertising, communications with stockholders, investors and consumers. The Consultant agrees to comply with all laws, regulations and opinions enforced by the Securities and Commission, any other applicable Federal, state, or provincial agency, self-regulatory organization, or any forum in which the Company's securities are traded. CONFIDENTIALITY The Consultant hereby agrees to maintain in the strictest confidence all such information provided to it by the Company, provided that such information is first identified by the Company, as confidential information. ECON agrees to sign a separate confidentiality agreement at the Company's request. INDEMNIFICATION The Company shall indemnify and hold harmless the Consultant against any and all loss, liability, damage, cost or expense arising out of any claim or lawsuit, actual or threatened, which the Consultant may suffer, sustain or become subject to, as a result of, or in connection with, the performance of their obligations under this Agreement, except for any loss, liability or expense which is suffered as the result of, or in connection with, the Consultant's willful misconduct, or reckless or grossly negligent conduct, provided that the Consultant shall give prompt written notice to, and shall cooperate with and render assistance to, the Company regarding any such claim or lawsuit, and provided further the Company shall have the option to undertake and conduct the defense of any such claim or law suit. Consultant agrees to indemnify and Agreement cont. Page 5 held harmless the Company from any and all loss, liability, damages, cost or expense arising out of any claim or lawsuit, actual or threatened, which the Company may suffer, sustain or become subject to, as a result of or in connection with Consultant's willful misconduct, reckless or grossly negligent conduct. ASSSIGNMENT No interest of any party under this Agreement may be assigned or otherwise transferred except with the written consent of the other party. ARBITRATION Any controversy arising out of, connected to, or relating to any matters herein of the transactions with Consultant and Company (including officers, directors, affiliates, agents, promoters, advisers) on behalf of the undersigned, or this Agreement, or the breach thereof, including, but not limited to any claims of violations of Federal and/or State Securities Acts, Canadian or other foreign jurisdiction securities laws, Banking Statutes, Consumer Protection Statutes, Environmental Statutes, Federal and/or State anti-Racketeering (e.g. RICO) claims as well as any common law claims and any State Law claims of fraud, negligence, negligent misrepresentations, and/or conversion shall be settled by arbitration; and in accordance with this paragraph and judgment on the arbitrator's award may be entered in any court having jurisdiction thereof in accordance with the provisions of the State of Incorporation Law. Please indicate acceptance of these terms by signing below where indicated and returning a copy to our office. ECON INVESTOR RELATIONS MARKLAND TECHNOLOGIES /s/ Dawn Van Zant /s/ Ken Ducey, Jr. - ------------------------------ ----------------------------------- Ms. Dawn Van Zant, Director Mr. Ken Ducey, Jr. Date: Date: EX-4.11 8 markland_sb2ex4-11.txt EXHIBIT 4.11 MARKETSHARE RECOVERY, INC. 95 Broadhollow Road (Suite 101) Melville, New York 11747 PH: (631) 385-0007 FX: (631) 385-5205 www.marketsharereporter.com - --------------------------- CONSULTING AGREEMENT This Agreement (the "Agreement") is dated October 29, 2003 and is entered into by and between MARKLAND TECHNOLOGIES (MRKL)), hereinafter referred to as ("CLIENT") and MarketShare Recovery, Inc./ Stuart Siller / George Matin / , hereinafter referred to as ("MSRY"). 1. CONDITIONS. This Agreement will not take effect, and MSRY will have no obligation to provide any service whatsoever, unless and until CLIENT returns a signed copy of this Agreement to MSRY (either by mail or facsimile copy). CLIENT shall be truthful with MSRY in regard to any relevant material regarding CLIENT, verbally or otherwise, or this entire Agreement will terminate and all monies paid shall be forfeited without further notice. Upon execution of this Agreement, CLIENT agrees to cooperate with MSRY in carrying out the purposes of this Agreement, keep MSRY informed of any developments of importance pertaining to CLIENT's business and abide by this Agreement in its entirety. 2. SCOPE AND DUTIES. During the term of this Agreement, MSRY will perform the following services for CLIENT: 2.1 DUTIES TO BE PERFORMED FOR CLIENT o Client allowed unparalleled access to active investors and a channel to communicate with new or existing shareholders. We use various channels to reach individual and professional investors worldwide. o Editorial Write up (Journalist will interview the CEO of our client firm(s), and do an in-depth article on the firm(s) potential as well as the particular industry's growth potential. o Initiate through a introduction independent research coverage, as example, www.stocksontheweb.com o Client to be featured on a internet-based talk radio and corporate radio show(s). o Send out company profile(s) to databases. o Developing innovative, results-oriented communication campaigns. We work with our clients to build solutions that allow companies to maximize their efforts across all mediums, allowing us to provide each of our clients individually tailored solutions to help them disseminate their messages. o Assistance in distribution of company news as appropriate and in concert with milestones and newsworthy events to MSRY's press contacts database. o Make introductions to professionals in various industries, giving us the ability to be leaders not laggards, to be proactive not reactive. The importance of our relationship building cannot be underestimated, as it represents an intangible value to the many clients who require us to have frequent contact with above. o Will help Consult in the areas of: identifying other company(ies) as potential partners for technology development and enhancement. o Will help Consult in the area of business strategy. o Mike Barton will concentrate on A fully dedicated server for 12 months running 24-7. 4 press releases per month each to our 10 million financial databases, which will contain 35,000 Media contacts, journalists and editors of major financial publications. We will also supply 4 editorial pieces written by Maria Esposito One every 3 months. Maria will do an extensive interview with the CEO and base her story on the companies strong points and how it fits into their sector. This editorial will be mailed to the entire 10 million subscribers. Maria will also host a live Internet interview with the CEO On Voice America every 3 months. This show gets about 4 million hits per month and is an excellent way to put a personal touch to the companies story. You will also be provided with a link for your site and the show will also be listed in the archives at www.marketsharereporter.com. The archives receive an additional 2 million hits per month. We will also provide a fax blast to 40,000 subscribers consisting of Institutions, Market makers and Retail investors. These blasts will be every 2 weeks and we will send a press release of your choice. We feel this campaign can help your company reach a large number of investors and give them a chance to get to know your companies story and build a history of trust. o As we all know in today's financial climate you really need to keep the investor informed and allow them the time they need to make an educated judgment on your company. George Patin will concentrate on: 1-EXPLORE ROLLUPS AND ACQUISITIONS FOR MRKL GLOBALLY. 2-ARRANGE FUNDING SOURCES EITHER THROUGH OUR OWN SOURCES OR AFFILIATE SOURCES. 3-ASSIST IN CREATING ADDITIONAL REVENUES FOR MRKL BY WAY OF JVs OR SYNERGIES HERE AND ABROAD. 4-HELPING WITH MARKET DEVELOPEMENT and Exposure. b-NEWS LETTER AND RESEARCH WRITERS (RW) THE STREET.COM & OTHERS. c-INTRODUCTION TO INSTITUTIONS FOR LIQUIDITY, OF COURSE SUBJECT TO COMPLETE DD d-ASSISTING WITH MMs 4-INTRODUCING MRKL TO TOP NOTCH IB, LAW AND ACCOUNTING FIRMS. 5-ARRANGING DEBT INSTRUMENTS, STOCKLOANS, ASSET PURCHASES, ETC, OR OTHER INSTRUMENTS AS TO BE MUTUALLY AGREED TO. 2.2 ADVICE AND COUNSEL. MSRY will provide advice and counsel regarding CLIENT's strategic business and financial plans, strategy and negotiations with potential lenders/investors, joint venture, corporate partners and others involving financial and financially-related transactions. 2.3 INTRODUCTIONS TO THE INVESTMENT COMMUNITY. MSRY has a familiarity or association with numerous funding sources across the country and will enable contact between CLIENT and/or CLIENT's affiliate to facilitate business transactions among them. MSRY shall use its contacts in the community to assist CLIENT in establishing relationships, as the CLIENT may warrant. 2.4 CLIENT AND/OR CLIENT'S AFFILIATE TRANSACTION DUE DILIGENCE. MSRY will assist in due diligenece phases as requested. 2.5 ADDITIONAL DUTIES. CLIENT and MSRY shall mutually agree upon any additional duties that MSR may provide for compensation paid or payable by CLIENT under this Agreement. Although there is no requirement to do so, such additional agreement(s) may be attached hereto or in the future. 2.6 STANDARD OF PERFORMANCE. MSRY shall devote such time and efforts to the affairs of the CLIENT as is reasonably necessary to render the services contemplated by this Agreement. MSR is not responsible for the performance of any services, which may be rendered hereunder if the CLIENT fails to provide the requested information in writing prior thereto. The services of MSRY shall not include the rendering of any legal opinions or the performance of any work that is in the ordinary purview of a certified public accountant. MSRY cannot guarantee results on behalf of CLIENT, but shall use commercially reasonable efforts in providing the services listed above. If an interest is expressed in satisfying all or part of CLIENT's financial needs, MSRY shall notify CLIENT and advise it as to the source of such interest and any terms and conditions of such interest. MSRY will in no way act as a "broker-dealer" under state securities laws. Because all final decisions pertaining to any particular investment are to be made by CLIENT, CLIENT may be required to communicate directly with potential funding sources. 3. COMPENSATION TO MSRY. CLIENT will pay for services described herein. 1. Within five (5) days of the signing of this agreement, the client will pay the following in lieu of $ 250,000 cash. Client will pay value based on the closing bid price at date of signing. The distribution is as follows: 60% to MarketShare Recovery, 30% to Stuart Siller, and 10% to George Matin. Certificates (restricted 144 stock) to be endorced as such above, and to be freely tradable in one (1) year. Please forward the Certificates to MarketShare Recovery Inc., 95 Broadhollow Road, Suite 101, Melville, New York, 11747, Att: Stuart Siller., and Stuart Siller will distribute to parties accordingly. 3.2 FEES FOR DIRECT INVESTMENT, MERGER/ACQUISITION. In the event that Stuart Siller / MSRY, on a non-exclusive basis, introduces CLIENT or a CLIENT affiliate to any third party funding source(s), underwriter(s), merger partner(s) or joint venture(s) who then enters into a funding, underwriting, merger, joint venture or similar agreement with CLIENT or CLIENT's affiliate, CLIENT hereby agrees to pay Stuart Siller / George Matin consultant fees, to be agreed upon. Consultant fees are deemed earned and shall be due and payable at the first close of the transaction, however, in certain circumstances when payment of consultant fees at closing is not possible, within 24 hours after CLIENT has received the proceeds of such investment shall payment occur. This provision shall survive this Agreement for a period of one year after termination or expiration of this Agreement. In other words, the consultant fee shall be deemed earned and due and payable for any funding, underwriting, merger, joint venture or similar transaction which first closes within a year of the termination or expiration of this Agreement as a result of an introduction as set forth above. A. DIRECT INVESTMENT. For a direct investment or loan made to CLIENT by a third party investor / lender either introduced to CLIENT by Stuart Siller / George Matin / STOCKSONTHEWEB / RESEARCH WORKS / Bill Ritger or which contacted CLIENT directly as a result of MSRY's efforts, CLIENT shall pay Stuart Siller / George Patin a introduction fee of 8% of total investment or loan amount received by CLIENT from the third party investor / lender. If Stock is used for a hypothecation [EXCLUDING 144 STOCK LOAN], Stuart Siller / George Patin shall be entitled to 10% of the total stock used for the loan. These fees are not intended to be cumulative and are to be considered separate for individual transactions. 4. TERM. TERM OF AGREEMENT twelve (12) months. . 5. NON CIRCUMVENTION. In and for valuable consideration, CLIENT hereby agrees that MSRY may introduce (whether by written, oral, data, or other form of communication) CLIENT to one or more opportunities, including, without limitation, existing or potential investors, lenders, borrowers, trusts, natural persons, corporations, limited liability companies, partnerships, unincorporated businesses, sole proprietorships and similar entities (an ""Opportunity"" or "Opportunities""). CLIENT further acknowledges and agrees that the identity of the subject Opportunities, and all other information concerning an Opportunity (including without limitation, all mailing information, phone and fax numbers, email addresses and other contact information) introduced hereunder are the property of MSRY, and shall be treated as confidential information by CLIENT, it affiliates, officers, directors, shareholders, employees, agents, representatives, successors and assigns. CLIENT shall not use such information, except in the context of any arrangement with MSRY in which MSRY is directly and actively involved, and never without MSRY's prior written approval. CLIENT further agrees that neither it nor its employees, affiliates or assigns, shall enter into, or otherwise arrange (either for it/him/herself, or any other person or entity) any business relationship, contact any person regarding such Opportunity, either directly or indirectly, or any of its affiliates, or accept any compensation or advantage in relation to such Opportunity except as directly though MSR, without the prior written approval of MSRY. MSRY is relying on CLIENT's assent to these terms and their intent to be bound by the terms by evidence of their signature. Without CLIENT's signed assent to these terms, MSRY would not introduce any Opportunity or disclose any confidential information to CLIENT as herein described. 6. ARBITRATION. The parties herein agree to arbitrate any dispute pursuant to the guidelines set forth by the American Arbitration Association. NOTE: IF ANY PARTY SHALL INSTITUTUTE ANY COURT PROCEEDING IN AN EFFORT TO RESIST ARBITRATION AND BE UNSUCCESSFUL IN RESISTING ARBITRATION OR SHALL UNSUCCESSFULLY CONTEST THE JURISDICTION OF ANY ARBITRATION FORUM, OVER ANY MATTER WHICH IS THE SUBJECT OF THIS AGREEMENT, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER FROM THE LOSING PARTY ITS LEGAL FEES AND ANY OUT-OF-POCKET EXPENSES INCURRED IN CONNECTION WITH THE DEFENSE OF SUCH LEGAL PROCEEDING OR ITS EFFORTS TO ENFORCE ITS RIGHTS TO ARBITRATION AS PROVIDED FOR HEREIN. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. STUART SILLER BY: /s/ Stuart Siller DATED: ---------------------------------- ---------------- Stuart Siller CLIENT: MARKLAND TECHNOLOGIES (MRKL) By: DATED: ---------------------------------- ---------------- Signature - -------------------------------------- Title - -------------------------------------- Printed Name EX-4.13 9 markland_sb2ex4-13.txt EXHIBIT 4.13 ================================================================================ THE RESEARCH WORKS, INC. 623 Ocean Avenue, Sea Girt, New Jersey 08750 Telephone: (732) 682-4950 Web: www.stocksontheweb.com ================================================================================ November 12, 2003 Mr. Ken Ducey, Jr. President Markland Technologies, Inc. 54 Danbury Road, #207 Ridgefield, CT 06877 Dear Mr. Ducey: This letter agreement (the "Agreement") will confirm our understanding regarding the engagement of THE RESEARCH WORKS, INC. ("RW"), a New Jersey corporation, to provide equity research services to MARKLAND TECHNOLOGIES, INC. ("Client") a Florida corporation. Whereas RW is an independent research firm that provides research services with respect to the securities of its clients, and whereas Client has publicly traded securities and desires RW to provide equity research services with respect to its common stock, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, RW and Client hereby agree as follows: 1. TERM. The term of this Agreement ("Term") shall commence on the date of your signing of this Agreement and shall continue through the one-year anniversary of the release of the first RW equity research report on the Client ("End of the Full Term"), unless either party terminates this Agreement, with or without cause, at an earlier date ("Early Termination Date") upon delivery of written notice to the other party at the address set forth hereinbelow. 2. RW SERVICES. RW shall prepare an equity research report on Client ("Report") in substantially the same form as samples of RW's research reports presently displayed at RW's Web site (www.stocksontheweb.com). Client shall have no editorial control over the opinions expressed in the Report, and RW shall not supply a draft copy of the Report to Client. RW shall complete and post a copy of the finished Report at its Web site within two (2) months of the date of this Agreement and shall update the Report on its Web site on approximately a monthly basis for the remainder of the Term. Client may make suggestions for changes regarding the factual content of the Report at any time after the initial Report is posted on RW's Web site, but RW is under no obligation to accept such proposed changes, and RW retains exclusive control over the opinions expressed in the Report. Following the initial posting of the Report on its Web site, RW shall print and distribute the Report at its own expense to individual and institutional investors whom RW believes have an interest in small-capitalization stocks. The date of such printing and distribution shall be at RW's sole discretion. RW shall also mail 100 copies of the Report to Client, and Client shall have permission to duplicate the Report at its own expense or to purchase additional original copies from RW for a nominal fee. 3. FEE. In consideration of RW's services, the Client shall pay to RW a fee ("Fee") consisting of that number of Client's common shares that is equal to one hundred thousand dollars ($100,000) divided by the average of the closing (last trade) prices of Client's common stock on the 10 trading days following the date on which you sign this Agreement. Fifty Percent of this Fee is due and payable upon the date on the sixth day after you sign this Agreement, and Fifty Percent of this Fee is due on the sixth day after the report is published. The shares shall be issued in certificate form for The Research Works, Inc. (623 Ocean Avenue, Sea Girt, NJ 08750; tax # 22-3173901). RW acknowledges that the common shares issued pursuant to this Agreement (a) have not been registered under the Securities Act of 1933, as amended (the "Act"), (b) cannot be offered or sold except pursuant to a registration statement under the Act or an exemption from registration under the Act, and (c) are being acquired for investment and not with a view to the distribution thereof. RW represents that it is an "accredited investor" as such term is defined by Rule 501(a) of Regulation D and also acknowledges that its officers and directors are capable of evaluating the merits and risks of an investment in Client's common shares. Should the Client terminate this Agreement prior to the End of the Full Term for any reason other than RW's failure to perform in accordance with the terms set forth in this Agreement, then no portion of the Fee shall be refunded to the Client. Should the Client terminate this Agreement prior to the End of the Full Term for RW's failure to perform in accordance with the terms set forth in this Agreement, then a percentage of the Fee shall be refunded to the Client; this percentage is the product of 50% times the result of the division of the number of days from the Early Termination Date until the End of the Full Term by the number of days from the commencement of the Term until the End of the Full Term. Notwithstanding the foregoing, Client shall recover the entire Fee from RW if Client terminates this Agreement based on RW's failure to release the initial Report in accordance with the time and manner mandated by Paragraph 2. 2 Should RW terminate this Agreement prior to the End of the Full Term, then a percentage of the Fee shall be refunded to the Client; this percentage shall be the product of 50% times the result of the division of the number of days from the Early Termination Date until the End of the Full Term by the number of days from the commencement of the Term until the End of the Full Term. Notwithstanding the foregoing, RW shall refund the entire Fee to Client if RW terminates this Agreement prior to the release of the initial Report for any reason other than Client's failure to perform in accordance with the terms set forth in this Agreement. 4. CLIENT'S REPRESENTATIONS AND COVENANTS. Client represents and covenants that: (a) it will not use the Report in connection with any offering without the prior written consent of RW; (b) it and its principals will keep confidential their knowledge of the pending release of the Report; (c) it will distribute the Report only in its entirety and in conformity with all securities laws; (d) it will cease any distribution of the Report when facts or management's expectations are materially different from those presented or estimated in such Report; (e) it has received a copy of RW's brochure and Part II of RW's ADV application, both of which are available for viewing at RW's web site (www.stocksontheweb.com); and (f) it will indemnify and hold RW and its officers, employees and independent contractors harmless from and against any loss, damage, liability, or expense (including reasonable attorneys' fees and other costs of litigation, regardless of outcome) arising out of or in connection with (i) any breach of the representations and covenants made by Client in this Paragraph 4, (ii) false or misleading information provided to RW by Client, or (iii) claims relating to the purchase and/or sale of Clients' securities arising from RW's relationship with Client. Such indemnifications shall continue for a period of five (5) years beyond the end of the Term. 5. ARBITRATION. Any dispute between RW and Client, either during or after the Term, shall be subject to binding arbitration before a three-arbitrator panel in accordance with the rules of the American Arbitration Association. Prior to the selection of the arbitrators of the binding arbitration, the parties shall first attempt non-binding mediation before a mediator selected by said Association. Each party shall bear its own costs relating to such mediation, including attorney's fees and expenses. In the event the parties are unable to resolve the dispute through mediation and the arbitrators reach a decision in favor of one of the parties then the other party shall be responsible for all costs of the first party relating to the arbitration, including attorney's fees and expenses, subject however to the discretion of the arbitrators to reallocate these costs if cause is so found by the arbitrators. Unless another location is mutually agreed upon by both parties, the mediation and arbitration are to take place in the State of New Jersey. 3 6. NOTICES. Notices to RW are to be delivered to William J. Ritger at the address in this letterhead. Notices to the Client are to be delivered to the individual to whom this letter is directed, at the inside address of this letter. The parties to this Agreement may change these addresses by giving written notice. 7. IMPAIRED PROVISION. If any provision of this Agreement is held invalid, illegal or unenforceable in any respect (an "Impaired Provision"), (a) such Impaired Provision shall be interpreted in such a manner as to preserve, to the maximum extent possible, the intent of the parties, (b) the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and (c) such decision shall not affect the validity, legality or enforceability of such Impaired Provision under other circumstances. The parties agree to negotiate in good faith and agree upon a provision to substitute for the Impaired Provision in the circumstances in which the Impaired Provision is invalid, illegal or unenforceable. 8. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof and shall not be modified, except by a written document signed by the parties. 9. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. 10. FACSIMILE COPIES. Duly executed facsimile copies are fully binding under any and all applicable laws. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. (The remainder of this page is left blank intentionally.) 4 Please confirm your agreement with the foregoing by signing and returning one copy of this letter to the undersigned whereupon this letter shall become a binding Agreement. The offer to enter into this Agreement shall expire 14 days from the date of this letter. Very truly yours, THE RESEARCH WORKS, INC. By: /s/ William J. Ritger ------------------------------ William J. Ritger President AGREED TO AS OF THE DATE BELOW: MARKLAND TECHNOLOGIES, INC. By: /s/ Ken Ducey, Jr. ------------------------------ Ken Ducey, Jr. President Date: ---------------------------- 5 EX-4.14 10 markland_sb2ex4-14.txt EXHIBIT 4.14 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "AGREEMENT") dated as of October 27, 2003 between Markland Technology, Inc. (including, as the context may require, its subsidiaries, the "COMPANY"), a Florida corporation, and Ms. Jo-Ann Nichols (the "EMPLOYEE"), a resident of Pawtucket, RI. WHEREAS, the Company wishes to employ the Employee to render services for the Company on the terms and conditions set forth in this Agreement, and the Employee wishes to be retained and employed by the Company on such tennis and conditions. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth below and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT - The Company hereby employs the Employee, and the Employee accepts such employment and agrees to perform services for the Company, upon the terms and conditions set forth in this Agreement. 2. POSITION AND DUTIES/SERVICE WITH COMPANY - During the term of the Employee's employment, the Employee agrees to perform such reasonable employment duties as the Board of Directors or Chief Executive Officer of the Company shall assign from time to time. Currently, the Employee's employment shall commence with the title of Senior Accountant. Performance of Duties - The Employee agrees to serve the Company faithfully and to the best of their ability and to devote a reasonable amount of time, attention and efforts to the business and affairs of the Company during their employment by the Company. The Employee hereby confirms that they are under no contractual commitments inconsistent with obligations set forth in this Agreement and that during the term of this Agreement, they will not render or perform services for any other corporation, firm, entity or person which are inconsistent with the provisions of this Agreement. While employed by the Company, the Employee may participate in reasonable professional, charitable, and/or personal investment activities so long as such activities do not interfere with the performance of their obligations under this Agreement. 3. COMPENSATION BASE SALARY - As compensation for services to be rendered by the Employee under this Agreement, the Company shall pay to the Employee: (a) a base salary of $3,750 per month, and also arrange for medical and dental health insurance coverage for the employee in the state of Rhode Island. (b) INCENTIVE COMPENSATION - In addition to the base salary, the Employee shall be eligible to participate in any bonus or incentive compensation plans that may be established by the Board of Directors of the Company from time to time applicable to the Employee. (c) PARTICIPATION IN BENEFIT PLANS - The Company agrees to pay for Employee's benefits during the employment period, including but not limited to health insurance and disability insurance. Additionally, while employed by the Company, the Employee shall also be eligible to participate in all employee benefit plans or programs (including vacation time) of the Company to the extent that the Employee meets the requirements for each individual plan. The Company provides no assurance as to the adoption or continuance of any particular employee benefit plan or program, and the Employee's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. (d) EXPENSES - The Company will pay or reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred in the performance of their duties under this Agreement, subject to the Company's normal policies for expense verification. (e) GRANT OF STOCK. The company agrees to grant to Employee, as of date of this contract equity in the Company equivalent to $40,000. Such stock shall be restricted, unregistered common stock of the Company. Confidential Information - Except as permitted or directed by the Company's Board of Directors or Chief Executive Officer, during the term of his employment or at any time thereafter, the Employee shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company that the Employee has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company (including employment by the Company or any affiliated companies prior to the date of this Agreement) whether developed by himself/herself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, any customer or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. The Employee acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. Both during and after the term of his employment, the Employee will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality shall not apply to any knowledge or information that is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by the Employee. 4. VENTURES - If, during the term of his employment the Employee is engaged in or associated with the planning or implementing of any project, program or venture involving the Company and a third party or parties, all rights in such project, program or venture shall belong to the Company. Except as approved by the Company's Board of Directors or Chief Executive Officer, the Employee shall not be entitled to any interest in such project, program or venture or to any commission, finder's fee or other compensation in connection therewith other than the compensation to be paid to the Employee as provided in this Agreement. 2 5. TERMINATION OF EMPLOYMENT; GROUNDS FOR TERMINATION - The Employee's employment shall terminate in the event that at any time: (i) The Employee dies, (ii) The Board of Directors of the Company elects to terminate this Agreement for "cause" and notifies the Employee in writing of such election, (iii) The Employee becomes "disabled," so that he cannot perform the essential functions of his position with or without reasonable accommodation, (iv) The Board of Directors of the Company elects to terminate this Agreement without "cause" and notifies the Employee in writing of such election, or (v) The Employee elects to terminate this Agreement and notifies the Company in writing of such election. If this Agreement is terminated such termination shall be effective 30 days after delivery of the notice of termination. (b) "Cause" Defined "Cause" means: (i) The Employee has breached the provisions of this Agreement in any material respect, (ii) The Employee has engaged in willful and material misconduct, including willful and material failure to perform the Employee's duties as an officer or employee of the Company and has failed to cure such default within 30 days after receipt of written notice of default from the Company, (iii) The Employee has committed fraud, misappropriation or embezzlement in connection with the Company's business, or (iv) The Employee has been convicted or has pleaded NOLO CONTENDERE to criminal misconduct (except for parking violations, occasional minor traffic violations and other similar minor violations). (c) EFFECT OF TERMINATION - Notwithstanding any termination of this Agreement, the Employee, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of this Agreement which specifically relate to periods, activities or obligations upon or subsequent to the termination of the Employee's employment. (d) "DISABLED" DEFINED - "DISABLED" means any mental or physical condition that renders the Employee unable to perform the essential functions of his position, with or without reasonable accommodation, for a period in excess of 3 months. (e) SURRENDER OF RECORDS AND PROPERTY - Upon termination of his employment with the Company, the Employee shall deliver promptly to the Company all records, manuals, books, 3 blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof that relate in any way to the business, products, practices or techniques of the Company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents that in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 6. INDEMNIFICATION In the event that Employee is made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that he is or was a director, officer, or member of a committee of the Board of Directors of the Company or serves or served any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of the Company, he shall be indemnified by the Company and the Company shall advance his related expenses to the fullest extent permitted by law (including without limitation, damages, costs and reasonable attorney fees), as may otherwise be provided in the Company's Certificate of Incorporation and ByLaws. 7. MISCELLANEOUS (a) COUNTERPARTS - This Agreement may be executed in separate counterparts, each of which will be an original and all of which taken together shall constitute one and the same agreement, and any party hereto may execute this Agreement by signing any such counterpart. (b) SEVERABILITY - Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule, the validity, legality and enforceability of the other provisions of this Agreement will not be affected or impaired thereby. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceably be covered. (c) SUCCESSORS AND ASSIGNS - This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives and, to the extent permitted by subsection (e), successors and assigns. (d) ASSIGNABILITY - Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable (including by operation of law) by either party without the prior written consent of the other party to this Agreement, except that the Company may, without the consent of the Employee, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. Provided such assignee explicitly assumes such responsibilities, after any such assignment by the Company, the 4 Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 10. (e) MODIFICATION, AMENDMENT, WAIVER OR TERMINATION - No provision of this Agreement may be modified, amended, waived or terminated except by an instrument in writing signed by the parties to this Agreement. No course of dealing between the parties will modify, amend, waive or terminate any provision of this Agreement or any rights or obligations of any party under or by reason of this Agreement. No delay on the part of the Company or Employee in exercising any right hereunder shall operate as a waiver of such right. No waiver, express or implied, by the Company of any right or any breach by the Employee shall constitute a waiver of any other right or breach by the Employee. (f) NOTICES - All notices, consents, requests, instructions, approvals or other communications provided for herein shall be in writing and delivered by personal delivery, overnight courier, mail, electronic facsimile or e-mail addressed to the receiving party at the address set forth herein. All such communications shall be effective when received. If to the Company: Facsimile:________________ Attn: Chief Executive Officer If to the Employee: Ms. Any party may change the address set forth above by notice to each other party given as provided herein. (g) HEADINGS - The headings and any table of contents contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. (h) GOVERNING LAW - ALL MATTERS RELATING TO THE INTERPRETATION, CONSTRUCTION, VALIDITY AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CONNECTICUT, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW PROVISIONS THEREOF. (i) VENUE; FEES AND EXPENSES. Any action at law, suit in equity or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement, or any provision hereof, shall be litigated only in the state courts located in the State of Connecticut, County of Fairfield or the federal courts in the district which covers such county. The Employee and the Company consent to the jurisdiction of such courts. The 5 prevailing party shall be entitled to recover its reasonable attorneys' fees and costs in any such action. (j) WAIVER OF RIGHT TO JURY TRIAL. Each party hereto hereby waives, except to the extent otherwise required by applicable law, the right to trial by jury in any legal action or proceeding between the parties hereto arising out of or in connection with this Agreement. (k) THIRD-PARTY BENEFIT - Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights, remedies, obligations or liabilities of any nature whatsoever. (1) WITHHOLDING TAXES - The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. THE PARTIES ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THIS AGREEMENT AND ANY EXHIBITS HERETO ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, WHICH SUPERSEDES ALL PROPOSALS OR ALL PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. ACCEPTED AND AGREED: MARKLAND TECHNOLOGY, INC. Ms. JO-ANN NICHOLS By /s/ Ken Ducey, Jr. /s/ Jo Ann Nichols ----------------------------- ----------------------------------- Ken Ducey, Jr. - -------------------------------- Print Name Title: President Date: 10-31-03 Date: 10/27/03 6 EX-10.1 11 markland_sb2ex10-1.txt EXHIBIT 10.1 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of April 2, 2004 (this "Agreement"), is entered into by and between MARKLAND TECHNOLOGIES, INC., a Florida corporation with headquarters located at #207, 54 Danbury Road, Ridgefield, CT 06877 (the "Company"), and each individual or entity named on a signature page hereto (as used herein, each such signatory is referred to as the "Buyer") (each agreement with a Buyer being deemed a separate and independent agreement between the Company and such Buyer, except that each Buyer acknowledges and consents to the rights granted to each other Buyer [each, an "Other Buyer"] under such agreement and the Transaction Agreements, as defined below, referred to therein). W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration for offers and sales to accredited investors afforded, INTER alia, by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and WHEREAS, the Buyer desires to purchase and the Company desires to sell, upon the terms and conditions set forth in this Agreement, the number of shares specified on the Buyer's signature page of this Agreement (the "Purchased Shares") of the Company's Common Stock, $0.0001 par value ("Common Stock") in consideration for the payment by Purchaser to the Company of $0.60 per share (the "Per Share Purchase Price"), or the aggregate amount specified on the Buyer's signature page (the "Purchase Price"); and WHEREAS, in connection with the Purchaser's purchase of the Purchased Shares, the Company will issue to the Purchaser the Warrants (as defined below), which Warrants may be exercised for the purchase of shares of Common Stock (the "Warrant Shares"); NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO PURCHASE; PURCHASE PRICE. a. PURCHASE OF SECURITIES. On the Closing Date (as defined below), the Company shall sell and deliver to the Buyer, and the Buyer agrees to purchase from the Company, the Purchased Shares and the Warrants (collectively, the "Purchased Securities") in consideration for the Purchase Price. The aggregate Purchase Price of all Buyers is $2,000,000 (the "Total Purchase Price"). -1- b. CERTAIN DEFINITIONS. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: "Affiliate" means, with respect to a specific Person referred to in the relevant provision, another Person who or which controls or is controlled by or is under common control with such specified Person. "Bid Price" shall mean the 4:00 P.M. closing bid price of the Common Stock (in U.S. Dollars) on the Principal Trading Market on the relevant Trading Day(s), as reported by the Reporting Service. "Buyer Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Buyer pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act. "Buyer's Allocable Share" means the fraction, of which the numerator is the Buyer's Purchase Price and the denominator is the Total Purchase Price. "Certificates" means (i) the certificates representing the Purchased Shares and (ii) the relevant Warrants, each duly executed by the Company and issued on the Closing Date in the name of the Buyer. "Closing Date" means the date of the closing of the purchase and sale of the Purchased Securities. "Company Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act (as defined below). "Effective Date" means the date the Registration Statement covering the Registrable Securities is declared effective by the SEC. "Escrow Agent" means the escrow agent identified in the Joint Escrow Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). "Escrow Funds" means the Purchase Price delivered to the Escrow Agent as contemplated by Sections 1(c) and (d) hereof. "Escrow Property" means the Escrow Funds and the Certificates delivered to the Escrow Agent as contemplated by Section 1(c) hereof. "Finder" means West Hastings, Ltd. "Holder" means the Person holding the relevant Securities at the relevant time. -2- "Last Audited Date" means June 30, 2003. "Majority in Interest of the Holders" means one or more Holders whose respective Purchase Prices aggregate more than fifty percent (50%) of the Total Purchase Price. "Material Adverse Effect" means an event or combination of events, which individually or in the aggregate, would reasonably be expected to (w) adversely affect the legality, validity or enforceability of the Securities or any of the Transaction Agreements, (x) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole, (y) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Agreements or the transactions contemplated thereby, or (z) materially and adversely affect the value of the rights granted to the Buyer in the Transaction Agreements. "New Common Stock" means shares of Common Stock and/or securities convertible into, and/or other rights exercisable for, the issuance of Common Stock, which are offered or sold in a New Transaction. "New Investor" means the third party investor, purchaser or lender (howsoever denominated) in a New Transaction. "New Transaction" means the offer or sale of New Common Stock in a capital raising or other financing transaction by or on behalf of the Company to a New Investor in a transaction offered or consummated after the date hereof; provided, however, that it is specifically understood that the term "New Transaction" does not include (1) the sale of the Purchased Shares to the Buyer and the Other Buyers, (2) the issuance of Common Stock upon the exercise or conversion of options, warrants or convertible securities outstanding on the date hereof or in connection with a put exercised by the Company pursuant to the terms of an equity line agreement in effect on the date hereof, and (3) the issuance of options or warrants hereafter granted to employees or consultants for compensatory purposes or the issuance of Common Stock upon the exercise of such options or warrants. "Person" means any living person or any entity, such as, but not necessarily limited to, a corporation, partnership or trust. "Principal Trading Market" means the Over the Counter Bulletin Board or such other market on which the Common Stock is principally traded at the relevant time, but shall not included the "pink sheets." "Registrable Securities" shall have the meaning ascribed to it in the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement in the form annexed hereto as ANNEX IV as executed by the Buyer and the Company simultaneously with the execution of this Agreement. -3- "Registration Statement" means an effective registration statement covering the Registrable Securities. "Reporting Service" means Bloomberg LP or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by a Majority in Interest of the Holders and reasonably acceptable to the Company. "Securities" means the Purchased Shares, the Warrants and the Warrant Shares. "Shares" means the shares of Common Stock representing any or all of the Purchased Shares and the Warrant Shares. "State of Incorporation" means Florida. "Trading Day" means any day during which the Principal Trading Market shall be open for business. "Transaction Agreements" means the Securities Purchase Agreement, the Registration Rights Agreement, the Joint Escrow Instructions, and the Warrants, and includes all ancillary documents referred to in those agreements. "Transfer Agent" means, at any time, the transfer agent for the Company's Common "Warrant Shares" means the shares of Common Stock issuable upon exercise of the c. FORM OF PAYMENT; DELIVERY OF CERTIFICATES. (i) The Buyer shall pay the Purchase Price by delivering immediately available good funds in United States Dollars to the Escrow Agent no later than the date prior to the Closing Date. (ii) No later than the Closing Date, but in any event promptly following payment by the Buyer to the Escrow Agent of the Purchase Price, the Company shall deliver the Certificates to the Escrow Agent. (iii) By signing this Agreement, each of the Buyer and the Company, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. d. METHOD OF PAYMENT. Payment into escrow of the relevant Purchase Price shall be made by wire transfer of funds to: -4- Bank of New York 350 Fifth Avenue New York, New York 10001 ABA# 021000018 For credit to the account of Krieger & Prager LLP Account No.: [To be provided to the Buyer by Krieger & Prager LLP] Re: Markland March 04 Transaction For: [Name of Buyer] 2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: a. Without limiting Buyer's right to sell the Securities pursuant to an effective registration statement or otherwise in compliance with the 1933 Act, the Buyer is purchasing the Securities for its own account for investment only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof. b. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its Affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and to evaluate the merits and risks of an investment in the Securities, and (iv) able to afford the entire loss of its investment in the Securities. c. All subsequent offers and sales of the Securities by the Buyer shall be made pursuant to registration of the relevant Securities under the 1933 Act or pursuant to an exemption from registration. d. The Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of the 1933 Act and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. e. The Buyer and its advisors, if any, have been furnished with or have been given access to all materials relating to the business, finances and operations of the Company and materials relating to the offer and -5- sale of the Purchased Shares and the Warrants which have been requested by the Buyer, including those set forth on in any annex attached hereto. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Buyer has also had the opportunity to obtain and to review the Company's filings on EDGAR listed on ANNEX VI hereto (the documents listed on such Annex VI, to the extent available on EDGAR or otherwise provided to the Buyer as indicated on said Annex VI, collectively, the "Company's SEC Documents"). f. The Buyer understands that its investment in the Securities involves a high degree of risk. g. The Buyer hereby represents that, in connection with its purchase of the Securities, it has not relied on any statement or representation by the Company or the Finder or any of their respective officers, directors and employees or any of their respective attorneys or agents or the Finder, except as specifically set forth herein. The Finder is a third party beneficiary of this provision. h. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities. i. This Agreement and the other Transaction Agreements to which the Buyer is a party, and the transactions contemplated thereby, have been duly and validly authorized, executed and delivered on behalf of the Buyer and are valid and binding agreements of the Buyer enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 3. COMPANY REPRESENTATIONS, ETC. The Company represents and warrants to the Buyer as of the Closing Date that, except as otherwise provided in the ANNEX V or in the Company's SEC Documents: a. RIGHTS OF OTHERS AFFECTING THE TRANSACTIONS. There are no preemptive rights of any shareholder of the Company, as such, to acquire the Purchased Shares, the Warrants or the Shares. No party other has a currently exercisable right of first refusal which would be applicable to any or all of the transactions contemplated by the Transaction Agreements. b. STATUS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have or result in a Material Adverse Effect. The Company -6- has registered its stock and is obligated to file reports pursuant to Section 12 or Section 15(d) of the Securities and Exchange Act of 1934, as amended (the "1934 Act"). The Common Stock is quoted on the Principal Trading Market. The Company has received no notice, either oral or written, with respect to the continued eligibility of the Common Stock for such quotation on the Principal Trading Market, and the Company has maintained all requirements on its part for the continuation of such quotation. c. AUTHORIZED SHARES. The authorized capital stock of the Company consists of (i) 500,000,000 shares of Common Stock, $.0001 par value per share, of which approximately 10,631,851 shares are outstanding as of the date hereof, and (ii) 5,000,000 shares of Preferred Stock, $.0001 per share, of which, as of the date hereof, (x) there are 30,000 shares of Series A authorized, all of which are outstanding, (y) there are 8,000 shares of Series C authorized, of which 2,374 shares are outstanding, and (z) there are 40,000 shares of Series C authorized, of which 20,096 shares are outstanding. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Company has sufficient authorized and unissued shares of Common Stock as may be necessary to effect the issuance of the Shares. As of the Closing Date, the Shares shall have been duly authorized by all necessary corporate action on the part of the Company, and, when issued on the Closing Date or upon exercise of the Warrants in accordance with their terms, will be duly and validly issued, fully paid and non-assessable and will not subject the Holder thereof to personal liability by reason of being such Holder. d. TRANSACTION AGREEMENTS AND STOCK. This Agreement and each of the other Transaction Agreements, and the transactions contemplated thereby, have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered by the Company and this Agreement is, and the Warrants and each of the other Transaction Agreements, when executed and delivered by the Company, will be, valid and binding agreements of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. e. NON-CONTRAVENTION. The execution and delivery of this Agreement and each of the other Transaction Agreements by the Company, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated by this Agreement, the Warrants and the other Transaction Agreements do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the certificate of incorporation or by-laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock except as herein set forth, or (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, except such conflict, breach or default which would not have or result in a Material Adverse Effect. -7- f. APPROVALS. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the shareholders of the Company is required to be obtained by the Company for the issuance and sale of the Securities to the Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained. g. FILINGS. None of the Company's SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. Since March 1, 2003, the Company has timely filed all requisite forms, reports and exhibits thereto required to be filed by the Company with the SEC. h. ABSENCE OF CERTAIN CHANGES. Since the Last Audited Date, there has been no material adverse change and no Material Adverse Effect, except as disclosed in the Company's SEC Documents. Since the Last Audited Date, except as provided in the Company's SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to shareholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts owed to the Company by any third party or claims of the Company against any third party, except in the ordinary course of business consistent with past practices; (v) waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any increases in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment. i. FULL DISCLOSURE. To the best of the Company's knowledge, there is no fact known to the Company (other than general economic conditions known to the public generally or as disclosed in the Company's SEC Documents) that has not been disclosed in writing to the Buyer that would reasonably be expected to have or result in a Material Adverse Effect. j. ABSENCE OF LITIGATION. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company before or by any governmental authority or nongovernmental department, commission, board, bureau, agency or instrumentality or any other person, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Agreements. The Company is not aware of any valid basis for any such claim that (either individually or in the aggregate with all other such events and circumstances) could reasonably be expected to have a Material Adverse Effect. There are no outstanding or unsatisfied judgments, orders, decrees, writs, injunctions or stipulations to which the Company is a party or by which it or any of its properties is bound, that involve the transaction contemplated herein or that, alone or in the aggregate, could reasonably be expect to have a Material Adverse Effect. -8- K. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in Section 3(e) hereof, no Event of Default (or its equivalent term), as defined in the respective agreement to which the Company or its subsidiary is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (or its equivalent term) (as so defined in such agreement), has occurred and is continuing, which would have a Material Adverse Effect. L. ABSENCE OF CERTAIN COMPANY CONTROL PERSON ACTIONS OR EVENTS. To the Company's knowledge, none of the following has occurred during the past five (5) years with respect to a Company Control Person: (1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Company Control Person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) Such Company Control Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (i) acting, as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other Person regulated by the Commodity Futures Trading Commission ("CFTC") or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; -9- (4) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such Company Control Person to engage in any activity described in paragraph (3) of this item, or to be associated with Persons engaged in any such activity; or (5) Such Company Control Person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated. m. NO UNDISCLOSED LIABILITIES OR EVENTS. To the best of the Company's knowledge, the Company has no liabilities or obligations other than those disclosed in the Transaction Agreements or the Company's SEC Documents or those incurred in the ordinary course of the Company's business since the Last Audited Date, or which individually or in the aggregate, do not or would not have a Material Adverse Effect. No event or circumstances has occurred or exists with respect to the Company or its properties, business, operations, condition (financial or otherwise), or results of operations, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company which proposal would (x) change the articles or certificate of incorporation or other charter document or by-laws of the Company, each as currently in effect, with or without shareholder approval, which change would reduce or otherwise adversely affect the rights and powers of the shareholders of the Common Stock or (y) materially or substantially change the business, assets or capital of the Company, including its interests in subsidiaries. n. NO INTEGRATED OFFERING. Neither the Company nor any of its Affiliates nor any Person acting on its or their behalf has, directly or indirectly, at any time since September 1, 2003, made any offer or sales of any security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale of the Securities as contemplated hereby. o. DILUTION. The number of shares issuable on the Closing Date and upon exercise of the Warrants may have a dilutive effect on the ownership interests of the other shareholders (and Persons having the right to become shareholders) of the Company. The Company's executive officers and directors have studied and fully understand the nature of the Securities being sold hereby and recognize that they have such a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Warrant Shares upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company, and the Company will honor such obligations, including honoring every Notice of Exercise (as contemplated by the Warrants), unless the Company is subject to an injunction (which injunction was not sought by the Company) prohibiting the Company from doing so. -10- p. FEES TO BROKERS, FINDERS AND OTHERS. Except for payment of the Finder's Compensation (as defined below) to the Finder, payment of which is the sole responsibility of the Company, the Company has taken no action which would give rise to any claim by any Person for brokerage commission, finder's fees or similar payments by Buyer relating to this Agreement or the transactions contemplated hereby. Buyer shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this paragraph that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless each of Buyer, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred. The term "Finder's Compensation" means, in connection with the consummation of the transactions contemplated by this Agreement, the consideration contemplated by the Joint Escrow Instructions. q. CONFIRMATION. The Company confirms that all statements of the Company contained herein shall survive acceptance of this Agreement by the Buyer. The Company agrees that, if any events occur or circumstances exist prior to the Closing Date or the release of the Purchase Price to the Company which would make any of the Company's representations, warranties, agreements or other information set forth herein materially untrue or materially inaccurate as of such date, the Company shall immediately notify the Buyer and the Escrow Agent in writing prior to such date of such fact, specifying which representation, warranty or covenant is affected and the reasons therefor. 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. a. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the Purchased Securities have not been and are not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Agreement or otherwise included in an effective registration statement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other Person is under any obligation to register the Securities (other than pursuant to the Registration Rights Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder. -11- b. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that, until such time as the relevant Shares have been registered under the 1933 Act, as contemplated by the Registration Rights Agreement, and sold in accordance with an effective Registration Statement or otherwise in accordance with another effective registration statement, the certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. c. FILINGS. The Company undertakes and agrees to make all necessary filings in connection with the sale of the Securities to the Buyer under any United States laws and regulations applicable to the Company, or by any domestic securities exchange or trading market, and to provide a copy thereof to the Buyer promptly after such filing. d. REPORTING STATUS. So long as the Buyer owns any of the Securities, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, shall take all reasonable action under its control to ensure that adequate current public information with respect to the Company, as required in accordance with Rule 144(c)(2) of the 1933 Act, is publicly available, and shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company will take all reasonable action under its control to maintain the continued listing and quotation and trading of its Common Stock (including, without limitation, all Registrable Securities) on the Principal Trading Market or a listing on the NASDAQ/Small Cap or National Markets and, to the extent applicable to it, will comply in all material respects with the Company's reporting, filing and other obligations under the by-laws or rules of the Principal Trading Market and/or the National Association of Securities Dealers, Inc., as the case may be, applicable to it at least through the date which is sixty (60) days after the date on which all of the Warrants have been exercised or have expired. e. USE OF PROCEEDS. The Company will use the proceeds received hereunder (excluding amounts paid by the Company for Finder's Compensation in connection with the sale of the Securities or legal and escrow fees contemplated by the Joint Escrow Instructions) for general corporate purposes. f. WARRANTS. The Company agrees to issue to the Buyer on the Closing Date transferable warrants (the "Warrants"), for the purchase of one (1) share of Common Stock for each Purchased Share. The exercise price of the Warrants (the "Exercise Price") will be equal to $1.25, subject to adjustment as provided in the Warrant. The Warrants will expire on the last day of the calendar month in which the third annual anniversary of the relevant Closing Date occurs. Each of the Warrants shall be in the form annexed hereto as ANNEX I. The Warrant Shares shall be subject to the provisions of the Registration Rights Agreement. -12- g. CERTAIN AGREEMENTS. (i) (A) The Company covenants and agrees that, except for the sale of Purchased Securities to the Other Buyers and subject to the other provisions of this Section 4(g) and Section 4(h), during the period (the "Pre-Effective Date Period") from the Closing Date and continuing through and including the Effective Date, it will not, without the prior written consent of a Majority in Interest of the Holders in each instance, enter into any subsequent or further offer or sale of New Common Stock in a New Transaction. (B) In the event there is a New Transaction during the Pre-Effective Date Period which breaches the provisions of the preceding subparagraph (i)(A) of this Section 4(g), (1) the Per Share Purchase Price shall be adjusted to an amount (the "Adjusted Per Share Purchase Price") equal to the lower of (x) $0.40 per share (subject to adjustment in the same manner as the Exercise Price of the Warrant is adjusted)(1) or (y) the lower of (I) the lowest fixed purchase price of any shares of the New Common Stock contemplated in the New Transaction or (II) the lowest conversion price which would be applicable under the terms of the New Transaction; (2) the Company will issue to the Holder additional shares of Common Stock ("Additional Shares") equal to the excess, if any, of (x) (I) the Purchase Price divided by (II) the Adjusted Per Share Purchase Price, over (y) the number of Purchased Shares and Additional Shares previously issued, if any; (3) the number of Warrants issued shall be adjusted to equal the number of shares equal to (x) (I) the higher of one hundred percent (100%) or (II) the Alternative Warrant Percentage (as defined below), of (y) the Purchase Price divided by the Adjusted Per Share Purchase Price; (4) if the exercise price of the warrants, option or similar instrument (howsoever denominated; collectively, "New Transaction Warrants") included in the New Transaction (the "New Transaction Exercise Price") is lower than the then effective Exercise Price on the Warrants, the Exercise Price of the Warrants shall be adjusted to equal the New Transaction Exercise Price; and - ------------------ (1) The Buyer has given the Company certain limited consents to certain New Transactions as to which the provisions of this clause (x) would not apply. Such limited consents are set forth in Annex VII attached hereto. -13- (5) if the provisions of the New Transaction Warrant are more beneficial to the holder of such instrument than the corresponding terms of the Warrant,(2) or if the terms which are beneficial to the Company in the Warrant are not included in the corresponding instrument in the New Transaction, then, unless waived by the Holder, the Warrant terms shall be modified to reflect similar terms (based on the original issue date of the Warrants). (ii) (A) The Company covenants and agrees that, except for the sale of Purchased Securities to the Other Buyers and subject to the other provisions of this Section 4(g) and Section 4(h), during the period (the "New Transaction Period") from the Effective Date and continuing through and including the Final Lock-up Date (as defined below), it will not, without the prior written consent of a Majority in Interest of the Holders in each instance, enter into a New Transaction where either the lowest fixed purchase price of any shares of the New Common Stock contemplated in the New Transaction is below the Threshold Price (as defined below) or the lowest conversion price which would be applicable under the terms of the New Transaction is below the Threshold Price. The term "Threshold Price" means $0.60 per share (subject to adjustment in the same manner as the Exercise Price of the Warrant is adjusted). The term "Final Lock-up Date" means the date which is one hundred eighty (180) days after the Effective Date, but not counting for such purposes the days, if any, during which sale of Registrable Securities was suspended after the Effective Date.(3) (B) In the event there is a New Transaction during the New Transaction Period which breaches the provisions of the preceding subparagraph (ii)(A) of this Section 4(g), (1) the Per Share Purchase Price shall be adjusted to an amount (the "Post Effective Date Adjusted Per Share Purchase Price") equal to the lower of (x) the lowest fixed purchase price of any shares of the New Common Stock contemplated in the New Transaction or (y) the lowest conversion price which would be applicable under the terms of the New Transaction; (2) the Company will issue to the Holder additional shares of Common Stock ("Additional Shares") equal to the excess, if any, of (x) (I) the Purchase Price divided by (II) the Post Effective Date Adjusted Per Share Purchase Price, over (y) the number of Purchased Shares and Additional Shares previously issued, if any; - ----------------- (2) Without limiting the foregoing, by way of example: the expiration date of the instrument in the New Transaction is more than three years from its original issue date. (3) By way of illustration: If the sale of Registrable Securities was suspended for ten (10) days in the interim, the applicable Final Lock-up Date will be one hundred ninety (190) days after the Effective Date. If on the 188th day after the Effective Date, the sale of Registrable Securities was suspended again for five (5) days, the Final Lock-up Date will be one hundred ninety-five (195) days after the Effective Date. -14- (3) the number of Warrants issued shall be adjusted to equal the number of shares equal to (x) (I) the higher of one hundred percent (100%) or (II) the Alternative Warrant Percentage (as defined below), of (y) the Purchase Price divided by the Post Effective Date Adjusted Per Share Purchase Price; (4) if the exercise price of the warrants, option or similar instrument (howsoever denominated; a "New Transaction Warrant") included in the New Transaction (the "New Transaction Exercise Price") is lower than the then effective Exercise Price on the Warrants, the Exercise Price of the Warrants shall be adjusted to equal the New Transaction Exercise Price; and (5) if the provisions of the New Transaction Warrant are more beneficial to the holder of such instrument than the corresponding terms of the Warrant,(4) or if the terms which are beneficial to the Company in the Warrant are not included in the corresponding instrument in the New Transaction, then, unless waived by the Holder, the Warrant terms shall be modified to reflect similar terms (based on the original issue date of the Warrants). (iii) The term "Alternative Warrant Percentage" means (x) the number of shares which are eligible to be purchased under the New Transaction Warrants, divided by (y) the aggregate of the shares of New Common Stock issued or issuable in such transaction (excluding the shares issuable on exercise of the New Transaction Warrants). (iv) The foregoing provisions of Section 4(g) do not apply to the issuance of New Common Stock in connection with a Person's exercise of conversion or other rights it may have under documents executed and transactions consummated prior to the date of this Agreement. (v) Nothing in the foregoing provisions reflects either an obligation on the part of any Buyer to participate in any New Transaction or a limitation on any Buyer from participating in any New Transaction. (vi) Any of the foregoing provisions of this Section 4(g) or any other provision of this Agreement (including but not limited to Section 4(h) hereof) or any of the other Transaction Agreements to the contrary notwithstanding, the Company shall not engage in any offers, sales or other transactions of its securities which would adversely affect the exemption from registration available for the transactions contemplated by the Transaction Agreements. h. RIGHT OF FIRST REFUSAL. (i) The following provisions apply to a New Transaction (other than a Specified Transaction, as defined below) made during the period - ---------------- (4) Without limiting the foregoing, by way of example: the expiration date of the instrument in the New Transaction is more than three years from its original issue date. -15- commencing on the date hereof and continuing through the end of the New Transaction Period (the "Right of First Refusal Period"). These provisions are in addition to, and not in lieu of, the provisions of Section 4(g). (ii) Before offering or consummating any such New Transaction with a New Investor during the Right of First Refusal Period, the Company shall give written notice (a "New Transaction Notice") to the Buyer and each Other Buyer summarizing all of the terms of such offer (a "New Transaction Offer"). The Buyer shall have the right (the "Right of First Refusal"), exercisable by written notice (a "Right of First Refusal Exercise Notice") given to the Company, by fax, mail, or other delivery, by the close of business on the tenth business day after the Buyer's receipt of the New Transaction Notice (the "Right of First Refusal Expiration Date"), to participate in all or any part of the New Transaction Offer on the terms so specified. (iii) If there is more than one Buyer, the Buyer's right to participate shall initially be limited to the Buyer's Allocable Share, such that if there is more than one Buyer signatory to this Agreement, the provisions of this paragraph (g) shall apply pro rata among them (based on their relative Buyer's Allocable Shares), except that, to the extent any such Buyer does not exercise its Right of First Refusal in full (a "Declining Buyer"), the remaining Buyer or Buyers who or which have exercised their own Right of First Refusal in full, shall have the right (pro rata among them based on their relative Buyer's Allocable Shares, if more than one) to exercise all or a portion of such Declining Buyer's unexercised Right of Refusal. To exercise this right, the Buyer should indicate in the Right of First Refusal Notice the additional dollar amount (over the Buyer's Allocable Share) which the Buyer is willing to participate in the New Transaction. (iv) In order for the Buyer's exercise of the Right of First Refusal to be effective, the Buyer and the Other Buyers who exercise their Rights of First Refusal shall have, in the aggregate, agreed to take up the entire New Transaction. (v) If, and only if, the Buyer and the Other Buyers in the aggregate do not exercise the Right of First Refusal in full, the Company may consummate the New Transaction with any New Investor on the terms specified in the New Transaction Offer within thirty (30) days of the Right of First Refusal Expiration Date (such thirtieth day, the "New Transaction Expiration Date"), even if the New Transaction Expiration Date is after the expiration of the Right of First Refusal Period. (vi) If the terms of the New Transaction to be consummated with such New Investor differ from the terms specified in the New Transaction Offer so that the terms are more beneficial in any respect to the New Investor, the Company shall give the Buyer a New Transaction Offer relating to the terms of the New Transaction, as so changed, and the Buyer's Right of First Refusal and the preceding terms of this paragraph (g) shall apply with respect to such changed terms. (vii) The term "Specified Transaction" means a New Transaction meeting any one or more of the following conditions: (1) the issuance of Common Stock or securities exercisable for or convertible into Common Stock in connection with a merger, acquisition or other business combination or a strategic partnering or joint venture transaction or the exercise or conversion of such securities; (2) the issuance of Common Stock or securities exercisable -16- for or convertible into Common Stock in connection with the settlement of claims which are the subject of law suits, arbitrations and similar proceedings or the conversion or exercise of such securities, or (3) the issuance of warrants to equipment lessors in connection with capital lease transactions or the exercise of such warrants. i. AVAILABLE SHARES. The Company shall have at all times authorized and reserved for issuance, free from preemptive rights, a number of shares (the "Minimum Available Shares") at least equal to one hundred ten percent (110%) of the number of shares issuable upon exercise of all outstanding Warrants held by all Holders (in each case, whether such Warrants were originally issued to the Holder, the Buyer or to any other party). For the purposes of such calculations, the Company should assume that all Warrants were then issued and exercisable, in each case without regard to any restrictions which might limit any Holder's right to exercise any of the Warrants held by any Holder. j. PUBLICITY, FILINGS, RELEASES, ETC. Each of the parties agrees that it will not disseminate any information relating to the Transaction Agreements or the transactions contemplated thereby, including issuing any press releases, holding any press conferences or other forums, or filing any reports (collectively, "Publicity"), without giving the other party reasonable advance notice and an opportunity to comment on the contents thereof. Neither party will include in any such Publicity any statement or statements or other material to which the other party reasonably objects. In furtherance of the foregoing, the Company will provide to the Buyer drafts of the applicable text of any filing intended to be made with the SEC which refers to the Transaction Agreements or the transactions contemplated thereby as soon as practicable (but at least two (2) business days before such filing will be made) and will not include in such filing any statement or statements or other material to which the other party reasonably objects. Notwithstanding the foregoing, each of the parties hereby consents to the inclusion of the text of the Transaction Agreements in filings made with the SEC (but any descriptive text accompanying or part of such filing shall be subject to the other provisions of this paragraph). 5. TRANSFER AGENT INSTRUCTIONS. a. The Company warrants that, except as required by law, with respect to the Securities, other than the stop transfer instructions to give effect to Section 4(a) hereof, it will give the Transfer Agent no instructions inconsistent with instructions to issue Common Stock representing the Purchased Shares and from time to time upon exercise of the Warrants in such amounts as specified from time to time by the Company to the Transfer Agent, bearing the restrictive legend specified in Section 4(b) of this Agreement prior to registration of the Shares under the 1933 Act, registered in the name of the Buyer or its nominee and in such denominations to be specified by the Holder in connection therewith. Except as so provided, the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Agreements. Nothing in this Section shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory to the -17- Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of the Securities and, in the case of the Purchased Shares or of the Warrant Shares, promptly instruct the Transfer Agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Buyer. b. Subject to the provisions of this Agreement, the Company will permit the Buyer to exercise its right to exercise the Warrants in the manner contemplated by the Warrants. c. In lieu of delivering physical certificates representing the Common Stock issuable upon exercise of a Warrant or at the request of the Holder with respect to the Purchased Shares or Warrant Shares previously issued, provided the Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the Holder and its compliance with the provisions contained in this paragraph, so long as the certificates therefor do not bear a legend and the Holder thereof is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause the Transfer Agent to electronically transmit to the Holder the Common Stock issuable upon exercise of the Warrant or in replacement of Purchased Shares or Warrant Shares previously issued by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. d. The Company shall assume any fees or charges of the Transfer Agent or Company counsel regarding (i) the removal of a legend or stop transfer instructions with respect to Registrable Securities, and (ii) the issuance of certificates or DTC registration to or in the name of the Holder or the Holder's designee or to a transferee as contemplated by an effective Registration Statement. e. The Company will authorize the Transfer Agent to give information relating to the Company directly to the Buyer or the Buyer's representatives upon the request of the Buyer or any such representative, to the extent such information relates to (i) the status of shares of Common Stock issued or claimed to be issued to the Buyer in connection with a Notice of Exercise, or (ii) the number of outstanding shares of Common Stock of all shareholders as of a current or other specified date. At the request of the Buyer, the Company will provide the Buyer with a copy of the authorization so given to the Transfer Agent. 6. CLOSING DATE. a. The Closing Date shall occur on the date which is the first Trading Day after each of the conditions contemplated by Sections 7 and 8 hereof shall have either been satisfied or been waived by the party in whose favor such conditions run. b. The closing of the purchase and issuance of Purchased Securities shall occur on the Closing Date at the offices of the Escrow Agent and shall take place no later than 3:00 P.M., New York time, on such day or such other time as is mutually agreed upon by the Company and the Buyer. -18- c. Notwithstanding anything to the contrary contained herein, the Escrow Agent will be authorized to release the Escrow Funds to the Company and to others and to release the other Escrow Property on the relevant Closing Date upon satisfaction of the conditions set forth in Sections 7 and 8 hereof and as provided in the Joint Escrow Instructions. 7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyer understands that the Company's obligation to sell the Purchased Securities to the Buyer pursuant to this Agreement on the Closing Date is conditioned upon: a. The execution and delivery of this Agreement by the Buyer on or before the Closing Date; b. Delivery by the Buyer to the Escrow Agent by the Closing Date of good funds as payment in full of an amount equal to the Purchase Price in accordance with this Agreement; c. The accuracy on such Closing Date of the representations and warranties of the Buyer contained in this Agreement, each as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; and d. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained. 8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Purchased Securities on the Closing Date is conditioned upon: a. The execution and delivery of this Agreement and the other Transaction Agreements by the Company on or before the Closing Date; b. Delivery by the Company to the Escrow Agent of the relevant Certificates in accordance with this Agreement; c. On such Closing Date, each of the Transaction Agreements executed by the Company on or before such date shall be in full force and effect and the Company shall not be in default thereunder; -19- d. The accuracy in all material respects on such Closing Date of the representations and warranties of the Company contained in this Agreement, each as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date; e. On such Closing Date, the Buyer shall have received an opinion of counsel for the Company, dated such Closing Date, in form, scope and substance reasonably satisfactory to the Buyer, substantially to the effect set forth in ANNEX III attached hereto; f. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained; and g. From and after the date hereof to and including the Closing Date, each of the following conditions will remain in effect: (i) the trading of the Common Stock shall not have been suspended by the SEC or on the Principal Trading Market; (ii) trading in securities generally on the Principal Trading Market shall not have been suspended or limited; (iii), no minimum prices shall been established for securities traded on the Principal Trading Market; and (iv) there shall not have been any material adverse change in any financial market that, in the reasonable judgment of the Buyer, makes it impracticable or inadvisable to purchase the Securities. 9. INDEMNIFICATION AND REIMBURSEMENT. a. (i) The Company agrees to indemnify and hold harmless the Buyer and its officers, directors, employees, and agents, and each Buyer Control Person from and against any losses, claims, damages, liabilities or expenses incurred (collectively, "Damages"), joint or several, and any action in respect thereof to which the Buyer, its partners, Affiliates, officers, directors, employees, and duly authorized agents, and any such Buyer Control Person becomes subject to, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Company contained in this Agreement, as such Damages are incurred, except to the extent such Damages result primarily from Buyer's failure to perform any covenant or agreement contained in this Agreement or the Buyer's or its officer's, director's, employee's, agent's or Buyer Control Person's gross negligence, recklessness or bad faith in performing its obligations under this Agreement or failure to deliver a prospectus, if required. (ii) The Company hereby agrees that, if the Buyer, other than by reason of its gross negligence or willful misconduct (in each case, as determined by a non-appealable judgment to such effect), (x) becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by this Agreement or the other Transaction Agreements, or if the Buyer is impleaded in any such action, proceeding or investigation by any Person, or (y) becomes involved in any capacity in any action, proceeding or investigation brought by the SEC, any self-regulatory organization or other body having jurisdiction, against or involving the Company or in connection with or as a result of the consummation -20- of the transactions contemplated by this Agreement or the other Transaction Agreements, or (z) is impleaded in any such action, proceeding or investigation by any Person, then in any such case, the Company shall indemnify, defend and hold harmless the Buyer from and against and in respect of all losses, claims, liabilities, damages or expenses resulting from, imposed upon or incurred by the Buyer, directly or indirectly, and reimburse such Buyer for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. The indemnification and reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Buyer who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and Buyer Control Persons (if any), as the case may be, of the Buyer and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Buyer, any such Affiliate and any such Person. b. All claims for indemnification by any Indemnified Party (as defined below) under this Section shall be asserted and resolved as follows: (i) In the event any claim or demand in respect of which any Person claiming indemnification under any provision of this Section (an "Indemnified Party") might seek indemnity under paragraph (a) of this Section is asserted against or sought to be collected from such Indemnified Party by a Person other than a party hereto or an Affiliate thereof (a "Third Party Claim"), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim for indemnification that is being asserted under any provision of this Section against any Person (the "Indemnifying Party"), together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been prejudiced by such failure of the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party as soon as practicable within the period ending thirty (30) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under this Section and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. The following provisions shall also apply. (x) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this paragraph (b) of this Section, then the Indemnifying Party shall have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying -21- Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party shall not be indemnified in full pursuant to paragraph (a) of this Section). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this subparagraph (x), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this subparagraph (x), and except as provided in the preceding sentence, the Indemnified Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under paragraph (a) of this Section with respect to such Third Party Claim. (y) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to paragraph (b) of this Section, or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this subparagraph (y), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that -22- the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in subparagraph(z) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this subparagraph (y) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this subparagraph (y), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation. (z) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under paragraph (a) of this Section or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the amount of Damages specified in the Claim Notice shall be conclusively deemed a liability of the Indemnifying Party under paragraph (a) of this Section and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand, as and when incurred. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate. (ii) In the event any Indemnified Party should have a claim under paragraph (a) of this Section against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under paragraph (a) of this Section specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an "Indemnity Notice") with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the amount of Damages specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under paragraph (a) of this Section and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate. -23- c. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar rights of the indemnified party against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to. 10. JURY TRIAL WAIVER. The Company and the Buyer hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the Parties hereto against the other in respect of any matter arising out or in connection with the Transaction Agreements. 11. GOVERNING LAW: MISCELLANEOUS. a. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Agreement or any of the other Transaction Agreements and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. b. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. c. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. d. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. e. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. f. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. g. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. -24- h. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. i. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. j. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 12. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of (a) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile transmission, (b) the seventh business day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or (c) the third business day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days' advance written notice similarly given to each of the other parties hereto): COMPANY: At the address set forth at the head of this Agreement. Attn: President Telephone No.: (203) 894-9700 Telecopier No.: (203) 286-1608 Attn: CFO with a copy to: Foley Hoag LLP 155 Seaport Blvd. Boston, MA 02210 Attn: David Broadwin, Esq. Telephone No.: (617) 832-1000 Telecopier No.: (617) 832-7000 -25- BUYER: At the address set forth on the signature page of this Agreement. with a copy to: Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 Attn: Ronald J. Nussbaum, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 ESCROW AGENT: Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the Buyer's representations and warranties herein shall survive the execution and delivery of this Agreement and the delivery of the Certificates and the payment of the Purchase Price, and shall inure to the benefit of the Buyer and the Company and their respective successors and assigns. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK.] -26- IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer (if an entity, by one of its officers thereunto duly authorized) as of the date set forth below. PURCHASED SHARES _______________________ PURCHASE PRICE: $______________________ SIGNATURES FOR BUYERS IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf as of the date first above written. ________________________________ ___________________________________ Address Printed Name of Buyer ________________________________ By:_________________________________ Telecopier No.__________________ (Signature of Authorized Person) ____________________________________ Printed Name and Title ________________________________ Jurisdiction of Incorporation or Organization As of the date set forth below, the undersigned hereby accepts this Agreement and represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf. MARKLAND TECHNOLOGIES, INC. By: ________________________ Title: Robert Tarini, President -27- ANNEX I FORM OF WARRANT ANNEX II JOINT ESCROW INSTRUCTIONS ANNEX III OPINION OF COUNSEL ANNEX IV REGISTRATION RIGHTS AGREEMENT ANNEX V COMPANY DISCLOSURE ANNEX VI COMPANY'S SEC DOCUMENTS AVAILABLE ON EDGAR ANNEX VII LIMITED CONSENTS OF BUYERS TO CERTAIN NEW TRANSACTIONS -28- EX-10.2 12 markland_sb2ex10-2.txt EXHIBIT 10.2 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made as of the 16th day of April, 2004, by and between Markland Technologies, Inc. (the "COMPANY"), a Florida corporation, and each of the persons whose names are set forth on the Schedule of Purchasers attached hereto as EXHIBIT A (the "PURCHASERS" and each individually as a "PURCHASER"). WHEREAS, each Purchaser wishes to purchase from the Company, and the Company wishes to sell to each Purchaser, certain shares (the "SHARES") of the Company's common stock, par value $0.0001 per share ("COMMON STOCK") and certain Warrants to purchase shares of Common Stock for $2.00 per share in substantially the form of EXHIBIT B hereto (the "WARRANTS" and collectively with the Shares, the "SECURITIES"); NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: SECTION 1 SALE OF SECURITIES. 1.1 AUTHORIZATION OF SALE OF THE SECURITIES. Subject to the terms and conditions of this Agreement, the Company has authorized the sale and issuance to the Purchasers of the number of Securites set forth next to each Purchaser's name on EXHIBIT A hereof. 1.2 AGREEMENT TO SELL AND PURCHASE THE SECURITIES. At the Closing (as defined below), the Company will issue and sell the Securities to each Purchaser, severally and not jointly, and each Purchaser will buy the Securities from the Company set forth opposite such Purchaser's name on EXHIBIT A, upon the terms and conditions hereinafter set forth, at the purchase price set forth on EXHIBIT A. 1.3 SEVERAL AND NOT JOINT OBLIGATIONS. The representations, warranties, covenants, agreements and obligations of the Purchasers under this Agreement are several and not joint. 1.4 TIME OF THE ESSENCE. Time is of the essence in this Agreement. If no Closing (as hereinafter defined) has take place by April 16, 2004, the Company may unilaterally and in its sole discretion terminate this Agreement as to any or all Purchasers, in which case no terminated party shall have any liability to or claim against the Company under or in connection with this Agreement or the transactions contemplated by this Agreement. 1.5 CLOSING. Subject to and in reliance upon all of the representations, warranties, covenants, terms and conditions of this Agreement, the closing shall take place at the offices of Foley Hoag, LLP, 155 Seaport Boulevard, Boston, Massachusetts, 02210 at 10:00 a.m., local time, on April 16, 2004, or at such other location, date and time as many be agreed upon between the applicable Purchasers and Company (such closing being called the "CLOSING"). SECTION 2 REGISTRATION 2.1 REGISTRATION. Subject to the terms and conditions of this Agreement, the Company will include the Shares in the securities to be covered by the registration statement proposed to be filed by the Company as soon as practicable after the Closing. EXHBIT C is the Registration Rights Agreement, dated April 2, 2004, by and between the Company and the Investors named therein (the "REGISTRATION RIGHTS AGREEMENT"). The Company and the Purchaser hereby agree to register the Common Stock and the Common Stock issuable upon exercise of the Warrant (the "WARRANT SHARES") on the same terms and conditions as the Registration Rights Agreement and that the Company and the Purchaser shall have the same rights, duties, and obligations as if Purchaser was a party to the Registration Rights Agreement, including without limitation, the obligations to file a registration statement within specified time frames and to pay penalties if the registration statement is not filed or the registration statement is not declared effective within the times frames specified in the Registration Rights Agreement; PROVIDED THAT (i) the Purchasers shall not be considered "Initial Investors" for purposes of Section 2 of the Registration Rights Agreement so that the Company shall not have to seek the consent of the Purchaser to include additional securities in the registration statement contemplated hereby, and (ii) the Purchasers shall not have a right to prevent the Company from granting further registration rights. The Company and the Purchaser intend for this Securities Purchase Agreement to comply with the provisions of the Limited Consent of Buyers to Certain New Transactions which is Annex VII to the Securities Purchase Agreement, dated April 2, 2004, by and among the Company and the Investors named therein (the "LIMITED CONSENT"), and to the extent any terms of this Section 2.1 or Section 3.5, or any other part of this Agreement conflicts with such Limited Consent then the Limited Consent will control. SECTION 3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents and warrants to, and covenants with, the Purchasers as follows: 3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation, validly existing and in good standing under the laws of the State of Florida; and the Company is duly qualified to do business as a foreign corporation and is in good standing in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a material adverse effect. 3.2 ISSUANCE, SALE AND DELIVERY OF THE SHARES. The Securities being purchased hereunder have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances other than liens or encumbrances created or imposed upon the Purchasers. 3.3 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The Company has full corporate power and authority to enter into this Agreement, to issue and sell the Securities, and perform the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions therein contemplated will not violate any provision of the Certificate of Incorporation or by-laws of the Company. 3.4 SEC FILINGS. Each report, schedule, registration statement and definitive proxy statement filed by the Company with the Securities and Exchange Commission (the "COMMISSION") under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), since December 31, 2003 is available on EDGAR (as such documents have since the time of their filing been amended, the "INFORMATION DOCUMENTS"), which are all the documents (other than preliminary -2- material) that the Company was required to file with the Commission since such date. Except for a filing on Form 8KA which was filed late, as of their respective dates, the Information Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder applicable to the Information Documents, and none of the Information Documents contained at the time they were filed, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.5 CERTAIN NEW TRANSACTIONS. For purposes of this Agreement, "New Transaction" means the offer or sale of new common stock in a capital raising or other financing transaction by or on behalf of the Company to a new investor in a transaction offered or consummated after the date hereof; PROVIDED, HOWEVER, that it is specifically understood that the term "New Transaction" does not include (i) the sale of the Securities to the Purchaser and other Purchasers, (ii) the issuance of Common Stock upon the exercise or conversion of options, warrants, or convertible securities outstanding at the date hereof or in connection with a put exercised by the Company pursuant to the terms of an equity line agreement in effect on the date hereof, (iii) the issuance of options or warrants hereafter granted to employees or consultants for compensatory purposes or the issuance of Common Stock upon the exercise of such options or warrants, (iv) the issuance of Common Stock or securities exercisable for or convertible into Common Stock in connection with a merger, acquisition or other business combination or a strategic partnering or joint venture transaction or the exercise or conversion of such securities, (v) the issuance of Common Stock or securities exercisable for or convertible into Common Stock in connection with the settlement of claims which are the subject of law suits, arbitrations and similar proceedings or the conversion or exercise of such securities, and (vi) the issuance of warrants to equipment lessors in connection with capital lease transactions or the exercise of such warrants. If within 180 days of the effective date of that certain registration statement covering the Securities, the Company consummates a New Transaction in which it sells or is deemed to sell Common Stock or securities exercisable for or convertible into Common Stock at a lower price than the Shares, or issues warrants with an exercise price lower than the Warrants, then the Company shall issue additional shares of Common Stock so that the effective price per share for the Shares equals the price of the new shares and if the Company issues warrants, the exercise price of the Warrants will be lowered to the price of the new warrants. 3.6 COMPLIANCE WITH REPRESENTATIONS AND WARRANTIES. The Company represents that each representation and warranty made by the Company in Section 3 of the Securities Purchase Agreement, dated April 2, 2004, by an between the Company and the Investors named therein, as qualified by the Annex V Disclosure Schedule delivered therewith, was true and correct in all material respects as of the date thereof. 3.7 PUBLICITY. Soon after the Close, the Company will prepare a press release relating to this transaction and those transactions detailed in the memorandum containing confidential company disclosures delivered to the Purchasers on the date hereof (the "MEMORANDUM OF DISCLOSURES"), and/or file a Form 8-K with the Securities and Exchange Commission disclosing this transaction. -3- SECTION 4 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS 4.1 EXPERIENCE; ACCREDITED INVESTOR STATUS. Each Purchaser, individually and not jointly, represents and warrants to, and covenants with, the Company that: (i) he is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, (ii) he is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the purchase of the Shares, including investments in securities issued by the Company, and has requested, received, reviewed and understood all information he deems relevant in making an informed decision to purchase the Shares; (iii) he acknowledges that the offering of the Shares pursuant to this Agreement has not been reviewed by the Securities and Exchange Commission or any state regulatory authority; (iv) it is acquiring the Securities set forth next to his name on EXHIBIT A hereto, for his own account for investment only and with no intention of effecting a distribution any of such Securities or any arrangement or understanding with any other persons regarding the distribution of such Securities; (v) he will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except in compliance with the Securities Act, rules and regulations promulgated under the Securities Act and any applicable state securities or blue sky laws; (vi) he has, in connection with his decision to purchase Securities, not relied upon any representations or other information (whether oral or written) other than as set forth in the representations and warranties of the Company contained herein and the Memorandum of Disclosure; (vii) he has had an opportunity to discuss this investment with representatives of the Company and ask questions of them and such questions have been answered to his full satisfaction. 4.2 ACKNOWLEDGEMENT OF RISK. Each Purchaser, individually and not jointly, recognizes that an investment in the Securities is speculative and involves a high degree of risk, including a risk of total loss of the Purchaser's investment. Each Purchaser, individually and not jointly, acknowledges that they have been afforded an opportunity to ask questions and to review any documents that might be necessary to evaluate the degree of risk involved in the transactions contemplated by this Agreement, including the documents related to the private placement of Common Stock and warrants completed on April 2, 2004 in which the Company sold 3,333,333 shares of Common Stock for $.60 per share and issued a like number of warrants to purchase Common Stock at $1.25 per share. 4.3 ACKNOWLEDGEMENT OF COMPANY'S RELIANCE. Each Purchaser, individually and not jointly, represents and warrants that all of the information provided to the Company or its agents or representatives concerning such Purchaser's suitability to invest in the Company and the representations and warranties contained herein, are complete, true, and correct as of the date hereof, and understands that the Company is relying on the statements contained herein to establish an exemption from registration under U.S. federal and state securities laws. Each Purchaser, individually and not jointly, represents and warrants that the address set forth in the signature page hereto is such Purchaser's true and correct domicile. -4- SECTION 5 EXPENSES. The provisions of Section 5.1 and 5.2 notwithstanding, each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated. 5.1 LEGAL FEES. Upon consummation of the transaction, and after the Close, and on the release of the Escrow Items (as that term is defined in the Escrow Agreement, dated April 16, 2004 by and among the Company, the Purchaser, and the Escrow Agent), the Company shall instruct the Escrow Agent to release the fees due to McLaughlin & Stern LLP, the sum of which will not exceed an amount equal to $10,000. 5.2 COMMISSIONS. Upon consummation of the transaction, and after the Close, and on the release of the Escrow Items (as that term is defined in the Escrow Agreement, dated April 16, 2004 by and among the Company, the Purchaser, and the Escrow Agent), the Company and the Purchaser shall instruct the Escrow Agent to release the fees due to any broker or finder, the sum of which will not exceed an amount equal to ten percent (10%) of the purchase price paid by the Purchaser and 50,000 Warrants. SECTION 6 NOTICES. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent via overnight courier, sent by facsimile, or mailed by first class certified or registered mail, return receipt requested, postage prepaid: if to the Company, to: Markland Technologies, Inc. #207 54 Danbury Road Ridgefield, CT 06877 Attn: Kenneth Ducey, Jr. Facsimile: (203)286-1608 with a copy to: Foley Hoag LLP 155 Seaport Boulevard Boston, MA 022110 Attn: David A. Broadwin, Esq. Facsimile: (617) 832-7000 or to such other person at such other place as the Company shall designate to the Purchasers in writing; and if to the Purchasers, at the address as set forth on EXHIBIT A, or at such other address or addresses as may have been furnished to the Company in writing pursuant to this SECTION 6. SECTION 7 SEVERABILITY. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 8 GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the -5- exclusive jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Agreement or any of the other Transaction Agreements and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. SECTION 9 ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and is in full substitution for any and all prior oral or written agreements and understandings between them related to such subject matter, and neither party hereto shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any representations, indemnities, covenants or agreements except as specifically set forth herein. -6- EX-10.3 13 markland_sb2ex10-3.txt EXHIBIT 10.3 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made as of the ___ day of April, 2004, by and between Markland Technologies, Inc. (the "COMPANY"), a corporation organized under the laws of the State of Florida, with its principal offices at #207 54 Danbury Road, Ridgefield, CT, 06877, and the purchaser whose name and address is set forth on the signature page hereof (the "PURCHASER") (each agreement with a Purchaser shall be deemed a separate and independent agreement between such Purchaser and the Company, except that each Purchaser acknowledges and consents to the rights granted to each other Purchaser under this Agreement). WHEREAS, the Company desires to raise up to $10,000,000 through a private placement of its securities to one or more accredited investors on the terms and conditions set forth in this agreement; and WHEREAS, the Purchaser desires to purchase the securities set forth opposite its name on the signature page hereof; and WHEREAS, the Purchaser acknowledges that it is one of several purchasers executing substantially similar agreements; (the "SIMILAR AGREEMENTS"). IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchaser agree as follows: SECTION 1. AUTHORIZATION OF SALE OF THE SECURITIES. Subject to the terms and conditions of this Agreement, the Company has authorized the sale to the Purchaser of the number of common shares (the "SHARES"), $.0001 par value per share (the "COMMON SHARES"), and the number of Redeemable Common Stock Purchase Warrants (the "WARRANTS") of the Company set forth on the signature page hereof. The purchase price shall be paid by wire transfer of immediately available funds to the account set forth on APPENDIX III hereof. SECTION 2. PURCHASE OF SECURITIES. 2.1 AGREEMENT TO SELL AND PURCHASE THE SHARES. At the Closing (as defined in SECTION 3), the Company will sell the Shares to the Purchaser, and the Purchaser will buy the Shares from the Company (the "PURCHASED SHARES"), upon the terms and conditions hereinafter set forth, at the purchase price set forth on the signature page hereof. 2.2 AGREEMENT TO SELL AND PURCHASE WARRANTS. At the Closing, in connection with the Purchaser's purchase of the Common Shares, the Company will issue to the Purchaser, the Warrants, for the purchase of one (1) Common Share for each Purchased Share (the "WARRANT SHARES"). The exercise price of the Warrants will be equal to the amount stated in each Warrant and subject to adjustment as provided in the Warrant (the "EXERCISE PRICE"). The Warrants will expire on the last day of the third anniversary of the relevant Closing Date (as defined in SECTION 3). The Warrant Shares shall be subject to the terms of the Registration Rights Agreement. SECTION 3. DELIVERY OF THE SHARES AND WARRANTS AT THE CLOSING. The completion of the purchase and sale of the Shares and Warrants (the "CLOSING") shall occur simultaneously with the execution hereof (the "CLOSING DATE"). At the Closing, the Company will issue to the Purchaser one or more stock certificates, and a corresponding number of Warrants, registered in the name of the Purchaser, or in such nominee name(s) as designated by the Purchaser in writing, representing the Shares. The name(s) in which the stock certificates are to be registered are set forth in the Stock Certificate Questionnaire attached hereto as APPENDIX I. The Company's obligation to complete the purchase and sale of the Shares being purchased hereunder and deliver such stock certificate(s) to the Purchaser at the Closing shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) receipt by the Company of same-day funds in the full amount of the purchase price for the Shares being purchased hereunder; and (b) the accuracy in all material respects of the representations and warranties made by the Purchaser and the fulfillment of those undertakings of the Purchaser to be fulfilled prior to or at the Closing. The Purchaser's obligation to accept delivery of such stock certificate(s) and to pay for the Shares and the Warrants shall be subject to the accuracy in all material respects of the representations and warranties made by the Company herein and the fulfillment of those undertakings of the Company to be fulfilled prior to or at the Closing. The Closing shall take place at the offices of Foley Hoag LLP, 155 Seaport Blvd., Boston MA immediately following the execution hereof, or at such other time or location as the parties shall agree upon. SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents and warrants to, and covenants with, the Purchaser as follows: 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; and the Company is duly qualified to do business as a foreign corporation and is good standing in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a Material Adverse Effect, as defined in SECTION 4.4. 4.2 AUTHORIZED CAPITAL STOCK. The authorized capital stock of the Company consists of 500,000,000 shares of Common Stock, $.0001 par value per share, and 5,000,000 shares of Preferred Stock, $.0001 par value per share. The issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all applicable U.S. federal and state securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. 4.3 ISSUANCE, SALE AND DELIVERY OF THE SECURITIES. The Shares and Warrants being purchased hereunder have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. The Warrant Shares, when issued, delivered and paid for in accordance with the terms of the Warrants, will be duly authorized, validly issued, fully paid and nonassessable. No preemptive rights or other rights of any stockholder of the Company to subscribe for or purchase exist with respect to the issuance and sale of the Securities by the Company pursuant to this Agreement. No further approval or -2- authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Securities to be sold by the Company as contemplated herein. The Company's issuance of the Securities shall be in compliance with all applicable U.S. and Canadian federal and state and provincial securities laws. 4.4 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The Company has full legal right, corporate power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated will not violate any provision of the organizational documents of the Company. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated will not result in the creation of any lien, charge, security interest or encumbrance upon any assets of the Company pursuant to the terms or provisions of, or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company is a party or by which the Company or any of its properties may be bound or affected and in each case which individually or in the aggregate would have a material adverse effect on the condition (financial or otherwise), properties, business, prospects, or results of operations of the Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"), or any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its respective properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with all U.S. federal and state securities laws applicable to the offering and sale of the Securities. Upon its execution and delivery, and assuming the valid execution thereof by the Purchaser, this Agreement will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.5 GOOD STANDING OF SUBSIDIARIES. Each of the Company's subsidiaries has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as conducted and as proposed to be conducted, and is duly qualified and is in good standing as a foreign corporation in each jurisdiction in which such qualification is required, except where the failure to be so qualified will not have a Material Adverse Effect. All of the issued and outstanding capital stock of each such subsidiary has been duly authorized and validly issued, is duly paid and nonassessable and is owned by the Company only free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of each such subsidiary was issued in violation of any preemptive or similar rights of any third party. -3- 4.6 NO DEFAULTS. The Company is not in violation of or default under any provision of its Charter or bylaws, or other organizational documents. The Company, and to the best of the Company's knowledge, each other party thereto, is not in breach of or default with respect to any provision of any agreement, judgement, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company is a party or by which the Company or any of its properties are bound; and there does not exist any state of facts which, with notice or lapse of time or both, would constitute an event of default as defined in such documents on the part of the Company, and to the best of the Company's knowledge, on the part of each other party thereto, except for such breaches and defaults which individually or in the aggregate would not have a Material Adverse Effect. 4.7 NO ACTIONS. Except as disclosed in the Information Documents (as defined in SECTION 4.15), there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of which property owned or leased by the Company or any of its subsidiaries is or may be subject (except for threatened litigation which individually or in the aggregate would not have a Material Adverse Effect); and no labor disturbance by the employees of the Company or any of its subsidiaries exists, or, to the best of the Company's knowledge, is imminent. Neither the Company nor any of its subsidiaries is a party to or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. 4.8 PROPERTIES. The Company and each of its subsidiaries has, as of the applicable dates referred to therein, good and marketable title to all the properties and assets reflected as owned by it in the financial statements included in the Information Documents, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements, or (ii) those which are not material in amount and do not adversely affect the use made and currently proposed to be made of such property by the Company or such subsidiary. The Company and its subsidiaries hold their leased properties under valid and binding leases. The Company and its subsidiaries own or lease all such properties as are necessary to their operations as now conducted. 4.9 NO MATERIAL CHANGE. Except as detailed in SCHEDULE 4.9, since December 31, 2003 (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could reasonably be expected to result in a material reduction in the future earnings of the Company or its subsidiaries; (ii) the Company and its subsidiaries have not sustained any material loss or interference with their businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock, and the Company and each of its subsidiaries is not in default in the payment of principal or interest on any outstanding debt obligations, if any; (iv) there has not been any material change in the capital stock of the Company or any of its subsidiaries other than the sale of the Securities hereunder or the concurrent sale of Securities to other purchasers in connection with this financing, or indebtedness material to the Company or any of its subsidiaries (other than in the ordinary course of business); and (v) there has not been a material adverse change in the condition (financial or otherwise), properties, business or results of operations of the Company or any of its subsidiaries. -4- 4.10 COMPLIANCE. The Company has not been advised, or has no reason to believe, that the Company or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where failure to be so in compliance would not have a Material Adverse Effect. 4.11 INTEGRATION, ETC. The Company has not in the past nor will it hereafter take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer, issuance or sale of the Securities, as contemplated by this Agreement, within the provisions of Section 5 of the Securities Act. Neither the Company nor any of its Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any "security" (as defined in the Securities Act) which is or could be integrated with the sale of the Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) in connection with the offering of the Securities or in any manner involving a public offering within the meaning of Section 4(2) of the Act. 4.12 INSURANCE. The Company and its subsidiaries maintain insurance of the types and in the amounts that the Company and its subsidiaries reasonably believe is adequate for their respective businesses, including, but not limited to, insurance against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect. 4.13 REPORTING COMPANY; LISTED SECURITIES. The Company has filed all reports required to be filed by Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the twelve (12) months preceding the Closing Date and has been subject to such filing requirements for such twelve (12) month period. 4.14 ADDITIONAL INFORMATION. Each report, schedule, registration statement and definitive proxy statement filed by the Company with the Commission under the Exchange Act since December 31, 2003 is available on EDGAR (as such documents have since the time of their filing been amended, the "INFORMATION DOCUMENTS"), which are all the documents (other than preliminary material) that the Company was required to file with the Commission since such date. As of their respective dates and except for a filing of Form 8KA which was filed late, the Information Documents and any forms, reports and other documents filed by the Company during the period commencing on the date of this Agreement and ending on the last date on which the Company is required to maintain the effectiveness of the registration statement referred to in SECTION 7.1 hereof, complied or will comply in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to the Information Documents or such other forms, reports or other documents, and none of the Information Documents contained, or will contain at the time they are filed, any untrue -5- statement of a material fact or omitted, or will omit at the time they are filed, to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Information Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by the rules and regulations of the Commission) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments, which were not individually or in the aggregate material) in all material respects the financial position of the Company as at the dates thereof and the results of its operations and cash flows for the periods then ended. 4.15 REGISTRATION RIGHTS. The Company is eligible to register the Purchased Shares and the Warrant Shares for resale by the Purchaser on Form SB-2 promulgated under the Securities Act of 1933, as amended. 4.16 REGISTRATION RIGHTS. In addition to rights granted to holders of Shares and Warrant Shares sold under this Agreement and the other Similar Agreements, the Company has granted registration rights to holders of approximately 5,833,333 shares of its common stock and 5,833,333 shares of common stock issuable on exercise of warrants issued in financing transactions as well as 2,145,384 shares to holders of common stock issued pursuant to acquisitions, employment arrangements and other contracts. The Company is obligated to file a registration statement for the holders of approximately 5,833,333 shares of common stock and 5,833,333 warrants issued in other private placements, and the Company intends to include the Shares and Warrant Shares required to be registered under this Agreement together with approximately 2,145,384 other shares of common stock in the registration statement it plans to file for such other holders. SECTION 5. Representations, Warranties and Covenants of the Purchaser. 5.1 ACCREDITED INVESTOR. The Purchaser represents and warrants to, and covenants with, the Company that: (i) the Purchaser is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the purchase of the Securities, including investments in securities issued by the Company, and has requested, received, reviewed and understood all information it deems relevant in making an informed decision to purchase the Securities, including, without limitation, the information contained in the Information Documents; (ii) it acknowledges that the offering of the Securities pursuant to this Agreement has not been reviewed by the Commission or any state or Canadian regulatory authority; (iii) the Purchaser is acquiring the number of Securities set forth in the signature page hereto, for its own account for investment only and with no present intention of distributing any of such Securities or any arrangement or understanding with any other persons regarding the distribution of such Securities; (iv) the Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except in compliance with the Securities Act, the 1933 Act Rules and Regulations and any applicable state securities or blue sky laws; (v) the Purchaser has completed or caused to be completed the Registration Statement Questionnaire and the Stock Certificate Questionnaire, attached hereto as APPENDIX I and APPENDIX II, for use in preparation of the -6- Registration Statement, and the answers thereto are true and correct as of the date hereof and will be true and correct as of the effective date of the Registration Statement; (vi) the Purchaser has, in connection with its decision to purchase the number of Securities set forth on the signature page hereof, not relied upon any representations or other information (whether oral or written) other than as set forth in the Information Documents and the representations and warranties of the Company contained herein; (vii) the Purchaser has had an opportunity to discuss this investment with representatives of the Company and ask questions of them and such questions have been answered to the full satisfaction of the Purchaser; and (viii) the Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. 5.2 COMPLIANCE WITH SECURITIES ACT. The Purchaser hereby covenants with the Company not to make any sale of the Securities without satisfying the prospectus delivery requirements under the Securities Act, if any. 5.3 AUTHORITY. The Purchaser further represents and warrants to, and covenants with, the Company that (i) the Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, (ii) the Purchaser is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (iii) the execution, delivery and performance of this Agreement by Purchaser and the consummation by the Purchaser of the transactions contemplated by this Agreement will not violate any provision of the organizational documents of Purchaser or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Purchaser is a party or, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Purchaser, (iv) no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required on the part of the Purchaser for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, and (v) upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of the Purchaser enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and (vi) there is not in effect any order enjoining or restraining the Purchaser from entering into or engaging in any of the transactions contemplated by this Agreement. 5.4 RISK. The Purchaser recognizes that an investment in the Securities is speculative and involves a high degree of risk, including a risk of total loss of the Purchaser's investment. 5.5 INFORMATION ABOUT INVESTOR. All of the information provided to the Company or its agents or representatives concerning the Purchaser's suitability to invest in the Company and the representations and warranties contained herein, are complete, true and correct as of the date hereof. The Purchaser understands that the Company is relying on the statements contained herein to establish an exemption from registration under U.S. federal and state securities laws. -7- 5.6 ADDRESS. The address set forth in the signature page hereto is the Purchaser's true and correct domicile. 5.7 PLAN OF DISTRIBUTION. The Purchaser covenants to provide the Company an updated, accurate and complete plan of distribution at all times during which the Company is required to keep the Registration Statement in effect. 5.8 LEGEND. The Purchaser understands and agrees that each certificate or other document evidencing any of the Shares, Warrants or Warrant Shares shall be endorsed with the legend in substantially the form set forth below as well as any other legends required by applicable law, and the Purchaser covenants that the Purchaser shall not transfer the Shares, Warrants, or Warrant Shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS OR CANADIAN SECURITIES LAWS. THESE SECURITIES MAY NOT BE TRANSFERRED UNLESS (A)COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND, IF APPLICABLE, CANADIAN SECURITIES LAWS OR (B) EXEMPTIONS FROM SUCH REGISTRATION OR QUALIFICATION REQUIREMENTS ARE AVAILABLE. AS A CONDITION TO PERMITTING ANY TRANSFER OF THESE SECURITIES, THE COMPANY MAY REQUIRE THAT IT BE FURNISHED WITH AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION OR QUALIFICATION IS LEGALLY REQUIRED FOR SUCH TRANSFER. SECTION 6. SURVIVAL OF REPRESENTATIVES, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants, agreements, representations and warranties made by the Company and the Purchaser herein and in any certificates or documents delivered pursuant hereto or in connection therewith shall survive following the delivery to the Purchaser of the Securities being purchased and the payment therefor. SECTION 7. REGISTRATION OF THE SHARES AND WARRANT SHARES COMPLIANCE WITH THE SECURITIES ACT. 7.1 REGISTRATION PROCEDURES AND EXPENSES. The Company shall: (a) as soon as practicable, but in no event later than thirty (30) days following the date hereof, prepare and file with the SEC a Registration Statement on Form SB-2, or such other Form as appropriate, relating to the resale pursuant to Rule 415 under the Securities Act of the Shares and Warrant Shares by the Purchaser from time to time on the facilities of any securities market on which the Common Shares are then traded or in privately-negotiated transactions, and specifically excluding underwritten offerings; -8- (b) subject to receipt of necessary information from the Purchaser, use its best efforts to cause the Registration Statement (as defined in SECTION 7.2 hereof) to be declared effective by the Commission within one hundred twenty (120) days after closing date; (c) promptly and in good faith respond to all Commission's comments on the Registration Statement, and within ten (10) business days of receipt of an indication from the Commission that it has no further comments, request acceleration of the effectiveness of the registration at the earliest practicable time; (d) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Purchaser may sell all the Shares then held by the Purchaser within a three-month period in accordance with Rule 144 under the Securities Act ("RULE 144"), or (iii) such time as all the Shares purchased by the Purchaser have been sold pursuant to a registration statement; (e) so long as the Registration Statement is effective covering the resale of the Shares and Warrant Shares owned by the Purchaser, furnish to the Purchaser with respect to the Shares and Warrant Shares registered under the Registration Statement such reasonable number of copies of prospectuses and such other documents as the Purchaser may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Shares and Warrant Shares by the Purchaser; (f) file documents required of the Company for blue sky clearance in states specified in writing by the Purchaser; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not so qualified or has not so consented; (g) with a view to making available to the Purchaser the benefits of Rule 144 (or its successor rule) and any other rule or regulation of the Commission that may at any time permit the Purchaser to sell the Shares to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Purchaser's Shares may be resold within a given three-month period pursuant to Rule 144 or any other rule of similar effect or (B) such date as all of the Purchaser's Shares shall have been resold and (ii) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act. 7.2 LATE FILING AND EFFECTIVENESS. (a) If the Registration Statement shall not have been timely filed in accordance with Section 7.1(a) hereof, the Company shall pay the Purchaser an amount equal to 1 1/2 % of the purchase price for the Shares for every calendar month during which the Company fails to file the Registration Statement after the end or the period provided in Section 7.1(a). Such amount shall be pro rated based on the actual number of days elapsed for any part of a month. -9- (b) If the Registration Statement shall not have been timely declared effective in accordance with Section 7.1(b) hereof, the Company shall pay the Purchaser an amount equal to 1 1/2 % of the purchase price for the Shares for every calendar month during which the Registration Statement shall not have been declared effective after the end of the period provided in Section 7.1(b). Such amount shall be pro rated based on the actual number of days elapsed for any part of a month. (c) Amount required to be paid pursuant to Section 7.2(a) or Section 7.2(b) may be paid in cash or by delivery of additional shares of Common Stock valued at the purchase price per share at which such the Shares are sold under this Agreement. 7.3 MARKET STAND-OFF. At any time, or from time to time, the Company may notify the Purchaser that it may not use the Registration Statement because there is material undisclosed information concerning the Company, and the Purchaser shall cease use of the Registration Statement until such time as the Company shall notify the Purchaser that it may recommence use of the Registration Statement; provided that the Company may not so suspend the rights of the Purchaser to use the Registration Statement more often that three times for not longer than ten (10) trading days each in any period of twelve consecutive months; provided, further, that if the Company shall suspend the use of the Registration statement more often than is permitted hereunder, the Company shall pay to the Purchaser a dollar amount per day for each day during which the Company exceeds its permitted suspension equal to (X)(i) the number of unsold shares subject to the registration statement owned by the Purchaser multiplied by (ii) 1.5% divided by (C) thirty (30). This amount shall be payable within ten days of the end of each calendar month in which it is incurred. 7.4 INDEMNIFICATION. For the purpose of this SECTION 7.4: (i) the term "Purchaser" shall include the Purchaser and any affiliate of the Purchaser; and (ii) the term "Registration Statement" shall include any final prospectus, exhibit, supplement or amendment included in or relating to the Registration Statement referred to in SECTION 7.1. (a) The Company agrees to indemnify and hold harmless the Purchaser and each person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages, liabilities or expenses, joint or several, to which the Purchaser or such controlling person may become subject, under the Securities Act, the Exchange Act, or any other U.S. federal, or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration -10- Statement, including the prospectus, financial statements and schedules, and all other documents filed as a part thereof, as amended at the time of effectiveness of the Registration Statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rule 434, of the 1933 Act Rules and Regulations, or the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the 1933 Act Rules and Regulations, or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required (the "PROSPECTUS"), or any amendment or supplement thereto, or (in the case of the Registration Statement or any amendment thereof) arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (in the case of the Prospectus and any amendment thereof or supplement thereto) arise out of or are based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and will reimburse the Purchaser and each such controlling person for any legal and other expenses reason ably incurred as such expenses are reasonably incurred by the Purchaser or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Purchaser expressly for use therein, or (ii) the failure of the Purchaser to comply with SECTION 5(2) hereof respecting sale of the Securities, or (iii) the inaccuracy of any representations made by the Purchaser herein or (iv) any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Purchaser prior to the pertinent sale or sales by the Purchaser. (b) The Purchaser will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, liabilities or expenses to which the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person may become subject, under the Securities Act, the Exchange Act, or any other U.S. federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Purchaser) insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any failure by the Purchaser to comply with SECTION 5(2) hereof respecting the sale of the Securities or (ii) the inaccuracy of any representation made by the Purchaser herein or (iii) any untrue or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or (in the case of the Registration Statement or any amendment thereof) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (in the case of the Prospectus and any amendment thereof or supplement thereto) the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, the Prospectus, or any -11- amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Purchaser expressly for use therein, and will reimburse the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person for any legal and other expense reasonably incurred, as such expenses are reasonably incurred by the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. (c) Promptly after receipt by an indemnified party under this SECTION 7.4 of notice of the threat or commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this SECTION 7.4, promptly notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise to the extent it is not actually prejudiced as a result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions or defenses of the indemnifying party and the indemnified party in conducting the defense of any such action, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this SECTION 7.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless: (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, reasonably satisfactory to the indemnifying party, representing the indemnified parties who are parties to such action and all other purchasers of Common Stock in this financing who may be parties to such action; provided, HOWEVER, that if any indemnified party shall have reasonably concluded that there may be a conflict between the positions or defenses of such indemnified party and the positions or defenses of other indemnified parties or other purchasers in conducting the defense of any such action, the indemnified party shall have the right to select a separate counsel to assume such legal defenses) or (ii) the indemnified party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. The indemnity agreements contained in SECTION 7.4(a) AND (b) shall not apply to amounts paid in settlement of any action if such settlement is effected without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), or to amounts paid in settlement of any action if the indemnifying party is not fully released under such settlement from any claim or liability under such action. -12- (d) If the indemnification provided for in this SECTION 7.4 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) of this SECTION 7.4 in respect to any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Purchaser from the sale of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but the relative fault of the Company and the Purchaser in connection with the statements or omissions or inaccuracies in the representations and warranties in this Agreement which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company on the one hand and the Purchaser on the other shall be deemed to be in the same proportion as the amount paid by the Purchaser to the Company pursuant to this Agreement for the Securities purchased by the Purchaser that were sold pursuant to the Registration Statement bears to the difference (the "DIFFERENCE") between the amount the Purchaser paid for the Securities that were sold pursuant to the Registration Statement and the amount received by the Purchaser from such sale. The relative fault of the Purchaser shall be determined by reference to, among other things, whether the untrue or alleged statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company or by the Purchaser and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in paragraph (c) of this SECTION 7.4, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in paragraph (c) of this SECTION 7.4 with respect to the notice of the threat or commencement of any threat or action shall apply if a claim for contribution is to be made under this paragraph (d); provided, however, that no additional notice shall be required with respect to any threat or action for which notice has been given under paragraph (c) for purposes of indemnification. The Company and the Purchaser agree that it would not be just and equitable if contribution pursuant to this SECTION 7.4 were determined solely by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding the provisions of this SECTION 7.4, the Purchaser shall not be required to contribute any amount in excess of the net proceeds received by such Purchaser from the sale of the Securities sold pursuant to the Registration Statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. SECTION 8 TRANSFER AGENT INSTRUCTIONS. The Company promptly after the Registration Statement is declared effective, the Company shall instruct the transfer agent for the Company's common stock, or cause the Company's counsel to -13- send an opinion letter to such transfer stating that the Registration Statement covering resales of the Shares and the Warrant Shares and that the Common Stock may be issued (or reissued if they have been issued at a time when there was not such an effective registration statement) or resold without any restrictive legend. The Company shall further instruct its transfer agent that upon receipt of a written representation from the Purchaser to the effect that (1) specified Shares or Warrant Shares were sold pursuant to the Registration Statement and (2) that all requirements of the Securities Act of 1933, as amended, including, without limitation, the prospectus delivery requirement were met, the transfer agent may deliver certificates representing the specified Shares or Warrant Shares without a legend restricting transfer of such Shares or Warrant Shares. SECTION 9. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified airmail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows: if to the Company, to: Markland Technologies, Inc. #207 54 Danbury Road Ridgefield, Connecticut 06877 Facsimile: (203)286-1608 Attention: Kenneth Ducey, Jr., CFO with a copy to: Foley Hoag, LLP 155 Seaport Boulevard Boston, Massachusetts 02210 Facsimile: (617) 832-7000 Attention: David Broadwin, Esq. or to such other person at such other place as the Company shall designate to the Purchaser in writing; and if to the Purchaser, at its address as set forth at the end of this Agreement, or at such other address or addresses as may have been furnished to the Company in writing. SECTION 10. CHANGES. This Agreement may not be modified or amended except pursuant to an instrument in writing, signed by the Company and the Purchaser. SECTION 11. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. SECTION 12. SEVERABILITY. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. -14- SECTION 13. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Agreement or any of the other Transaction Agreements and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. SECTION 14 PUBLICITY. Within two (2) trading days after the Closing, the Company will prepare a press release relating to this transaction, and/or file a Form 8-K with the Securities and Exchange Commission disclosing this transaction. SECTION 15. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but both of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party. SECTION 16. ENTIRE AGREEMENT. This Agreement (including the attachments hereto) contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and is in full substitution for any and all prior oral or written agreements and understandings between them related to such subject matter, and neither party hereto shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any representations, indemnities, covenants or agreements except as specifically set forth herein. [REMAINDER OF PAGE INTENTIONALLY DELETED] -15- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives shown below: ____________________________________ [Name of Purchaser] By:_________________________________ Name: Title: Address: __________________________ __________________________ __________________________ Telephone:__________________________ Facsimile:__________________________ Date:_______________________________ Number of Number of Price Per Aggregate Common Shares Warrants Share in Price in to be Purchased to be issued U.S. Dollars U.S. Dollars - ------------------- ------------ ------------ ------------- $0.80 Accepted and Agreed to by: MARKLAND TECHNOLOGIES, INC. By:_________________________________ Robert Tarini, CHIEF EXECUTIVE OFFICER Date:_______________________________ -16- APPENDIX I MARKLAND TECHNOLOGIES, INC. STOCK CERTIFICATE QUESTIONNAIRE Pursuant to SECTION 3 of the Agreement, please provide us with the following information: 1. The exact name that your Shares are to be registered in (this is the name that will appear on your stock certificate(s)). You may use a nominee name if appropriate: ________________________ 2. The relationship between the Purchaser of the Shares and the Registered Holder listed in response to item 1 above: ________________________ 3. The mailing address of the Registered Holder listed in response to item 1 above: ________________________ ________________________ ________________________ 4. The Social Security Number or Tax Identification Number of the Registered Holder listed in response to item 1 above: ________________________ APPENDIX II MARKLAND TECHNOLOGIES, INC. REGISTRATION STATEMENT QUESTIONNAIRE In connection with the preparation of the Registration Statement, please provide us with the following information: 1. Pursuant to the "Selling Shareholder" section of the Registration Statement, please state your or your organization's address and name exactly as it should appear in the Registration Statement: ________________________ ________________________ ________________________ 2. Please provide the number of Common Shares that you or your organization will own immediately after Closing, including those Shares purchased by you or your organization pursuant to this Purchase Agreement and those Common Shares purchased by you or your organization through other transactions: ________________________ ________________________ ________________________ 3. Have you or your organization had any position, office or other material relationship within the past three (3) years with the Company or its affiliates? Please circle the correct answer. Yes No If yes, please indicate the nature of any such relationships below: ________________________ ________________________ ________________________ 4. Does the plan of distribution in the draft form of Registration Statement provided to you reflect your current plan of distribution? Yes No If no, please attach a copy of your current plan of distribution. EX-10.6 14 markland_sb2ex10-6.txt EXHIBIT 10.6 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is dated as of September_, 2003, and is between George Yang ("Secured Party"), Markland Technologies, Inc., a Florida corporation ("Parent"), and STR Acquisition Corp., a Maryland corporation. ("Merger Sub"), a Delaware corporation as succeeded in interest by the surviving corporation of a merger, Security and Technology Research, Inc. (the "Company"), a Maryland corporation ("Debtor"), such corporation being a wholly owned subsidiary of Parent. This Agreement is entered into in connection with a merger of Merger Sub into the Company. Pursuant to an Agreement and Plan of Merger of even date herewith by and between Secured Party, Parent, Merger Sub and the Company, the Company will become a wholly owned subsidiary of Parent. As partial consideration for such merger transaction Merger Sub delivered a Promissory Note of even date herewith in the principal amount of $375,000 to Secured Party (the "Note") that by operation of law will become an obligation of the Company upon the closing of the merger transaction and is itself subject to the Guaranty of even date herewith delivered by Parent to Secured Party (the "Guaranty"). In addition, as part of the merger transaction set forth in the Agreement and Plan of Merger, Parent will retain Secured Party to perform consulting services for Parent and Secured Party will agree to perform such consulting services and covenant to other matters under a "Consulting Agreement" executed on even date herewith. In consideration for Secured Party's services and covenants Parent will pay Secured Party a fee as set forth in the Consulting Agreement (the "Fee"). WHEREFORE, Debtor, Parent and Secured Party agree as follows: 1. GRANT OF SECURITY INTEREST. Each of Debtor and Parent (to the extent that each owns any portion of the assets constituting the Collateral) hereby grants a security interest in the Collateral (as defined in Section 2) in favor of Secured Party to secure the payment of the Obligations (as defined in Section 3). 2. COLLATERAL. The Collateral shall consist of: 2.1 CORPORATE STOCK. Parent's corporate stock in STR in an amount that is equal to [forty] percent [(40%)J of the outstanding and issued voting, common shares of STR. 2.2 ACCOUNTS. All present and future net accounts receivable of and other rights of Debtor to the payment of money no matter how evidenced, all present and future chattel paper, instruments and other writings evidencing any such right, all goods repossessed or returned in connection therewith, and all deposit accounts; 2.3 INVENTORY. All inventory of Debtor now owned or hereafter acquired (to the fullest extent permitted by present or future law). 1 2.4 EQUIPMENT. All equipment of Debtor now owned or hereafter acquired, including, without limitation, all machinery, computer hardware and software, furniture, furnishings and fixtures; 2.5 INTELLECTUAL PROPERTY. All patents, copyrights, service marks, trademarks, tradenames, trade secrets, web sites, web pages, domain names, URL's, confidential information, know-how, customer lists and other customer information owned by Debtor or in which Debtor has an interest, including all licenses or other rights with respect to any of the foregoing and all registrations or applications for registration of any of the foregoing. All other intangibles of Debtor now owned or hereafter acquired; 2.6 BOOKS AND RECORDS. All now existing or hereafter acquired books and records relating to the foregoing Collateral and all equipment containing such books and records; and 2.7 PROCEEDS. All proceeds of the foregoing Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. 3. OBLIGATIONS. The term "Obligations" means and includes obligations of Debtor to Secured Party arising from the Note and this Agreement, and also includes all other debts, obligations and liabilities of Debtor to Secured Party, now or hereafter made which are memorialized in a writing. The term "Obligations" also means and includes obligations of Parent to Secured Party arising from the Guaranty and this Agreement, and also includes all other debts, obligations and liabilities of Debtor to Secured Party, now or hereafter made which are memorialized in a writing including but not limited to the Fee. 4. REPRESENTATIONS AND WARRANTIES. Each of Debtor and Parent represents and warrants to Secured Party that: (a) Debtor or Parent, as the case may be, is the owner of its portion of the Collateral free and clear of all liens, encumbrances and security interests (other than as permitted by Section 9 below); (bit has the right and power to make this Agreement; and (c) the Collateral will be kept at the address specified below. 5. DEFENSE OF CLAIM. Debtor and Parent agree to defend their respective portions of the Collateral against claims and demands of all persons. 6. INSURANCE. Debtor will insure its portion of the Collateral against all hazards in an amount at least equal to the remaining principal balance of the Note. If Debtor fails to obtain insurance, Secured Party shall have the right to obtain it at Debtor's expense. Debtor hereby assigns to Secured Party all rights to receive proceeds of insurance not exceeding the unpaid balance under the Obligations, directs any insurer to pay all proceeds directed to Secured Party, and authorizes Secured Party to endorse any draft for the proceeds. 2 7. POSSESSION; CONDITION. Until default, Debtor may retain possession of its portion of the Collateral and use it in any lawful manner not inconsistent with either the Debtor's obligations herein or the terms and conditions of any policy of insurance thereon. Debtor agrees to keep its portion of the Collateral in good condition and repair, reasonable wear and tear excepted, and will permit Secured Party or its agents to inspect Debtor's portion of the Collateral at any time. Until default, Parent may retain possession of, but may not in any form or manner sell, transfer, assign, pledge, hypothecate or in any form or manner encumber its portion of the Collateral. 8. SALE. Other than in the ordinary course of business, Debtor agrees not to sell the Collateral without the prior written consent of the Secured Party, which consent will not be unreasonably withheld. 9. APPOINTMENT. Secured Party is hereby appointed Debtor's and Parent's attorney-in-fact to do all acts and things which Secured Party may deem necessary to perfect and continue to perfect the security interest created by this Security Agreement and to protect the Collateral. Without limiting the foregoing, Debtor and Parent hereby authorizes Secured Party to file all financing statements that Secured Party believes necessary to perfect the security interest granted hereby, and further authorizes Secured Party to make filings with the U.S. Patent and Trademark Office in connection with the security interest granted hereby. 10. EVENTS OF DEFAULT. The occurrence of any of the following, whatever the reason therefor, shall constitute an Event of Default: 10.1 DEFAULT UNDER GUARANTY. The occurrence of any Event of Default as defined in the Guaranty. 10.2 BREACH OF THE AGREEMENT AND PLAN OF MERGER. Any material breach of any covenant or agreement or non-fulfillment of any obligation of Debtor or Parent set forth in the Agreement and Plan of Merger. 10.3 NONPAYMENT. Debtor or Parent fails to pay any amount owing to Secured Party under the Obligations after the expiration of any grace period or notice period for such payment provided in the Obligations. 10.4 NONPERFORMANCE. Debtor or Parent fails to perform or observe any other terms, covenant or agreement contained hereunder, and such failure continues uncured for a period of ten (10) days following Secured Party's delivery of written notice of such failure to Debtor or Parent, as the case may be. 10.5 FAILURE OF WARRANTY. Any representation or warranty under any of the Obligations or in any other document made or delivered pursuant to or in connection with any of the Obligations proves to have been incorrect in any material respect when made. 3 11. EFFECT OF DEFAULT. Upon any Event of Default hereunder: 11.1 ACCELERATION. Secured Party may accelerate the outstanding amounts (if any) on the Note and/or the Fee by delivering written notice of such acceleration. 11.2 OTHER REMEDIES. Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or other applicable law. All rights and remedies provided herein or in the Obligations (including the Guaranty) shall, to the full extent permitted by law, be cumulative. After default, Secured Party may require Debtor and/or Parent to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to Secured Party and Debtor. Any notice of sale, disposition or other intended action by Secured Party, sent to Debtor at the address specified below, or such other address of Debtor as may from time to time be shown on Secured Party's records, at least five (5) days prior to such action, shall constitute reasonable notice to Debtor. 12. COSTS. Debtor and Parent agree that, upon any Event of Default, they will pay to Secured Party all costs reasonably incurred by Secured Party for the purpose of enforcing Secured Party's rights hereunder, including, but not limited to, the cost of foreclosures, the costs of obtaining necessary permits and consents to the transfer of the Collateral (should any such transfer occur), and all attorneys' fees, costs and other expenses incurred by Secured Party in connection therewith, together with interest thereon from the date of demand at the rate applicable to the principal balance of the Note. 13. NOTICES. All notices and other communications provided for hereunder shall be in writing (including facsimile) and mailed, telecopied or delivered to a party at its address shown on the signature page of this Agreement; or in each case at such other address as shall be designated by Secured Party or Debtor and Parent in a written notice to the other. All such notices and communications shall, when mailed, telecopied or sent by courier, be effective when deposited in the mails, delivered to the courier, as the case may be, or sent by telecopier. 14. GOVERNING LAW; JURISDICTION. This Agreement shall be construed and enforced, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with and governed by, the laws of the State of Maryland, without reference to the principles of conflict of laws thereof. By execution and delivery of this Agreement, each party hereto irrevocably submits to the exclusive jurisdiction of such court for itself and on behalf of its permitted successors and assigns. 15. WAIVER OF JURY. DEBTOR, PARENT AND SECURED PARTY HEREBY IRREVOCABLY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and 4 statutory claims. Debtor, Parent and Secured Party each (i) acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this relationship, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents that each has reviewed this waiver with its legal counsel and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS AGREEMENT. In the event of litigation, this provision may be filed as a written consent to a trial by the court. 16. MISCELLANEOUS PROVISIONS. No provision of this Agreement may be amended, modified, supplemented, changed, waived, discharged or terminated unless Secured Party consents thereto in writing. In case any one or more of the provisions contained in this Agreement should be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. This Agreement shall be binding upon and inure to the benefit of Debtor, Parent, Secured Party and their respective successors and assigns. Secured Party shall have the right to sell, assign or otherwise transfer, either in part or in its entirety, this Agreement and the Guaranty, without Debtor's or Parent's consent, with any such transferee being entitled to be treated in all favorable respects as a holder or holders in due course. Time is of the essence of this Agreement and the performance of each of the covenants and agreements contained herein, including, but not limited to, the payment of all sums due hereunder. 5 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officer as of the day and year first above written. SECURED PARTY: /s/ George Yang ---------------------------------------- George Yang Address: Facsimile No. DEBTOR: STR Acquisition Corp. (as succeeded in interest by Security and Technology Research, Inc.) By: /s/ Ken Ducey ------------------------------------ Ken Ducey, CFO/President Address: Facsimile No. PARENT: Markland Technologies, Inc. By: /s/ Ken Ducey ------------------------------------ Ken Ducey, CFO/President Address: Facsimile No. 6 EX-10.7 15 markland_sb2ex10-7.txt EXHIBIT 10.7 This GUARANTY (this "Guaranty"), dated as of September _, 2003, is made by Markland Technologies, Inc., a Florida corporation (the "Guarantor"), in favor of George Yang, a Maryland resident ("Yang") RECITALS WHEREAS, Guarantor, STR Acquisition Corp., a wholly owned subsidiary of Guarantor ("Merger Sub"), Security Technology, Inc., another wholly owned subsidiary of Guarantor ("Controlled Subsidiary"), Yang and Security and Technology Research, Inc., a Maryland corporation all the capital stock of which is owned by Yang (the "Company") are entering into an Agreement and Plan of Merger on even date herewith (the "Merger Agreement"), pursuant to which Merger Sub will merge into the Company and Company will become a wholly owned subsidiary of Controlled Subsidiary; WHEREAS, in consideration for the completion of the transaction as contemplated in the Merger Agreement, Yang will receive voting common stock of Guarantor, cash and Merger Sub's promissory note, that by operation of law will become an obligation of the Company upon the closing of the merger transaction, in the amount of Three Hundred Seventy-Five Thousand Dollars (the "Note"); WHEREAS, Yang is willing to enter into the Merger Agreement only if the Guarantor executes and delivers this Guaranty. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants contained herein, the parties hereby agree as follows: 1. GUARANTY. The Guarantor hereby unconditionally and irrevocably guarantees the full and prompt payment when due of any and all amounts due and payable under the Note. 2. OBLIGATIONS PAID IN ACCORDANCE WITH TERMS HEREOF. The Guarantor guarantees that each payment under the Note shall be paid in accordance with the terms and provisions thereof without regard to any applicable law now or hereafter in affect in any jurisdiction that might in any manner affect any of such terms or provisions or the rights of Yang with respect hereto. 3. ENFORCEMENT OF GUARANTY. On the date on which the Payment is due and payable by the Company, Yang, in his sole discretion, may proceed directly against the Guarantor to exercise any right or remedy that Yang may have under this Guaranty without pursuing or exhausting any other right or remedy that Yang may have against the Company. 4. GUARANTY ABSOLUTE. The obligations of the Guarantor hereunder shall be absolute and unconditional irrespective of the validity, legality or enforceability of the Merger Agreement or any event that might otherwise constitute a legal or equitable discharge of a guarantor, and shall not be subject to any defense, counterclaim, setoff, recoupment, abatement, reduction or other determination that the Guarantor, Merger Sub or the Company may have against Yang, it being agreed that the agreements and liabilities of the Guarantor hereunder shall not be discharged except by payment or as otherwise expressly provided in this Guaranty. The Guarantor acknowledges that there are no conditions precedent to the effectiveness of this Guaranty, and that this Guaranty is in full force and effect and is binding on the Guarantor as of the date written above. 5. WAIVER. The Guarantor hereby waives notice of acceptance of this Guaranty and of any action taken or omitted in reliance thereon. The Guarantor waives any right to require Yang to: (a) proceed against any person, including Merger Sub or its successor in interest, the Company, (b) proceed against or exhaust any collateral held from the Company or any other person; (c) pursue any other remedy in Yang's power; or (d) make any presentments, demands for performance, or give any notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any obligations or evidences of the payments under the Note guaranteed hereunder. 6. CONTINUING GUARANTY OF PAYMENT. The Guarantor hereby represents and agrees that this is a present and continuing guaranty of payment and that this Guaranty (a) shall be binding upon the Guarantor and its respective successors and assigns and (b) shall inure to and shall be enforceable by Yang and his successors, transferees and assigns. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Guarantor hereby represents, warrants and covenants to Yang that: 7.1. NO BREACH. The execution and delivery of this Guaranty by the Guarantor will not result in any breach of or default under any provision of any contract or agreement of any kind to which the Guarantor is a party or by which the Guarantor is bound or to which the Guarantor's assets or properties are subject. 7.2. DUE AUTHORIZATION; ENFORCEABILITY. The execution of this Guaranty has been duly authorized by all required action of the Guarantor and this Guaranty constitutes a valid, legal and binding guaranty of the Guarantor, enforceable in accordance with its terms. 8. MISCELLANEOUS. 8.1. GOVERNING LAW. This Guaranty is governed by and construed in accordance with the laws of the State of Maryland, without reference to principles of conflicts of laws. 8.2. COSTS, EXPENSES AND ATTORNEYS' FEES. All costs and expenses, including reasonable attorneys' fees, made or incurred by Yang in the enforcement of this Guaranty or in the collection of any of the payment under the Note shall be paid by the Guarantor immediately upon demand. 8.3. NOTICES. Any notice, request, demand or other communication permitted or required to be given shall be in writing, shall be signed by the party giving it, shall be sent to the addressee at the address set forth below (or at such other address as shall be designated hereunder by notice to the other parties and persons receiving copies) and shall be deemed conclusively to have been given (a) when sent by telefax, telex or telegram, (b) on the third day following the day sent by certified or registered United States mail, postage prepaid and return receipt requested, or (c) when otherwise delivered to addressee. The addresses of the parties are as follows: (a) If to Yang, at the following address: (b) If to Guarantor, at the following address: 8.4. ENTIRE AGREEMENT. This Guaranty contain all the terms and conditions of and the entire agreement between Yang and the Guarantor relating to the subject matter hereof. 8.5. COUNTERPARTS. This Guaranty may be executed in one or more counterparts, and by facsimile, each of which may be executed by one or more of the parties hereto, but all of which, when taken together, shall constitute but one agreement. 8.6. NO WAIVER BY ACTION, ETC. Any waiver or consent respecting any representation, warranty or other provision of this Guaranty shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of the frequency given, to be a further or continuing waiver or consent. The failure or delay of a party at any time or times to require performance of, or to exercise its rights with respect to, any representation, warranty or other provision of this Guaranty in no manner (except as otherwise expressly provided herein) shall affect its right at a later time to enforce any such provision. No notice to or demand on a party in any case shall entitle such party to any other or further notice or demand in this same, similar or other circumstances. 8.7. AMENDMENTS. This Guaranty may not be amended, modified, waived or assigned except by a writing signed by the Guarantor and Yang. IN WITNESS WHEREOF, each of the parties hereto has caused this Guaranty to be executed and delivered as of the date first set forth above. GUARANTOR: MARKLAND TECHNOLOGIES, INC. By: /s/ Ken Ducey ------------------------------------ Ken Ducey, CFO/President Approved and Accepted: George Yang /s/ George Yang - ------------------------------- EX-10.8 16 markland_sb2ex10-8.txt EXHIBIT 10.8 AMENDMENT AND PAYMENT EXTENSION AGREEMENT THIS AMENDMENT AND PAYMENT EXTENSION AGREEMENT (this "AMENDMENT") is made as of March 17th, 2004, by and between MARKLAND TECHNOLOGIES, INC., a Florida Corporation ("MARKLAND"), SECURITY AND TECHNOLOGY RESEARCH, INC., a Maryland corporation ("STR") and George Yang, an individual residing in the State of Maryland ("YANG"). WHEREAS, Markland, STR and Yang are all parties to an Agreement and Plan of Merger dated as of October __, 2003 (the "MERGER AGREEMENT:); WHEREAS, STR is a wholly-owned subsidiary of a corporation that is itself wholly-owned by Markland; WHEREAS, in consideration for the completion of the transaction set forth in the Merger Agreement, Yang received voting common stock of Markland, cash and STR's promissory note in the amount of Three Hundred Seventy-Five Thousand Dollars (the "NOTE"); WHEREAS, the Note is payable in four (4) principal installments, the first due 150 days following the Agreement Date (as defined in the Merger Agreement), the second due 210 days following the Agreement Date, the third due 270 days following the Agreement Date and the final Note payment due 360 days following the Agreement date (collectively, the "NOTE PAYMENT SCHEDULE"); WHEREAS, as a condition to the closing of the Merger Agreement, Markland entered into a one (1) year consulting agreement with Yang (the "CONSULTING AGREEMENT"), pursuant to which, in consideration for his performance of services thereunder, Yang is to receive compensation in the aggregate amount of Two Hundred Eighty-Five Thousand Dollars ($285,000.00) Term (the "FEE"); WHEREAS, the Fee is payable in four (4) installments, the first due on March 15, 2004, the second due on May 15, 2004, the third due on July 15, 2004 and the final Fee payment due on October 15, 2004 (collectively, the "FEE PAYMENT SCHEDULE"); WHEREAS, Markland and STR have experienced certain unexpected cash flow problems; WHEREAS, Markland, STR and Yang each desire to extend the terms of both the Note Payment Schedule and Fee Payment Schedule by amending the Note and the Consulting Agreement, respectively. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants contained herein, the parties hereby agree as follows: 1 1. AMENDMENT OF THE NOTE. The Note Payment Schedule in the Note (the second paragraph of the Note) is hereby amended by deleting it in its entirety and inserting in its place the following provision: "THE PRINCIPAL ON THE PROMISSORY NOTE SHALL BE PAYABLE IN FIVE (5) EQUAL PRINCIPAL PAYMENTS IN THE AMOUNT OF SEVENTY-FIVE THOUSAND DOLLARS ($75,000) THAT SHALL BE DUE ON JUNE 15, 2004, JULY 15, 2004, AUGUST 15, 2004, SEPTEMBER 15, 2004 AND OCTOBER 15, 2004, RESPECTIVELY." 2. AMENDMENT OF THE CONSULTING AGREEMENT. The Fee Payment Schedule in the Consulting Agreement (Section 5.1 thereof) is hereby amended by deleting it in its entirety and inserting in its place the following provision: "5.1 CONSULTING FEES. IN CONSIDERATION FOR THE CONSULTING SERVICES TO BE RENDERED BY CONSULTANT DURING THE TERM AND THE OTHER COVENANTS MADE BY CONSULTANT UNDER THIS AGREEMENT, THE COMPANY SHALL PAY TO CONSULTANT THE NEGOTIATED SUM OF TWO HUNDRED EIGHTY-FIVE THOUSAND DOLLARS ($285,000) TERM (THE "FEE"). THE FEE SHALL BE PAYABLE AS FOLLOWS: TWENTY-FIVE THOUSAND DOLLARS ($25,000) SHALL BE PAYABLE ON JULY 15, 2004, A SECOND PAYMENT IN THE AMOUNT OF THIRTY-FIVE THOUSAND DOLLARS ($35,000), SHALL BE DUE AUGUST 15, 2004, A THIRD PAYMENT IN THE AMOUNT OF SIXTY THOUSAND DOLLARS ($60,000) SHALL BE DUE ON SEPTEMBER 15, 2004, A FOURTH PAYMENT IN THE AMOUNT OF SIXTY THOUSAND DOLLARS ($60,000) SHALL BE DUE ON OCTOBER 15, 2004, A FIFTH PAYMENT IN THE AMOUNT OF SIXTY THOUSAND DOLLARS ($60,000) SHALL BE DUE ON NOVEMBER 15, 2004 AND A SIXTH AND FINAL PAYMENT IN THE AMOUNT OF FORTY-FIVE THOUSAND DOLLARS ($45,000) SHALL BE DUE ON DECEMBER 15, 2005. THE COMPANY SHALL NOT WITHHOLD ANY FEDERAL, STATE OR LOCAL TAXES OR OTHER WITHHOLDINGS FROM ANY PAYMENT DUE TO CONSULTANT. ANY AND ALL RESPONSIBILITY FOR PAYMENT OF SUCH TAXES AND OTHER WITHHOLDINGS SHALL BE THE SOLE AND EXCLUSIVE RESPONSIBILITY OF CONSULTANT." 3. PAYMENT EXTENSION CONSIDERATION. In consideration of Yang's agreement to extend the term of both the Note Payment Schedule and Fee Payment Schedule, through the above set forth amendments to the Note and Consulting Agreement, respectively, Markland shall pay Yang the following consideration. Promptly after the due execution of this Amendment, though in no event more than seven (7) business thereafter, Markland shall deliver to Yang Fifty Thousand (50,000) shares of Markland's single class of voting common stock, $0.0001 par value per share (the "STOCK CONSIDERATION"). In addition to the Stock Consideration, Markland shall also pay cash in the sum of Forty Thousand Dollars ($40,000) to Yang (the "CASH CONSIDERATION"). The Cash Consideration shall be paid as follows: a partial payment of the Cash Consideration in the amount of Ten Thousand Dollars ($10,000) shall be due and payable on September 15, 2004, a second partial payment of the Cash Consideration in the amount of Ten Thousand Dollars ($10,000) shall be due and payable on October 15, 2004, a third partial payment of the Cash Consideration in the amount of Ten Thousand Dollars ($10,000) shall be due and payable on November 15, 2004 and a forth and final partial payment of the Cash 2 Consideration in the amount of Ten Thousand Dollars ($10,000) shall be due and payable on December 15, 2004. The Cash Consideration shall be paid by Markland to Yang at his mailing address first set forth in the Note, or at such other address as Yang may specify in writing to Markland. Payment shall be made by means of a check or wire transfer in immediately available funds to be received Yang on or before the relevant due date. Payments that are not paid when due under this Amendment shall be subject to interest charges at a rate of twelve percent (12%) per annum. 4. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original hereof, and it shall not be necessary in making proof of this Amendment to produce or account for more than one original counterpart hereof. 5. CONTROLLING LAW. This Amendment is made under, and shall be construed in accordance with, the laws of the State of Maryland applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law. 6. DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Merger Agreement. 7. NO NOVATION. This Amendment is only an agreement amending certain provisions of the Note and Consulting Agreement, respectively. All of the provisions of the Note and Consulting Agreement are incorporated herein by reference and shall remain and continue in full force and effect as amended by this Amendment. [Signatures on the following page] 3 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first written above. MARKLAND TECHNOLOGIES, INC. By: /S/ ROBERT TARINI -------------------------------------- Robert Tarini, CEO SECURITY AND TECHNOLOGY RESEARCH, INC. By: /S/ ROBERT TARINI -------------------------------------- Robert Tarini, CEO /S/ GEORGE YANG 3/18/04 - ------------------------------------------- George Yang 4 EX-10.11 17 markland_sb2ex10-11.txt EXHIBIT 10.11 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT is made as of the ____ day of September, 2003, by and between SECURITY TECHNOLOGY, INC., A DELAWARE CORPORATION ("Debtor"); and BAY VIEW CAPITAL L.L.C., A RHODE ISLAND LIMITED LIABILITY COMPANY ("Secured Party"). WITNESSETH: ----------- WHEREAS, Debtor and Markland Technologies, Inc., a Florida corporation ("Markland", Debtor and Markland are hereinafter sometimes referred to collectively as the "Borrowers"), have executed and delivered to Secured Party a Loan Agreement of even date herewith (as the same may be amended, extended or restated from time to time, the "Loan Agreement"); and WHEREAS, pursuant to the Loan Agreement, Borrowers executed and delivered to Secured Party a Promissory Note of even date herewith made payable to Secured Party by Borrowers, jointly and severally, in the original principal amount of up to One Million Four Hundred Thousand and 00/100 ($1,400,000.00) Dollars (as the same may be amended, extended, renewed or restated from time to time, the "Note"); and WHEREAS, Debtor has agreed to enter into this Security Agreement in order to induce Secured Party, INTER ALIA, to make the loan evidenced by the Note; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. THE SECURITY INTERESTS. --------- ---------------------- (a) In order (i) to secure the due and punctual payment of the Note; (ii) to secure the due and punctual payment and performance of all obligations of Debtor contained herein; (iii) to secure the due and punctual payment and performance of all indebtedness, obligations and liabilities of Debtor contained in the Loan Agreement and in all other agreements executed or delivered by Debtor in connection with or as contemplated by the Loan Agreement; and (iv) to secure the due and punctual payment and performance of all other indebtedness, liabilities and obligations of Debtor to Secured Party of every kind and description, whether direct, indirect or contingent, whether now existing or hereafter arising or incurred, whether due or to become due, whether otherwise secured or unsecured and howsoever evidenced, incurred or arising, including, without limitation, all indebtedness, liabilities and obligations evidenced or arising pursuant to any promissory note, loan agreement, equipment lease, conditional sales agreement, consignment agreement, guaranty, overdraft, bankers' acceptance, forward contract, foreign exchange contract, letter of credit reimbursement agreement or any other agreement or instrument which may at any time be executed or issued for Debtor's account or to which Debtor is now or hereafter may become a party (all of the foregoing are hereinafter collectively called the "Obligations"), Debtor hereby grants to Secured Party a continuing security interest in the following described fixtures and personal property, whether now existing or hereafter arising (hereinafter collectively called the "Collateral"): All fixtures and all tangible and intangible personal property of Debtor of every kind and description and wherever located, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest, including, without limitation: (1) all equipment (as such term is defined in the Uniform Commercial Code [the "UCC"]), machinery and fixtures, including, without limitation, all processing and manufacturing equipment, machine tools, data processing and computer equipment, furniture, tools, dies, molds, motor vehicles, rolling stock, trailers, airplanes, vessels and other equipment of every kind and description, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (2) all inventory (as such term is defined in the UCC), including without limitation, all merchandise, raw materials, work in process, parts, components, dies, molds, finished goods, supplies and all goods returned to or repossessed by Debtor, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (3) all accounts (as such term is defined in the UCC), accounts receivable, other receivables, evidences of indebtedness, notes, drafts, acceptances, contract rights, leases, chattel paper and electronic chattel paper (as such terms are defined in the UCC), commercial tort claims (as such term is defined in the UCC), and general intangibles (as such term is defined in the UCC), including, without limitation, all collateral and security therefor and all supporting obligations (as such term is defined in the UCC) of every kind and description (including, without limitation, all guarantees, letters of credit, letter-of-credit rights (as such term is defined in the UCC), liens and security interests in favor of Debtor), and all goodwill, going concern value, patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and servicemarks, customer lists, advertising materials, operating manuals, copyrights, blueprints, designs, engineering drawings and contracts, proprietary information, product lines, distribution agreements, dealer contracts, supplier contracts, tax refund claims, licenses, research and development, and all rights to the payment of money, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; 2 (4) all instruments (as such term is defined in the UCC), documents of title, policies and certificates of insurance, securities (as such term is defined in the UCC), securities entitlements (as such term is defined in the UCC), investment property (as such term is defined in the UCC), partnership interests, membership interests in limited liability companies, bank deposits, deposit accounts (as such term is defined in the UCC), checking accounts, certificates of deposit and cash, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (5) all accessions, additions and improvements to, and all proceeds and products of, all of the foregoing, including proceeds of insurance, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; and (6) all books, records, documents, computer tapes and discs relating to all of the foregoing, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest. (b) All of Debtor's accounts, accounts receivable, contract rights, chattel paper, general intangibles and rights to the payment of money, and all collateral and security therefor and related supporting obligations, and all proceeds thereof, are sometimes hereinafter collectively called the "Customer Receivables". All of Debtor's equipment, fixtures and inventory are sometimes hereinafter collectively called the "Tangible Collateral". (c) The security interests granted pursuant to this SECTION 1 (the "Security Interests") are granted as security only and shall not subject Secured Party to, or transfer to Secured Party, or in any way affect or modify, any obligation or liability of Debtor under any of the Collateral or any transaction which gave rise thereto. (d) If Debtor shall at any time acquire a commercial tort claim, as defined in Article 9 of the UCC, Debtor shall immediately notify Secured Party in writing of the brief details thereof and shall grant to Secured Party in writing a security interest therein and in the proceeds thereof, all on the terms of this Security Agreement, and in writing in form and substance satisfactory to Secured Party. (e) For avoidance of doubt it is expressly understood and agreed that (i) the Collateral is intended to consist of all assets of Debtor, and (ii) to the extent the UCC is revised subsequent to the date hereof such that the definition of any of the foregoing terms included in the description of Collateral is changed, the parties agree that any property which is included in such changed definitions which would not otherwise be included in the foregoing grant on the date hereof be included in such grant immediately upon the effective date of such revision, it being the intention of the parties hereto that the description of Collateral set forth herein be construed to include the broadest possible range of property and assets and all tangible and intangible personal property and fixtures of Debtor of every kind and description. 3 SECTION 2. DELIVERY OF PLEDGED SECURITIES AND CHATTEL PAPER. --------- ------------------------------------------------ (a) All securities of Debtor, whether now owned or hereafter acquired by Debtor (SUBJECT TO A PRIOR PLEDGE OF UP TO FORTY (40%) PERCENT OF THE COMMON STOCK OF SCIENCE & TECHNOLOGY RESEARCH, INC., A MARYLAND CORPORATION, TO GEORGE YANG), shall be promptly delivered to Secured Party by Debtor pursuant hereto (which securities, together with all other securities, securities entitlements, and shares of stock which may hereafter be delivered to Secured Party pursuant to the terms hereof, are hereinafter called the "Pledged Securities"), shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignments in blank, with signatures appropriately guaranteed, and accompanied in each case by any required transfer tax stamps, all in form and substance satisfactory to Secured Party. EXHIBIT A attached hereto and made a part hereof sets forth a complete description of all Pledged Securities owned by Debtor on the date hereof. Debtor shall from time to time promptly and in accordance with the foregoing provisions deliver to Secured Party any and all Pledged Securities which may hereafter be acquired by Debtor. (b) Secured Party may at any time or from time to time, in its sole discretion, require Debtor to cause any chattel paper included in the Customer Receivables to be delivered to Secured Party or any agent or representative designated by it, or to cause a legend referring to the Security Interests to be placed on such chattel paper and upon any ledgers or other records concerning the Customer Receivables. SECTION 3. FILING; FURTHER ASSURANCES. ---------- --------------------------- Debtor will, at its expense, execute, deliver, file and record (in such manner and form as Secured Party may require), or permit Secured Party to file and record, any financing statements, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which the parties hereto agree shall be sufficient as a financing statement hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that Secured Party may request, in order to create, confirm, preserve, perfect or validate any Security Interest or to enable Secured Party to exercise and enforce its rights and remedies hereunder or under applicable law with respect to any of the Collateral. Debtor hereby authorizes Secured Party, at any time and from time to time, without the Debtor's further signature or authorization, to file financing statements, continuation statements and amendments thereto that describe or indicate the Collateral including, without limitation, an indication that the Collateral consists of "all assets" of the Debtor or words of similar effect and which contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether Debtor is an organization, the type of organization and any organization identification number issued to Debtor. Debtor agrees to furnish any such information to Secured Party promptly upon request. 4 SECTION 4. DEBTOR'S REPRESENTATIONS AND WARRANTIES. ---------- ---------------------------------------- Debtor hereby represents and warrants to Secured Party as follows: (a) Except as described in EXHIBIT B attached hereto and made a part hereof, Debtor is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse lien, security interest or encumbrance. (b) Except for such financing statements as may be described in EXHIBIT B attached hereto and made a part hereof, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement. (c) All additional information, representations and warranties contained in EXHIBIT C attached hereto and made a part hereof, and any Schedules attached to said EXHIBIT C, are true, accurate and complete on the date hereof. (d) There are no restrictions upon the voting rights or the transfer of all or any of the Pledged Securities (other than may appear on the face of the certificate thereof) and Debtor has the right to vote, pledge, grant a security interest in, and otherwise transfer the Pledged Securities free of any encumbrances (other than applicable restrictions imposed by Federal or state securities laws or regulations). (e) EXHIBIT D attached hereto constitutes an accurate and complete list of all patents, trademarks, tradenames, patent applications, servicemarks and registrations of the foregoing owned by or held by Debtor. SECTION 5. DEBTOR'S COVENANTS. ---------- ------------------- Debtor hereby covenants and agrees with Secured Party that Debtor will: (a) Defend the Collateral against all claims and demands of all persons at any time claiming any interest therein. (b) Provide Secured Party, at least fifteen (15) business days prior to occurrence, with written notice of (i) any change in Debtor's chief executive office or the office where Debtor maintains its books and records pertaining to the Customer Receivables, (ii) the movement or location of Collateral to or at any address other than as set forth in said EXHIBIT C, and (iii) any event or occurrence which would render any warranty or information contained in EXHIBIT C OR D hereto inaccurate or incomplete. (c) Immediately notify Secured Party of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution. 5 (d) Not sell or offer to sell or otherwise assign, transfer, encumber, grant a security interest in, or dispose of the Collateral or any interest therein, without Secured Party's prior written consent; PROVIDED, HOWEVER, that Debtor may sell finished goods inventory, if any, in the ordinary course of its business. (e) Except as otherwise permitted by the Loan Agreement, keep the Collateral free from any adverse lien, security interest or encumbrance and in good order and repair, reasonable wear and tear excepted, and not waste or destroy the Collateral or any part thereof. (f) Not use the Collateral in violation of applicable law or of any policy of insurance applicable thereto. (g) Not change its corporate name, identity, structure or state of organization or formation without Secured Party's prior written consent. (h) At Secured Party's request, execute, acknowledge and deliver such further documents and instruments as Secured Party may from time to time reasonably request or require to confirm Secured Party's Security Interests in and to any patent, trademark or service mark, and any registrations or applications for same. (i) Promptly pay any and all taxes, assessments and governmental charges upon the Collateral prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by Debtor, adequate reserves have been set aside therefor, and payment of such contested taxes made prior to the institution of any enforcement proceeding which could adversely affect the Security Interests or the Collateral. (j) Have and maintain insurance at all times with respect to the Tangible Collateral against risks of fire (including so-called extended coverage) and theft, and such other risks as Secured Party may reasonably require in writing, containing such terms, in such form, in such amounts, for such periods, and written by such companies as may be reasonably satisfactory to Secured Party, such insurance to name Secured Party as "additional insured" and "loss payee" thereunder and to be payable to Secured Party and Debtor as their respective interests may appear pursuant to Loss Payable Endorsements in form acceptable to Secured Party. All policies of insurance shall provide for thirty (30) days' prior written notice to Secured Party of cancellation or material amendment of the policies, and Debtor shall furnish Secured Party with certificates or other evidence satisfactory to Secured Party of compliance with the foregoing insurance provisions. Debtor shall notify Secured Party of any material change in the insurance maintained with respect to the Tangible Collateral and shall furnish Secured Party satisfactory evidence of any such change. Without limiting any other remedies available to Secured Party, in the event Debtor shall default in the performance of its obligations under this paragraph (j), Secured Party, at its option, may effect such insurance coverage with an insurer acceptable to Secured Party and add the premium(s) paid therefor to the Obligations secured hereby, and the amount of such premium(s) shall be payable by Debtor on demand with interest thereon at the highest rate payable under the agreements evidencing the Obligations. 6 (k) Take such steps as the Secured Party may reasonably request for Secured Party (i) to obtain an acknowledgement, in form and substance satisfactory to Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for Secured Party, (ii) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Article 9 of the UCC) with any agreements establishing control to be in form and substance satisfactory to Secured Party, and (iii) otherwise to insure the continued perfection and priority of Secured Party's security interest in the Collateral and of the preservation of its rights therein. (l) Debtor shall perform all acts and execute all documents, including, without limitation, assignments for security in form suitable for filing with the United States Patent and Trademark Office and the United States Copyright Office and in any other jurisdiction where any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs are registered, requested by Secured Party at any time to evidence, perfect and maintain the security interest in the Collateral granted hereunder and, to the extent permitted by law, Debtor hereby authorizes Secured Party to execute and file one or more financing statements (and similar documents) or copies thereof or of this Agreement with respect to the Collateral. (m) Except to the extent that Secured Party shall consent, Debtor (either itself or through licensees) shall maintain all of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs in full force and effect in the jurisdictions in which the any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs are currently in effect, free from any claim of abandonment for non-use and Debtor shall not (and shall not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs may or shall become invalidated. (n) In no event shall Debtor, either itself or through any agent, employee, licensee or designee, file an application for the registration of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs covered hereby with the United States Patent and Trademark Office or in any other jurisdiction, file an application for the registration of any of the copyrights covered hereby with the United States Copyright 7 Office or in any other jurisdiction, or grant or assign to any party a license to use any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, unless it first informs Secured Party, and, upon request of Secured Party, executes and delivers any and all assignments, agreements, instruments, documents and papers as Secured Party requests to evidence Secured Party's interest in the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs and the goodwill relating thereto or represented thereby and, to the extent permitted by law, Debtor hereby constitutes Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (o) Debtor shall take all steps necessary in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office, to maintain each application and registration of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs in Debtor's name, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings. (p) Debtor shall use consistent standards of quality in its manufacture of products sold under any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs. SECTION 6. RECORDS RELATING TO COLLATERAL. ---------- ------------------------------- Debtor will keep its records concerning the Collateral, including the Customer Receivables and all chattel paper included in the Customer Receivables, at its offices at ________________________________________________________, or at such other place or places of business as Secured Party may approve in writing. Debtor will hold and preserve such records and chattel paper and will permit Secured Party's representatives at any time during normal business hours to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and will furnish to Secured Party such information and reports regarding the Collateral as Secured Party may from time to time reasonably request. 8 SECTION 7. COLLECTIONS WITH RESPECT TO CUSTOMER RECEIVABLES. --------- ------------------------------------------------ Debtor will, at its expense, and subject at all times to Secured Party's right to give reasonable directions and instructions: (i) endeavor to collect or cause to be collected from customers indebted on Customer Receivables, as and when due, any and all amounts, including interest, owing under or on account of each Customer Receivable; and (ii) take or cause to be taken such appropriate action to repossess goods, the sale or rental of which gave rise to any Customer Receivable, and to enforce any rights or liens under Customer Receivables, in the name of Debtor or Secured Party, as Secured Party may deem proper; PROVIDED, HOWEVER, that (a) Debtor will at all times use its best judgment to protect the interests of Secured Party, and (b) Debtor shall not be required under this SECTION 7 to take any action which would be contrary to any applicable law, court order or standard practice in Debtor's industry. Debtor shall, at Secured Party's request following the occurrence of an Event of Default, notify Debtor's account debtors of the Security Interests in the Customer Receivables and Secured Party may itself at any such time so notify account debtors. Secured Party shall have full power at any time after such notice to collect, compromise, endorse, sell or otherwise deal with any or all outstanding Customer Receivables or the proceeds thereof in the name of either Secured Party or Debtor, as Secured Party shall determine. In the event that, after notice to any account debtors to pay Secured Party, Debtor receives any payment on a Customer Receivable, all such payments shall be held by Debtor in trust for Secured Party and immediately turned over to Secured Party. SECTION 8. RECORD OWNERSHIP OF PLEDGED SECURITIES. ---------- --------------------------------------- Upon the occurrence of an Event of Default, Secured Party may cause any or all of the Pledged Securities to be transferred of record into Secured Party's name. Debtor will promptly give to Secured Party copies of any notices or other communications received by Debtor with respect to Pledged Securities registered in the name of Debtor and Secured Party will promptly give to Debtor copies of any notices and communications received by Secured Party with respect to Pledged Securities registered in the name of Secured Party. SECTION 9. RIGHT TO RECEIVE DISTRIBUTIONS ON PLEDGED SECURITIES. --------- ---------------------------------------------------- Unless an Event of Default shall have occurred, Debtor shall be entitled, from time to time, to collect and receive for its own use all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except (i) stock dividends, (ii) dividends payable in securities or other property, and cash dividends (unless otherwise provided in the Loan Agreement), 9 (iii) dividends or distributions on dissolution, or on partial or total liquidation, or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iv) other securities issued with respect to or in lieu of the Pledged Securities (whether upon conversion of the convertible securities included therein or through stock split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of shares or otherwise). Secured Party shall have the right to receive and retain all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except those which Debtor is specifically authorized to receive as provided above, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right. From time to time upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer stating that no Event of Default has occurred and is continuing, Secured Party shall deliver to Debtor suitable assignments and orders for the payment to Debtor or upon its order of all dividends, interest and other payments and distributions to which Debtor is entitled as set forth herein, upon or with respect to any Pledged Securities which are registered in Secured Party's name. SECTION 10. RIGHT TO VOTE PLEDGED SECURITIES. ----------- --------------------------------- Unless an Event of Default shall have occurred, Debtor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the Pledged Securities and to exercise conversion rights with respect to the convertible securities included therein, and Secured Party shall, upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer stating that no Event of Default has occurred and is continuing, deliver to Debtor or as specified in such request such proxies, powers of attorney, consents, ratifications and waivers as Secured Party shall approve in respect of any Pledged Securities which are registered in Secured Party's name, and make such arrangements with respect to the conversion of convertible securities as shall be specified in Debtor's request and be in form and substance satisfactory to Secured Party. If an Event of Default shall have occurred, and provided Secured Party elects to exercise the rights hereinafter set forth by notice to Debtor of such election, Secured Party shall have the right to the extent permitted by law, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consents, ratifications and waivers and take any other action with respect to all the Pledged Securities with the same force and effect as if Secured Party were the absolute and sole owner thereof. The curing of any such Event of Default shall not divest Secured Party of its rights under SECTIONS 8, 9, 10 and 11 hereof unless and until Secured Party in writing reinstates the rights of Debtor which existed prior to the occurrence of the Event of Default. 10 SECTION 11. GENERAL AUTHORITY. Debtor hereby irrevocably appoints Secured Party Debtor's true and lawful attorney, with full power of substitution, in the name of Debtor, Secured Party or otherwise, for the sole use and benefit of Secured Party, but at Debtor's expense, to the extent permitted by law to exercise, at any time and from time to time after any Event of Default has occurred, all or any of the following powers with respect to all or any of the Collateral (which power shall be in addition and supplemental to any powers, rights and remedies of Secured Party described herein or otherwise available to Secured Party under applicable law): (i) to demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due upon or by virtue thereof, (ii) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other negotiable and non-negotiable instruments and chattel paper taken or received by Secured Party in connection therewith, (iii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (iv) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof or any related goods securing the Customer Receivables, as fully and effectually as if Secured Party were the absolute owner thereof, (v) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto, and (vi) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon. The power conferred on Secured Party under this SECTION 11 is solely to protect, realize upon and enforce Secured Party's Security Interests and rights and remedies in respect to the Collateral and shall not impose any duty upon Secured Party to exercise such power. SECTION 12. EVENTS OF DEFAULT. ----------- ------------------ Debtor shall be in default under this Security Agreement upon the occurrence of any one or more of the following events (each such event is herein referred to as an "Event of Default"): (a) default by Debtor in the payment, observance or performance of any obligation, covenant or agreement herein contained, or breach by Debtor of any representation or warranty herein contained; or 11 (b) the occurrence of any "Event of Default" as defined in the Loan Agreement, or in any agreement now or hereafter securing the Note, or in any agreement now or hereafter evidencing or securing any of the Obligations. SECTION 13. REMEDIES UPON EVENT OF DEFAULT. ----------- ------------------------------- (a) If any Event of Default shall have occurred, Secured Party may exercise all the rights and remedies of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where such rights and remedies are exercised) and, in addition, Secured Party may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, (i) apply the cash, if any, then held by it as Collateral in the manner specified in SECTION 15 hereof, and (ii) if there shall be no such cash or if such cash shall be insufficient to pay all the Obligations in full, sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery, and at such price as Secured Party may deem satisfactory. (b) Secured Party may require Debtor to assemble all or any part of the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient. Any holder of an Obligation may be the purchaser of any or all of the Collateral so sold at any public sale (and, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale) and thereafter hold the same absolutely, free from any right or claim of whatsoever kind. Upon any such sale Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor. (c) Unless the Collateral to be sold is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party shall give Debtor at least twenty (20) days' prior written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice, in case of a public sale, shall state the time and place fixed for such sale, and in case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or the portion thereof so being sold, will first be offered for sale at such board or exchange. Such notice, in case of a private sale or disposition, shall state the time after which any private sale or other intended disposition is to be made. (d) Any such public sale shall be held at such time or times within ordinary business hours and at public or private place or places as Secured Party may fix in the notice of such sale. At any public or private sale, the Collateral may be sold in one lot as an entirety or in separate parcels, as Secured Party may determine. Secured Party shall not be obligated to make such sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be 12 adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. (e) Debtor acknowledges that Secured Party may be unable to effect a public sale of Pledged Securities by reason of prohibitions contained in applicable state and federal securities laws, and agrees that Secured Party is authorized, at any such sale, if it deems it advisable so to do, to restrict the prospective bidders or purchasers of any of the Pledged Securities to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such Pledged Securities. Debtor agrees that any private sale of Pledged Securities may be at prices and on terms less favorable than if sold at public sales, and Debtor agrees that such private sales shall not by reason thereof be deemed to have been made in a commercially unreasonable manner. Secured Party shall have no obligation to delay any sale of Pledged Securities for the period of time necessary to permit the issuer of such Pledged Securities to register such securities for public sale under applicable securities laws, even if such issuer would agree to do so. (f) Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (g) Secured Party, and any officer or agent of Secured Party is hereby constituted and appointed as true and lawful attorney-in-fact of Debtor with power: (i) to license, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, subject to any existing licenses, any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, for such term or terms, on such conditions, and in such manner, as Secured Party shall in its sole discretion determine; (ii) to enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of Debtor in, to and under any one or more licenses of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, and take or refrain from taking any action under any thereof, and Debtor hereby releases Secured Party from, and agrees to hold Secured Party free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such licenses except for Secured Party's own gross negligence or willful misconduct; 13 (iii) to execute and deliver on behalf of Debtor, one or more instruments of assignment of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, in form suitable for filing, recording or registration in the United States Patent and Trademark Office, the United States Copyright Office or in any other jurisdiction; (iv) to bring suit and/or otherwise to pursue any claims that Debtor may have against any third party for infringement of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs. (h) All rights and remedies contained herein shall be separate and cumulative and in addition to all other rights and remedies available to a secured party under applicable law, and the exercise of one shall not in any way limit or prejudice the exercise of any other such rights or remedies. SECTION 14. RIGHT OF SECURED PARTY TO USE AND OPERATE TANGIBLE ---------- --------------------------------------------------- COLLATERAL, ETC. - ---------------- Upon the occurrence of an Event of Default, to the extent permitted by law, Secured Party shall have the right and power to take possession of all or any part of the Tangible Collateral, and to exclude Debtor and all persons claiming under Debtor wholly or partly therefrom, and thereafter to hold, store, and/or use, operate, manage and control the same. Upon any such taking of possession, Secured Party may, from time to time, at Debtor's expense, make all such repairs, replacements, alterations,, additions and improvements to and of the Tangible Collateral as Secured Party may deem proper. In such case, Secured Party shall have the right to manage and control the Tangible Collateral and to carry on the business and to exercise all rights and powers of Debtor in respect thereto as Secured Party shall deem best, including the right to enter into any and all such agreements with respect to the leasing and/or operation of the Tangible Collateral or any part thereof as Secured Party may deem fit; and Secured Party shall be entitled to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof. Such rents, issues, profits, fees, revenues and other income shall be applied to pay the expenses of holding and operating the Tangible Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which Secured Party may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Tangible Collateral or any part thereof, and all other payments which Secured Party may be required or authorized to make under any provision of this Security Agreement (including legal costs and attorney's fees). The remainder of such rents, issues, profits, fees, revenues and other income shall be applied to the payment of the Obligations in such order or priority as Secured Party shall determine (subject to the provisions of SECTION 15 hereof) and, unless otherwise provided by law or by a court of competent jurisdiction, any surplus shall be paid over to Debtor. SECTION 15. APPLICATION OF COLLATERAL AND PROCEEDS. ----------- --------------------------------------- The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: 14 (a) first, to pay the expenses of such sale or other realization, including reasonable commission to Secured Party's agent, and all expenses, liabilities and advances incurred or made by Secured Party in connection therewith, and any other unreimbursed expenses for which Secured Party is to be reimbursed pursuant to SECTION 16 hereof; (b) second, to the payment of the Obligations in such order and manner as Secured Party, in its sole discretion, shall determine; and (c) finally, unless applicable law otherwise provides, to pay to Debtor, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. SECTION 16. EXPENSES; SECURED PARTY'S LIEN. ----------- ------------------------------- Debtor will forthwith upon demand pay to Secured Party: (a) the amount of any taxes which Secured Party may at any time be required to pay by reason of the Security Interests (including any applicable transfer taxes and taxes payable in connection with the filing of financing statements to perfect the Security Interests) or to free any of the Collateral from any lien thereon, and (b) the amount of any and all reasonable out-of-pocket expenses, including reasonable attorneys' fees and the reasonable fees and disbursements of any agents not regularly in its employ, which Secured Party may incur in connection with (i) the preparation and administration of this Security Agreement, (ii) the collection, sale or other disposition of any of the Collateral, (iii) the exercise by Secured Party of any of the powers, rights or remedies conferred upon it hereunder, or (iv) any default on Debtor's part hereunder. SECTION 17. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL. ---------- -------------------------------------------------------- Upon the repayment and performance in full of all the Obligations and Secured Party's receipt of a writing signed by Debtor terminating all obligations of Secured Party to extend credit or provide financial accommodations to Debtor, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtor. Upon any such termination of the Security Interests or release of Collateral, Secured Party will, at Debtor's expense to the extent permitted by law, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. 15 SECTION 18. NOTICES. ---------- ------- All notices, communications and demands hereunder shall be in writing and sent by certified or registered mail, return receipt requested, or by overnight delivery service, with all charges prepaid, to the applicable party or parties at the addresses set forth below, or by facsimile transmission (including, without limitation, computer generated facsimile), promptly confirmed in writing sent by first class mail, to the FAX numbers and addresses set forth below: (i) If to Debtor, to it at: ______________________ ______________________ with a copy to: ______________________ ______________________ ______________________ (ii) If to Secured Party, to it at: Bay View Capital L.L.C. 5600 Post Road, No. 114-372 East Greenwich, RI 02818 with a copy to: MacAdams & Wieck, Incorporated 101 Dyer Street, Suite 400 Providence, RI 02903 Attn: Richard L.Gemma, Esq. or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties complying as to delivery with the terms of this Section. All such notices and correspondence shall be deemed given upon the earliest to occur of (i) actual receipt, (ii) if sent by certified or registered mail, three (3) business days after being postmarked, (iii) if sent by overnight delivery service, when received or when delivery is refused, or (iv) if sent by facsimile, when receipt of such transmissions acknowledged. SECTION 19. WAIVERS; NON-EXCLUSIVE REMEDIES. ----------- -------------------------------- (a) Except as otherwise specifically provided herein, Debtor hereby waives demand, notice, protest, notice of acceptance of this Security Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon (and all other demands and notice of any description). With respect to both the Obligations and the Collateral, Debtor hereby assents to any extension or postponement of the time of payment or any 16 other indulgence, to any substitution, exchange or release of Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as Secured Party may deem advisable. (b) Except as otherwise provided by applicable law, Secured Party shall not have any duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody of any Collateral in its possession. Except as otherwise provided by applicable law, Secured Party may exercise its rights with respect to the Collateral without resorting or regard to other collateral or sources of reimbursement for liability. Except as otherwise provided by applicable law, Secured Party shall not be required to marshal any present or future security for (including, but not limited to, this Security Agreement and the Collateral subject to the Security Interest created hereby), or guaranties of, the Obligations or any of them, or to resort to such security or guarantees in any particular order; and all of its rights hereunder and in respect of such security and guarantees shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may do so, Debtor hereby agrees that it will not invoke any law relating to the marshalling of Collateral which might cause delay in or impede the enforcement of Secured Party's rights under this Security Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and to the extent that it lawfully may do so, Debtor hereby irrevocably waives the benefits of all such laws. (c) No failure on the part of Secured Party to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by Secured Party of any right, power or remedy under this Security Agreement preclude any other right, power or remedy. The remedies in this Security Agreement are cumulative and are not exclusive of any other remedies provided by law, including any rights of setoff in favor of Secured Party. (d) Debtor, to the extent it may lawfully do so, hereby consents to the jurisdiction of the courts of the State of Rhode Island and the Federal District Court for the District of Rhode Island for the purpose of any suit or proceeding brought in connection with or with respect to this Security Agreement. SECTION 20. WAIVER OF JURY TRIAL. ----------- --------------------- EACH OF DEBTOR AND SECURED PARTY HEREBY EXPRESSLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS SECURITY AGREEMENT. 17 SECTION 21. CHANGES IN WRITING. ----------- ------------------- Neither this Security Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. SECTION 22. RHODE ISLAND LAW; MEANING OF TERMS. ----------- ----------------------------------- This Security Agreement shall be construed in accordance with and governed by the laws of the State of Rhode Island applicable to contracts made and performed in said state, except to the extent that remedies provided by the laws of any state other than Rhode Island are governed by the laws of such state. Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the UCC as in effect in the State of Rhode Island have the meanings therein stated. SECTION 23. SEPARABILITY. ----------- ------------- If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Secured Party. SECTION 24. SUCCESSORS AND ASSIGNS. ----------- ----------------------- This Security Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any subsequent holders of the Note or any of the Obligations, each of whom shall, without further act, become a party hereto by becoming a holder of the Note or such Obligations. SECTION 25. HEADINGS. ---------- -------- The headings in this Security Agreement are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 26. COUNTERPARTS. ----------- ------------- This Security Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same agreement. 18 IN WITNESS WHEREOF, this Security Agreement has been executed by the parties hereto all as of the day and year first above written. SECURITY TECHNOLOGY, INC. By: ---------------------------------------- Title: ------------------------------- BAY VIEW CAPITAL L.L.C. By: ---------------------------------------- Title: ------------------------------- 19 EXHIBIT A --------- PLEDGED SECURITIES EXISTING ON DATE HEREOF ------------------------------------------ EXHIBIT B --------- FINANCING STATEMENTS ON FILE ON DATE HEREOF ------------------------------------------- Filing Secured File Collateral Office Party No. Date Description - ------ ----- --- ---- ----------- EXHIBIT C --------- ADDITIONAL REPRESENTATIONS AND WARRANTIES ----------------------------------------- 1. Debtor's exact name is:___________________________________ 2. Debtor's Federal Tax Identification Number is: #_____________. 3. Debtor's organization number assigned to Debtor by the Secretary of State of its state of formation is #__________________. 4. Debtor uses in its business and owns the following trade names: ____________ 5. Debtor's chief executive office is: ________________________________ 6. Debtor's principal place of business is: ____________________________ 7. Debtor has other places of business located at: ____________________- 8. Debtor owns or has an interest in personal property located elsewhere at:___________________________________________________________________ 9. Debtor owns property consisting of fixtures at the following locations: Address Record Owner of Real Estate True and complete legal descriptions of such real estate are attached hereto as Schedules ______________. EXHIBIT D --------- PATENTS, TRADEMARKS, TRADENAMES, ETC. ------------------------------------- EX-10.12 18 markland_sb2ex10-12.txt EXHIBIT 10.12 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT is made as of the ____ day of September, 2003, by and between MARKLAND TECHNOLOGIES, INC., A FLORIDA CORPORATION ("Debtor"); and BAY VIEW CAPITAL L.L.C., A RHODE ISLAND LIMITED LIABILITY COMPANY ("Secured Party"). WITNESSETH: ----------- WHEREAS, Debtor and Security Technology, Inc., a Delaware corporation ("Security", Debtor and Security are hereinafter sometimes referred to collectively as the "Borrowers"), have executed and delivered to Secured Party a Loan Agreement of even date herewith (as the same may be amended, extended or restated from time to time, the "Loan Agreement"); and WHEREAS, pursuant to the Loan Agreement, Borrowers executed and delivered to Secured Party a Promissory Note of even date herewith made payable to Secured Party by Borrowers, jointly and severally, in the original principal amount of up to One Million Four Hundred Thousand and 00/100 ($1,400,000.00) Dollars (as the same may be amended, extended, renewed or restated from time to time, the "Note"); and WHEREAS, Debtor has agreed to enter into this Security Agreement in order to induce Secured Party, INTER ALIA, to make the loan evidenced by the Note; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. THE SECURITY INTERESTS. --------- ---------------------- (a) In order (i) to secure the due and punctual payment of the Note; (ii) to secure the due and punctual payment and performance of all obligations of Debtor contained herein; (iii) to secure the due and punctual payment and performance of all indebtedness, obligations and liabilities of Debtor contained in the Loan Agreement and in all other agreements executed or delivered by Debtor in connection with or as contemplated by the Loan Agreement; and (iv) to secure the due and punctual payment and performance of all other indebtedness, liabilities and obligations of Debtor to Secured Party of every kind and description, whether direct, indirect or contingent, whether now existing or hereafter arising or incurred, whether due or to become due, whether otherwise secured or unsecured and howsoever evidenced, incurred or arising, including, without limitation, all indebtedness, liabilities and obligations evidenced or arising pursuant to any promissory note, loan agreement, equipment lease, conditional sales agreement, consignment agreement, guaranty, overdraft, bankers' acceptance, forward contract, foreign exchange contract, letter of credit reimbursement agreement or any other agreement or instrument which may at any time be executed or issued for Debtor's account or to which Debtor is now or hereafter may become a party (all of the foregoing are hereinafter collectively called the "Obligations"), Debtor hereby grants to Secured Party a continuing security interest in the following described fixtures and personal property, whether now existing or hereafter arising (hereinafter collectively called the "Collateral"): All fixtures and all tangible and intangible personal property of Debtor of every kind and description and wherever located, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest, including, without limitation: (1) all equipment (as such term is defined in the Uniform Commercial Code [the "UCC"]), machinery and fixtures, including, without limitation, all processing and manufacturing equipment, machine tools, data processing and computer equipment, furniture, tools, dies, molds, motor vehicles, rolling stock, trailers, airplanes, vessels and other equipment of every kind and description, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (2) all inventory (as such term is defined in the UCC), including without limitation, all merchandise, raw materials, work in process, parts, components, dies, molds, finished goods, supplies and all goods returned to or repossessed by Debtor, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (3) all accounts (as such term is defined in the UCC), accounts receivable, other receivables, evidences of indebtedness, notes, drafts, acceptances, contract rights, leases, chattel paper and electronic chattel paper (as such terms are defined in the UCC), commercial tort claims (as such term is defined in the UCC), and general intangibles (as such term is defined in the UCC), including, without limitation, all collateral and security therefor and all supporting obligations (as such term is defined in the UCC) of every kind and description (including, without limitation, all guarantees, letters of credit, letter-of-credit rights (as such term is defined in the UCC), liens and security interests in favor of Debtor), and all goodwill, going concern value, patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and servicemarks, customer lists, advertising materials, operating manuals, copyrights, blueprints, designs, engineering drawings and contracts, proprietary information, product lines, distribution agreements, dealer contracts, supplier contracts, tax refund claims, licenses, research and development, and all rights to the payment of money, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (4) all instruments (as such term is defined in the UCC), documents of title, policies and certificates of insurance, securities (as such term is defined in the UCC), securities entitlements (as such term is defined in the UCC), investment property (as such term is 2 defined in the UCC), partnership interests, membership interests in limited liability companies, bank deposits, deposit accounts (as such term is defined in the UCC), checking accounts, certificates of deposit and cash, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (5) all accessions, additions and improvements to, and all proceeds and products of, all of the foregoing, including proceeds of insurance, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; and (6) all books, records, documents, computer tapes and discs relating to all of the foregoing, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest. (b) All of Debtor's accounts, accounts receivable, contract rights, chattel paper, general intangibles and rights to the payment of money, and all collateral and security therefor and related supporting obligations, and all proceeds thereof, are sometimes hereinafter collectively called the "Customer Receivables". All of Debtor's equipment, fixtures and inventory are sometimes hereinafter collectively called the "Tangible Collateral". (c) The security interests granted pursuant to this SECTION 1 (the "Security Interests") are granted as security only and shall not subject Secured Party to, or transfer to Secured Party, or in any way affect or modify, any obligation or liability of Debtor under any of the Collateral or any transaction which gave rise thereto. (d) If Debtor shall at any time acquire a commercial tort claim, as defined in Article 9 of the UCC, Debtor shall immediately notify Secured Party in writing of the brief details thereof and shall grant to Secured Party in writing a security interest therein and in the proceeds thereof, all on the terms of this Security Agreement, and in writing in form and substance satisfactory to Secured Party. (e) For avoidance of doubt it is expressly understood and agreed that (i) the Collateral is intended to consist of all assets of Debtor, and (ii) to the extent the UCC is revised subsequent to the date hereof such that the definition of any of the foregoing terms included in the description of Collateral is changed, the parties agree that any property which is included in such changed definitions which would not otherwise be included in the foregoing grant on the date hereof be included in such grant immediately upon the effective date of such revision, it being the intention of the parties hereto that the description of Collateral set forth herein be construed to include the broadest possible range of property and assets and all tangible and intangible personal property and fixtures of Debtor of every kind and description. 3 SECTION 2. DELIVERY OF PLEDGED SECURITIES AND CHATTEL PAPER. --------- ------------------------------------------------ (a) All securities of Debtor, whether now owned or hereafter acquired by Debtor, shall be promptly delivered to Secured Party by Debtor pursuant hereto (which securities, together with all other securities, securities entitlements, and shares of stock which may hereafter be delivered to Secured Party pursuant to the terms hereof, are hereinafter called the "Pledged Securities"), shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignments in blank, with signatures appropriately guaranteed, and accompanied in each case by any required transfer tax stamps, all in form and substance satisfactory to Secured Party. EXHIBIT A attached hereto and made a part hereof sets forth a complete description of all Pledged Securities owned by Debtor on the date hereof. Debtor shall from time to time promptly and in accordance with the foregoing provisions deliver to Secured Party any and all Pledged Securities which may hereafter be acquired by Debtor. (b) Secured Party may at any time or from time to time, in its sole discretion, require Debtor to cause any chattel paper included in the Customer Receivables to be delivered to Secured Party or any agent or representative designated by it, or to cause a legend referring to the Security Interests to be placed on such chattel paper and upon any ledgers or other records concerning the Customer Receivables. SECTION 3. FILING; FURTHER ASSURANCES. ---------- --------------------------- Debtor will, at its expense, execute, deliver, file and record (in such manner and form as Secured Party may require), or permit Secured Party to file and record, any financing statements, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which the parties hereto agree shall be sufficient as a financing statement hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that Secured Party may request, in order to create, confirm, preserve, perfect or validate any Security Interest or to enable Secured Party to exercise and enforce its rights and remedies hereunder or under applicable law with respect to any of the Collateral. Debtor hereby authorizes Secured Party, at any time and from time to time, without the Debtor's further signature or authorization, to file financing statements, continuation statements and amendments thereto that describe or indicate the Collateral including, without limitation, an indication that the Collateral consists of "all assets" of the Debtor or words of similar effect and which contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether Debtor is an organization, the type of organization and any organization identification number issued to Debtor. Debtor agrees to furnish any such information to Secured Party promptly upon request. SECTION 4. DEBTOR'S REPRESENTATIONS AND WARRANTIES. ---------- ---------------------------------------- Debtor hereby represents and warrants to Secured Party as follows: (a) Except as described in EXHIBIT B attached hereto and made a part hereof, Debtor is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse lien, security interest or encumbrance. 4 (b) Except for such financing statements as may be described in EXHIBIT B attached hereto and made a part hereof, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement. (c) All additional information, representations and warranties contained in EXHIBIT C attached hereto and made a part hereof, and any Schedules attached to said EXHIBIT C, are true, accurate and complete on the date hereof. (d) There are no restrictions upon the voting rights or the transfer of all or any of the Pledged Securities (other than may appear on the face of the certificate thereof) and Debtor has the right to vote, pledge, grant a security interest in, and otherwise transfer the Pledged Securities free of any encumbrances (other than applicable restrictions imposed by Federal or state securities laws or regulations). (e) EXHIBIT D attached hereto constitutes an accurate and complete list of all patents, trademarks, tradenames, patent applications, servicemarks and registrations of the foregoing owned by or held by Debtor. SECTION 5. DEBTOR'S COVENANTS. ---------- ------------------- Debtor hereby covenants and agrees with Secured Party that Debtor will: (a) Defend the Collateral against all claims and demands of all persons at any time claiming any interest therein. (b) Provide Secured Party, at least fifteen (15) business days prior to occurrence, with written notice of (i) any change in Debtor's chief executive office or the office where Debtor maintains its books and records pertaining to the Customer Receivables, (ii) the movement or location of Collateral to or at any address other than as set forth in said EXHIBIT C, and (iii) any event or occurrence which would render any warranty or information contained in EXHIBIT C OR D hereto inaccurate or incomplete. (c) Immediately notify Secured Party of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution. (d) Not sell or offer to sell or otherwise assign, transfer, encumber, grant a security interest in, or dispose of the Collateral or any interest therein, without Secured Party's prior written consent; PROVIDED, HOWEVER, that Debtor may sell finished goods inventory, if any, in the ordinary course of its business. 5 (e) Except as otherwise permitted by the Loan Agreement, keep the Collateral free from any adverse lien, security interest or encumbrance and in good order and repair, reasonable wear and tear excepted, and not waste or destroy the Collateral or any part thereof. (f) Not use the Collateral in violation of applicable law or of any policy of insurance applicable thereto. (g) Not change its corporate name, identity, structure or state of organization or formation without Secured Party's prior written consent. (h) At Secured Party's request, execute, acknowledge and deliver such further documents and instruments as Secured Party may from time to time reasonably request or require to confirm Secured Party's Security Interests in and to any patent, trademark or service mark, and any registrations or applications for same. (i) Promptly pay any and all taxes, assessments and governmental charges upon the Collateral prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by Debtor, adequate reserves have been set aside therefor, and payment of such contested taxes made prior to the institution of any enforcement proceeding which could adversely affect the Security Interests or the Collateral. (j) Have and maintain insurance at all times with respect to the Tangible Collateral against risks of fire (including so-called extended coverage) and theft, and such other risks as Secured Party may reasonably require in writing, containing such terms, in such form, in such amounts, for such periods, and written by such companies as may be reasonably satisfactory to Secured Party, such insurance to name Secured Party as "additional insured" and "loss payee" thereunder and to be payable to Secured Party and Debtor as their respective interests may appear pursuant to Loss Payable Endorsements in form acceptable to Secured Party. All policies of insurance shall provide for thirty (30) days' prior written notice to Secured Party of cancellation or material amendment of the policies, and Debtor shall furnish Secured Party with certificates or other evidence satisfactory to Secured Party of compliance with the foregoing insurance provisions. Debtor shall notify Secured Party of any material change in the insurance maintained with respect to the Tangible Collateral and shall furnish Secured Party satisfactory evidence of any such change. Without limiting any other remedies available to Secured Party, in the event Debtor shall default in the performance of its obligations under this paragraph (j), Secured Party, at its option, may effect such insurance coverage with an insurer acceptable to Secured Party and add the premium(s) paid therefor to the Obligations secured hereby, and the amount of such premium(s) shall be payable by Debtor on demand with interest thereon at the highest rate payable under the agreements evidencing the Obligations. 6 (k) Take such steps as the Secured Party may reasonably request for Secured Party (i) to obtain an acknowledgement, in form and substance satisfactory to Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for Secured Party, (ii) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Article 9 of the UCC) with any agreements establishing control to be in form and substance satisfactory to Secured Party, and (iii) otherwise to insure the continued perfection and priority of Secured Party's security interest in the Collateral and of the preservation of its rights therein. (l) Debtor shall perform all acts and execute all documents, including, without limitation, assignments for security in form suitable for filing with the United States Patent and Trademark Office and the United States Copyright Office and in any other jurisdiction where any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs are registered, requested by Secured Party at any time to evidence, perfect and maintain the security interest in the Collateral granted hereunder and, to the extent permitted by law, Debtor hereby authorizes Secured Party to execute and file one or more financing statements (and similar documents) or copies thereof or of this Agreement with respect to the Collateral. (m) Except to the extent that Secured Party shall consent, Debtor (either itself or through licensees) shall maintain all of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs in full force and effect in the jurisdictions in which the any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs are currently in effect, free from any claim of abandonment for non-use and Debtor shall not (and shall not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs may or shall become invalidated. (n) In no event shall Debtor, either itself or through any agent, employee, licensee or designee, file an application for the registration of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs covered hereby with the United States Patent and Trademark Office or in any other jurisdiction, file an application for the registration of any 7 of the copyrights covered hereby with the United States Copyright Office or in any other jurisdiction, or grant or assign to any party a license to use any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, unless it first informs Secured Party, and, upon request of Secured Party, executes and delivers any and all assignments, agreements, instruments, documents and papers as Secured Party requests to evidence Secured Party's interest in the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs and the goodwill relating thereto or represented thereby and, to the extent permitted by law, Debtor hereby constitutes Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (o) Debtor shall take all steps necessary in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office, to maintain each application and registration of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs in Debtor's name, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings. (p) Debtor shall use consistent standards of quality in its manufacture of products sold under any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs. SECTION 6. RECORDS RELATING TO COLLATERAL. ---------- ------------------------------- Debtor will keep its records concerning the Collateral, including the Customer Receivables and all chattel paper included in the Customer Receivables, at its offices at ________________________________________________________, or at such other place or places of business as Secured Party may approve in writing. Debtor will hold and preserve such records and chattel paper and will permit Secured Party's representatives at any time during normal business hours to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and will furnish to Secured Party such information and reports regarding the Collateral as Secured Party may from time to time reasonably request. SECTION 7. COLLECTIONS WITH RESPECT TO CUSTOMER RECEIVABLES. --------- ------------------------------------------------ Debtor will, at its expense, and subject at all times to Secured Party's right to give reasonable directions and instructions: 8 (i) endeavor to collect or cause to be collected from customers indebted on Customer Receivables, as and when due, any and all amounts, including interest, owing under or on account of each Customer Receivable; and (ii) take or cause to be taken such appropriate action to repossess goods, the sale or rental of which gave rise to any Customer Receivable, and to enforce any rights or liens under Customer Receivables, in the name of Debtor or Secured Party, as Secured Party may deem proper; PROVIDED, HOWEVER, that (a) Debtor will at all times use its best judgment to protect the interests of Secured Party, and (b) Debtor shall not be required under this SECTION 7 to take any action which would be contrary to any applicable law, court order or standard practice in Debtor's industry. Debtor shall, at Secured Party's request following the occurrence of an Event of Default, notify Debtor's account debtors of the Security Interests in the Customer Receivables and Secured Party may itself at any such time so notify account debtors. Secured Party shall have full power at any time after such notice to collect, compromise, endorse, sell or otherwise deal with any or all outstanding Customer Receivables or the proceeds thereof in the name of either Secured Party or Debtor, as Secured Party shall determine. In the event that, after notice to any account debtors to pay Secured Party, Debtor receives any payment on a Customer Receivable, all such payments shall be held by Debtor in trust for Secured Party and immediately turned over to Secured Party. SECTION 8. RECORD OWNERSHIP OF PLEDGED SECURITIES. ---------- --------------------------------------- Upon the occurrence of an Event of Default, Secured Party may cause any or all of the Pledged Securities to be transferred of record into Secured Party's name. Debtor will promptly give to Secured Party copies of any notices or other communications received by Debtor with respect to Pledged Securities registered in the name of Debtor and Secured Party will promptly give to Debtor copies of any notices and communications received by Secured Party with respect to Pledged Securities registered in the name of Secured Party. SECTION 9. RIGHT TO RECEIVE DISTRIBUTIONS ON PLEDGED SECURITIES. --------- ---------------------------------------------------- Unless an Event of Default shall have occurred, Debtor shall be entitled, from time to time, to collect and receive for its own use all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except (i) stock dividends, (ii) dividends payable in securities or other property, and cash dividends (unless otherwise provided in the Loan Agreement), 9 (iii) dividends or distributions on dissolution, or on partial or total liquidation, or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iv) other securities issued with respect to or in lieu of the Pledged Securities (whether upon conversion of the convertible securities included therein or through stock split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of shares or otherwise). Secured Party shall have the right to receive and retain all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except those which Debtor is specifically authorized to receive as provided above, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right. From time to time upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer stating that no Event of Default has occurred and is continuing, Secured Party shall deliver to Debtor suitable assignments and orders for the payment to Debtor or upon its order of all dividends, interest and other payments and distributions to which Debtor is entitled as set forth herein, upon or with respect to any Pledged Securities which are registered in Secured Party's name. SECTION 10. RIGHT TO VOTE PLEDGED SECURITIES. ----------- --------------------------------- Unless an Event of Default shall have occurred, Debtor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the Pledged Securities and to exercise conversion rights with respect to the convertible securities included therein, and Secured Party shall, upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer stating that no Event of Default has occurred and is continuing, deliver to Debtor or as specified in such request such proxies, powers of attorney, consents, ratifications and waivers as Secured Party shall approve in respect of any Pledged Securities which are registered in Secured Party's name, and make such arrangements with respect to the conversion of convertible securities as shall be specified in Debtor's request and be in form and substance satisfactory to Secured Party. If an Event of Default shall have occurred, and provided Secured Party elects to exercise the rights hereinafter set forth by notice to Debtor of such election, Secured Party shall have the right to the extent permitted by law, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consents, ratifications and waivers and take any other action with respect to all the Pledged Securities with the same force and effect as if Secured Party were the absolute and sole owner thereof. The curing of any such Event of Default shall not divest Secured Party of its rights under SECTIONS 8, 9, 10 and 11 hereof unless and until Secured Party in writing reinstates the rights of Debtor which existed prior to the occurrence of the Event of Default. 10 SECTION 11. GENERAL AUTHORITY. ----------- ------------------ Debtor hereby irrevocably appoints Secured Party Debtor's true and lawful attorney, with full power of substitution, in the name of Debtor, Secured Party or otherwise, for the sole use and benefit of Secured Party, but at Debtor's expense, to the extent permitted by law to exercise, at any time and from time to time after any Event of Default has occurred, all or any of the following powers with respect to all or any of the Collateral (which power shall be in addition and supplemental to any powers, rights and remedies of Secured Party described herein or otherwise available to Secured Party under applicable law): (i) to demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due upon or by virtue thereof, (ii) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other negotiable and non-negotiable instruments and chattel paper taken or received by Secured Party in connection therewith, (iii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (iv) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof or any related goods securing the Customer Receivables, as fully and effectually as if Secured Party were the absolute owner thereof, (v) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto, and (vi) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon. The power conferred on Secured Party under this SECTION 11 is solely to protect, realize upon and enforce Secured Party's Security Interests and rights and remedies in respect to the Collateral and shall not impose any duty upon Secured Party to exercise such power. SECTION 12. EVENTS OF DEFAULT. ----------- ------------------ Debtor shall be in default under this Security Agreement upon the occurrence of any one or more of the following events (each such event is herein referred to as an "Event of Default"): (a) default by Debtor in the payment, observance or performance of any obligation, covenant or agreement herein contained, or breach by Debtor of any representation or warranty herein contained; or 11 (b) the occurrence of any "Event of Default" as defined in the Loan Agreement, or in any agreement now or hereafter securing the Note, or in any agreement now or hereafter evidencing or securing any of the Obligations. SECTION 13. REMEDIES UPON EVENT OF DEFAULT. ----------- ------------------------------- (a) If any Event of Default shall have occurred, Secured Party may exercise all the rights and remedies of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where such rights and remedies are exercised) and, in addition, Secured Party may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, (i) apply the cash, if any, then held by it as Collateral in the manner specified in SECTION 15 hereof, and (ii) if there shall be no such cash or if such cash shall be insufficient to pay all the Obligations in full, sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery, and at such price as Secured Party may deem satisfactory. (b) Secured Party may require Debtor to assemble all or any part of the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient. Any holder of an Obligation may be the purchaser of any or all of the Collateral so sold at any public sale (and, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale) and thereafter hold the same absolutely, free from any right or claim of whatsoever kind. Upon any such sale Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor. (c) Unless the Collateral to be sold is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party shall give Debtor at least twenty (20) days' prior written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice, in case of a public sale, shall state the time and place fixed for such sale, and in case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or the portion thereof so being sold, will first be offered for sale at such board or exchange. Such notice, in case of a private sale or disposition, shall state the time after which any private sale or other intended disposition is to be made. (d) Any such public sale shall be held at such time or times within ordinary business hours and at public or private place or places as Secured Party may fix in the notice of such sale. At any public or private sale, the Collateral may be sold in one lot as an entirety or in separate parcels, as Secured Party may determine. Secured Party shall not be obligated to make such sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be 12 adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. (e) Debtor acknowledges that Secured Party may be unable to effect a public sale of Pledged Securities by reason of prohibitions contained in applicable state and federal securities laws, and agrees that Secured Party is authorized, at any such sale, if it deems it advisable so to do, to restrict the prospective bidders or purchasers of any of the Pledged Securities to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such Pledged Securities. Debtor agrees that any private sale of Pledged Securities may be at prices and on terms less favorable than if sold at public sales, and Debtor agrees that such private sales shall not by reason thereof be deemed to have been made in a commercially unreasonable manner. Secured Party shall have no obligation to delay any sale of Pledged Securities for the period of time necessary to permit the issuer of such Pledged Securities to register such securities for public sale under applicable securities laws, even if such issuer would agree to do so. (f) Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (g) Secured Party, and any officer or agent of Secured Party is hereby constituted and appointed as true and lawful attorney-in-fact of Debtor with power: (i) to license, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, subject to any existing licenses, any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, for such term or terms, on such conditions, and in such manner, as Secured Party shall in its sole discretion determine; (ii) to enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of Debtor in, to and under any one or more licenses of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs, and take or refrain from taking any action under any thereof, and Debtor hereby releases Secured Party from, and agrees to hold Secured Party free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such licenses except for Secured Party's own gross negligence or willful misconduct; (iii) to execute and deliver on behalf of Debtor, one or more instruments of assignment of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, 13 other proprietary information and designs, in form suitable for filing, recording or registration in the United States Patent and Trademark Office, the United States Copyright Office or in any other jurisdiction; (iv) to bring suit and/or otherwise to pursue any claims that Debtor may have against any third party for infringement of any of the patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and service marks, copyrights, other proprietary information and designs. (h) All rights and remedies contained herein shall be separate and cumulative and in addition to all other rights and remedies available to a secured party under applicable law, and the exercise of one shall not in any way limit or prejudice the exercise of any other such rights or remedies. SECTION 14. RIGHT OF SECURED PARTY TO USE AND OPERATE TANGIBLE ---------- --------------------------------------------------- COLLATERAL, ETC. - ---------------- Upon the occurrence of an Event of Default, to the extent permitted by law, Secured Party shall have the right and power to take possession of all or any part of the Tangible Collateral, and to exclude Debtor and all persons claiming under Debtor wholly or partly therefrom, and thereafter to hold, store, and/or use, operate, manage and control the same. Upon any such taking of possession, Secured Party may, from time to time, at Debtor's expense, make all such repairs, replacements, alterations,, additions and improvements to and of the Tangible Collateral as Secured Party may deem proper. In such case, Secured Party shall have the right to manage and control the Tangible Collateral and to carry on the business and to exercise all rights and powers of Debtor in respect thereto as Secured Party shall deem best, including the right to enter into any and all such agreements with respect to the leasing and/or operation of the Tangible Collateral or any part thereof as Secured Party may deem fit; and Secured Party shall be entitled to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof. Such rents, issues, profits, fees, revenues and other income shall be applied to pay the expenses of holding and operating the Tangible Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which Secured Party may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Tangible Collateral or any part thereof, and all other payments which Secured Party may be required or authorized to make under any provision of this Security Agreement (including legal costs and attorney's fees). The remainder of such rents, issues, profits, fees, revenues and other income shall be applied to the payment of the Obligations in such order or priority as Secured Party shall determine (subject to the provisions of SECTION 15 hereof) and, unless otherwise provided by law or by a court of competent jurisdiction, any surplus shall be paid over to Debtor. SECTION 15. APPLICATION OF COLLATERAL AND PROCEEDS. ----------- --------------------------------------- The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: 14 (a) first, to pay the expenses of such sale or other realization, including reasonable commission to Secured Party's agent, and all expenses, liabilities and advances incurred or made by Secured Party in connection therewith, and any other unreimbursed expenses for which Secured Party is to be reimbursed pursuant to SECTION 16 hereof; (b) second, to the payment of the Obligations in such order and manner as Secured Party, in its sole discretion, shall determine; and (c) finally, unless applicable law otherwise provides, to pay to Debtor, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. SECTION 16. EXPENSES; SECURED PARTY'S LIEN. ----------- ------------------------------- Debtor will forthwith upon demand pay to Secured Party: (a) the amount of any taxes which Secured Party may at any time be required to pay by reason of the Security Interests (including any applicable transfer taxes and taxes payable in connection with the filing of financing statements to perfect the Security Interests) or to free any of the Collateral from any lien thereon, and (b) the amount of any and all reasonable out-of-pocket expenses, including reasonable attorneys' fees and the reasonable fees and disbursements of any agents not regularly in its employ, which Secured Party may incur in connection with (i) the preparation and administration of this Security Agreement, (ii) the collection, sale or other disposition of any of the Collateral, (iii) the exercise by Secured Party of any of the powers, rights or remedies conferred upon it hereunder, or (iv) any default on Debtor's part hereunder. SECTION 17. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL. ---------- -------------------------------------------------------- Upon the repayment and performance in full of all the Obligations and Secured Party's receipt of a writing signed by Debtor terminating all obligations of Secured Party to extend credit or provide financial accommodations to Debtor, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtor. Upon any such termination of the Security Interests or release of Collateral, Secured Party will, at Debtor's expense to the extent permitted by law, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION 18. NOTICES. ---------- ------- All notices, communications and demands hereunder shall be in writing and sent by certified or registered mail, return receipt requested, or by overnight delivery service, with all charges prepaid, to the applicable party or parties at the addresses set forth below, or by facsimile transmission 15 (including, without limitation, computer generated facsimile), promptly confirmed in writing sent by first class mail, to the FAX numbers and addresses set forth below: (i) If to Debtor, to it at: ____________________________ ____________________________ with a copy to: ____________________________ ____________________________ ____________________________ (ii) If to Secured Party, to it at: Bay View Capital L.L.C. 5600 Post Road, No. 114-372 East Greenwich, RI 02818 with a copy to: MacAdams & Wieck, Incorporated 101 Dyer Street, Suite 400 Providence, RI 02903 Attn: Richard L.Gemma, Esq. or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties complying as to delivery with the terms of this Section. All such notices and correspondence shall be deemed given upon the earliest to occur of (i) actual receipt, (ii) if sent by certified or registered mail, three (3) business days after being postmarked, (iii) if sent by overnight delivery service, when received or when delivery is refused, or (iv) if sent by facsimile, when receipt of such transmissions acknowledged. SECTION 19. WAIVERS; NON-EXCLUSIVE REMEDIES. ----------- -------------------------------- (a) Except as otherwise specifically provided herein, Debtor hereby waives demand, notice, protest, notice of acceptance of this Security Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon (and all other demands and notice of any description). With respect to both the Obligations and the Collateral, Debtor hereby assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of Collateral, to the 16 addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as Secured Party may deem advisable. (b) Except as otherwise provided by applicable law, Secured Party shall not have any duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody of any Collateral in its possession. Except as otherwise provided by applicable law, Secured Party may exercise its rights with respect to the Collateral without resorting or regard to other collateral or sources of reimbursement for liability. Except as otherwise provided by applicable law, Secured Party shall not be required to marshal any present or future security for (including, but not limited to, this Security Agreement and the Collateral subject to the Security Interest created hereby), or guaranties of, the Obligations or any of them, or to resort to such security or guarantees in any particular order; and all of its rights hereunder and in respect of such security and guarantees shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may do so, Debtor hereby agrees that it will not invoke any law relating to the marshalling of Collateral which might cause delay in or impede the enforcement of Secured Party's rights under this Security Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and to the extent that it lawfully may do so, Debtor hereby irrevocably waives the benefits of all such laws. (c) No failure on the part of Secured Party to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by Secured Party of any right, power or remedy under this Security Agreement preclude any other right, power or remedy. The remedies in this Security Agreement are cumulative and are not exclusive of any other remedies provided by law, including any rights of setoff in favor of Secured Party. (d) Debtor, to the extent it may lawfully do so, hereby consents to the jurisdiction of the courts of the State of Rhode Island and the Federal District Court for the District of Rhode Island for the purpose of any suit or proceeding brought in connection with or with respect to this Security Agreement. SECTION 20. WAIVER OF JURY TRIAL. ----------- --------------------- EACH OF DEBTOR AND SECURED PARTY HEREBY EXPRESSLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS SECURITY AGREEMENT. 17 SECTION 21. CHANGES IN WRITING. ----------- ------------------- Neither this Security Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. SECTION 22. RHODE ISLAND LAW; MEANING OF TERMS. ----------- ----------------------------------- This Security Agreement shall be construed in accordance with and governed by the laws of the State of Rhode Island applicable to contracts made and performed in said state, except to the extent that remedies provided by the laws of any state other than Rhode Island are governed by the laws of such state. Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the UCC as in effect in the State of Rhode Island have the meanings therein stated. SECTION 23. SEPARABILITY. ----------- ------------- If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Secured Party. SECTION 24. SUCCESSORS AND ASSIGNS. ----------- ----------------------- This Security Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any subsequent holders of the Note or any of the Obligations, each of whom shall, without further act, become a party hereto by becoming a holder of the Note or such Obligations. SECTION 25. HEADINGS. ---------- -------- The headings in this Security Agreement are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 26. COUNTERPARTS. ----------- ------------- This Security Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same agreement. 18 IN WITNESS WHEREOF, this Security Agreement has been executed by the parties hereto all as of the day and year first above written. MARKLAND TECHNOLOGIES, INC. By: -------------------------------------- Title: ----------------------------- BAY VIEW CAPITAL L.L.C. By: -------------------------------------- Title: ----------------------------- 19 EXHIBIT A --------- PLEDGED SECURITIES EXISTING ON DATE HEREOF ------------------------------------------ EXHIBIT B --------- FINANCING STATEMENTS ON FILE ON DATE HEREOF ------------------------------------------- Filing Secured File Collateral Office Party No. Date Description - ------ ----- --- ---- ----------- EXHIBIT C --------- ADDITIONAL REPRESENTATIONS AND WARRANTIES ----------------------------------------- 1. Debtor's exact name is:_______________________________________ 2. Debtor's Federal Tax Identification Number is: #_____________. 3. Debtor's organization number assigned to Debtor by the Secretary of State of its state of formation is #__________________. 4. Debtor uses in its business and owns the following trade names: ____________ 5. Debtor's chief executive office is: ________________________________ 6. Debtor's principal place of business is: ____________________________ 7. Debtor has other places of business located at: ____________________- 8. Debtor owns or has an interest in personal property located elsewhere at:__________________________________________________________________ 9. Debtor owns property consisting of fixtures at the following locations: Address Record Owner of Real Estate True and complete legal descriptions of such real estate are attached hereto as Schedules ______________. EXHIBIT D --------- PATENTS, TRADEMARKS, TRADENAMES, ETC. ------------------------------------- EX-10.31 19 markland_sb2ex10-31.txt EXHIBIT 10.31 NONEXCLUSIVE LICENSE Between SCIENCE & TECHNOLOGY RESEARCH, INC. And UNITED STATES OF AMERICA As Represented By THE SECRETARY OF THE NAVY INDEX Page Preamble .............................................................. 3 Article I Definitions................................................... 4 Article II License Grant................................................. 6 Article III LICENSEE'S Performance........................................ 6 Article IV Royalties..................................................... 7 Article V Patent Marking and Nonendorsement............................. 9 Article VI Representation and Warranties.................................10 Article VII Progress Reports..............................................10 Article VIII Modification and Termination..................................11 Article IX Notice........................................................14 3 PREAMBLE This Nonexclusive License (hereinafter called "LICENSE") is made and entered into by and between the United States of America as represented by the Secretary of the Navy (hereinafter called "LICENSOR") and Science & Technology Research, Inc., incorporated under the laws of the State of Maryland, (hereinafter called "LICENSEE") having an address at 112 Juliard Court, Suite 200, Fredericksburg, Virginia 22406. WITNESSETH: WHEREAS Title 35 of the United States Code, section 207 authorizes Federal agencies to license their patents; and WHEREAS Title 37 of the Code of Federal Regulations, Chapter IV, Part 404 entitled "Licensing of Government Owned Inventions" sets forth the terms and conditions under which licenses may be granted and; WHEREAS the above-cited authorities provide that licensing of Government inventions will best serve the interests of the Federal Government and the public when utilization of such inventions is promoted and such inventions are brought to practical application; and WHEREAS, LICENSOR has an assignment of title to the invention disclosed and claimed in United States Patent No. 6,459,079 4 issued on October 1, 2002 for "SHIPBOARD CHEMICAL AGENT MONITOR-PORTABLE (SCAMP)" (Navy Case No. NC79285); and WHEREAS LICENSEE has supplied LICENSOR with a plan for development and marketing of the invention disclosed in this patent and has expressed its intention to carry out this plan upon the granting of this LICENSE; and WHEREAS LICENSEE has agreed that any products embodying this invention or produced through the use of this invention for use or sale in the United States will be manufactured substantially in the United States; NOW THEREFORE, in accordance with and to the extent provided by the aforementioned authorities and in consideration of the foregoing premises and of the covenants and obligations herein-after set forth to be well and truly performed and other good and valuable consideration, the parties hereto agree to the foregoing and as follows: ARTICLE I Definitions ----------- The following definitions shall apply to the defined words where such words are used in this LICENSE: a. The "licensed patent" means U.S. Patent No. 6,459,079 entitled "SHIPBOARD CHEMICAL AGENT MONITOR-PORTABLE (SCAMP)," 5 issued October 1, 2002 to Kevin J. Machlinski and Michael A. Pompeii; b. A "licensed invention" means the invention claimed in U.S. Patent No. 6,459,079; c. To "practice the licensed invention" means to make, use and sell by or on behalf of LICENSEE or otherwise dispose of according to law any machine, article of manufacture or composition of matter physically embodying or made according to the licensed invention; d. "Practical application" means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system, and, in each case under such conditions as to establish that the licensed invention is being utilized and that its benefits are to the extent permitted by law and Government regulations available to the public on reasonable terms; e. A "royalty-bearing product" means any product defined by any claim of the licensed patent or made by a process or method claimed in the licensed patent; f. The "net selling price" shall mean the invoice price of the royalty-bearing product sold and not returned. A royalty-bearing product will be considered to be sold when shipped or delivered to a customer; g. A "grace period" is the period after October 1 of a 6 calendar year and before January 1 of the following year; and h. "United States" means the United States of America, its territories and possessions, the District of Columbia, and the Commonwealth of Puerto Rico. ARTICLE II License Grant ------------- LICENSOR grants to LICENSEE a nonexclusive right and license to practice the licensed invention throughout the United States in all fields of commerce for a period of ten (10) years, commencing on the date of execution of this LICENSE by LICENSOR, which shall become the effective date of the LICENSE, unless the LICENSE is sooner modified or terminated in whole or in part. This LICENSE is nonassignable without written approval of LICENSOR except to the successor of that part of LICENSEE'S business to which the licensed invention pertains. ARTICLE III Licensee's Performance ---------------------- LICENSEE agrees to carry out the plan for development and marketing of the licensed invention submitted with LICENSEE's Application for License dated November , 2003 to bring the licensed invention to practical application by the end on calendar year 2004 and LICENSEE will, thereafter, continue to make the benefits of the licensed invention reasonably accessible 7 to the public for the remainder of this LICENSE. LICENSEE agrees that during the period of this LICENSE any products embodying the licensed invention or produced through the use of a licensed invention for use or sale in the United States will be manufactured substantially in the United States. LICENSEE shall pay to the LICENSOR a nonrefundable licensing fee in the amount of ten thousand dollars ($10,000) payable upon the execution of this LICENSE by LICENSEE. Payment will be made in the manner prescribed in Article IV. LICENSEE agrees to promptly report to LICENSOR any changes in mailing address, name or company affiliation during the period of this LICENSE and to promptly report discontinuance of LICENSEE'S making the benefits of this licensed invention reasonably accessible to the United States public. ARTICLE IV Royalties --------- LICENSEE shall pay a royalty to LICENSOR of four percent (40) of the net selling price for each royalty-bearing product made, used or sold by LICENSEE in the United States. Royalties will not be paid on items sold directly to agencies of the U.S. Government or for known U.S. Government end use. Notwithstanding the provisions of the preceding paragraphs in this Article IV, LICENSEE agrees to pay at least a minimum annual 8 royalty of five thousand dollars ($10,000) for calendar year 2004 and each calendar year thereafter throughout the LICENSE. The minimum annual royalty for each calendar year shall be due and payable in advance on or before October 1 of the preceding year and will be credited as advance payment of royalties to accrue during the calendar year following payment. The minimum annual royalty for calendar year 2004 shall be due and payable upon execution of this LICENSE by LICENSEE. The minimum annual royalty payments will not be refunded in whole or in part. LICENSEE shall send to LICENSOR all royalties which accrue between 1 January and 31 December of each year by 1 March of the following year. A royalty report shall be included with each payment setting forth the quantity and net selling price of each royalty-bearing product sold during the period covered by the report, to whom sold and the date of such sale, and the total amount of royalties being paid for that year. Royalty reports are due for each calendar year. The last royalty report is due no later than sixty (60) days after the expiration of this LICENSE. 9 All payments due LICENSOR under this LICENSE shall be made payable to the "Department of the Navy" and mailed to: Patent Counsel of the Navy Office of Naval Research ONR 01CC, Room 207 800 North Quincy Street Arlington, Virginia 22217-5660 LICENSEE agrees to make and keep full, accurate and complete books and records as are necessary to establish its compliance with this Article IV. LICENSEE agrees that LICENSOR may, if LICENSOR so desires at a future time or times, have a duly authorized agent or representative in LICENSOR's behalf inspect, check or verify all such books and records either at LICENSEE's business premises or at a place mutually agreed upon by LICENSEE and LICENSOR. ARTICLE V Patent Marking and Nonendorsement --------------------------------- LICENSEE hereby agrees to mark any royalty-bearing product manufactured or sold by LICENSEE under this LICENSE (or when the character of the product precludes marking, the package containing any such product) with the notation "Licensed from U.S. Navy under U.S. Patent No. 6,459,079." LICENSEE agrees not to create any appearance that LICENSOR endorses LICENSEE's business or products. 10 ARTICLE VI Representations and Warranties ------------------------------ LICENSOR makes no representation or warranty as to the validity of U.S. Patent No. 6,459,079 or of the scope of any of the claims contained therein or that the exercise of this LICENSE will not result in the infringement of other patent(s). Neither LICENSOR nor its employees assumes any liability whatsoever resulting from the exercise of this LICENSE. Nothing relating to the grant of this LICENSE nor the grant itself shall be construed to confer upon LICENSEE any immunity from or defenses under the antitrust laws or from a charge of patent misuse, and the acquisition and use of rights pursuant to this LICENSE shall not be immunized from the operation of State or Federal law by reason of the source of the grant. Nothing contained in this LICENSE shall be interpreted to grant to LICENSEE any rights with respect to any invention other than the licensed invention. ARTICLE VII Progress Reports ---------------- LICENSEE agrees to submit periodic reports on its efforts to achieve practical application of the licensed invention by the end of calendar year 2004 with particular reference to LICENSEE'S plan for development and marketing of the licensed invention 11 submitted with LICENSEE'S application for license. These reports shall contain information within LICENSEE'S knowledge, or which it may acquire under normal business practices, pertaining to the commercial use being made of this licensed invention and other information which LICENSOR may determine is pertinent to Government licensing activities. LICENSEE agrees to submit such reports to LICENSOR semiannually until such time that the invention has been brought to the point of practical application. LICENSEE will submit such report to the following: Chemical-Biological Systems Technology Division Attn: Dr. Richard A. Lorey NSWCDD, Code B50 17320 Dahlgren Road Dahlgren, VA 22448; and Office of Counsel (Patents) NSWCDD, Code XCD1 17320 Dahlgren Road Dahlgren, Virginia 22448. ARTICLE VIII Modification and Termination ---------------------------- This License may be terminated in whole or in part by LICENSOR, if: (1) LICENSOR determines that LICENSEE is not executing the plan submitted with its application for license dated November __, 2003 and LICENSEE cannot otherwise demonstrate to the 12 satisfaction of LICENSOR that it has taken or can be expected to take within a reasonable time effective steps to achieve practical application of this licensed invention; (2) LICENSOR determines that such action is necessary to meet requirements for public use specified by Federal regulations issued after the date of this LICENSE and such requirements are not reasonably satisfied by LICENSEE; (3) Licensee willfully made a false statement of or willfully omitted a material fact in its application for license or in any report required by this LICENSE; or (4) LICENSEE commits a substantial breach of a covenant or agreement herein contained. This LICENSE may be modified or terminated in whole or in part consistent with the law and applicable regulations upon mutual agreement of LICENSOR and LICENSEE evidenced in writing and signed by both parties. LICENSEE may request modification of this LICENSE in writing sent to LICENSOR and stating the reasons therefore. This LICENSE may be restricted to the fields of use or geographic areas, or both, in which the LICENSEE has brought the invention to practical application and continues to make the benefits of the invention reasonably accessible to the public. However, such restriction may be made only after the expiration of three (3) years following the effective date of this LICENSE 13 and shall be made only in order to grant an exclusive or partially exclusive license. Notwithstanding the provisions of Article II, LICENSEE and LICENSOR agree that this LICENSE shall automatically terminate on September 30 of any year if the minimum annual royalty due for the following calendar year, as expressed in Article IV of the LICENSE, is not timely paid. If, however, the minimum annual royalty payment together with a surcharge of one thousand dollars ($1,000) is paid during the grace period before the following calendar year, then this LICENSE shall be considered as not having automatically terminated. Before modifying or terminating in whole or in part this LICENSE, other than by mutual agreement, LICENSOR shall furnish LICENSEE a written notice of intention to modify or terminate in whole or in part this LICENSE, and LICENSEE shall be allowed no less than thirty (30) days after such notice or other agreed-upon time period, whichever is greater, to remedy any breach of any covenant or agreement set forth in this LICENSE or to show cause why this LICENSE should not be modified or terminated in whole or in part. LICENSEE has a right to appeal, in accordance with procedures prescribed by the Chief of Naval Research, any decision concerning the interpretation, modification or termination in whole or in part of this LICENSE. 14 ARTICLE IX Notice ------ All communications and notices required under this LICENSE shall be considered duly given if timely mailed by U.S. Postal Service, first class, postage prepaid and addressed as follows: (a) if to LICENSOR: Patent Counsel of the Navy Office of Naval Research ONR O1CC, Room 207 800 North Quincy Street Arlington, Virginia 22217-5660; and Office of Counsel (Patents) NSWCDD, Code XDCl 17320 Dahlgren Road Dahlgren, Virginia 22448 (b) if to LICENSEE: Science & Technology Research, Inc. Attn: Edward L. Kessler, Exec. V.P./Gen. Mgr. 112 Juliard Court, Suite 200 Fredericksburg, Virginia 22406 or such mailing address as the parties from time to time specify in writing. 15 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized representatives. UNITED STATES OF AMERICA For the Secretary of the Navy By: /s/ Lyal B. Davidson ------------------------------------ Lyal B. Davidson, Capt., USN Title: Commander, NSWCDD Date: SCIENCE & TECHNOLOGY RESEARCH, INC. By: /s/ Edward L. Kessler ------------------------------------ Edward L. Kessler Title: Exec. V.P./Gen. Mgr. Date: ATTEST: EX-10.32 20 markland_sb2ex10-32.txt EXHIBIT 10.32 INTERNATIONAL DISTRIBUTOR AGREEMENT THIS AGREEMENT is made and entered into by and between Markland Technologies, Inc., a Florida Corporation, with a mailing address of 54 Danbury Road, Ridgefield, CT (hereinafter referred to as "Markland") and Tradeways, Ltd., a Delaware Corporation, with a mailing address of 184 Duke of Gloucester Street, Annapolis, Maryland 21401 (hereinafter referred to as "Tradeways"). IT IS AGREED AS FOLLOWS: Tradeways hereby offers to sell the Shipboard ACADA (hereinafter called the "Product") manufactured by Markland, to Argentina, Australia, Austria, Bahrain, Canada, Chile, Croatia, Denmark, Egypt, Estonia, Finland, Greece, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Malaysia, The Netherlands, New Zealand, Norway, Oman, Pakistan, Portugal, Qatar, Saudi Arabia, Spain, Sweden, Taiwan, Turkey, United Arab Emirates (hereinafter called the "Territory"). Tradeways shall, through the executions of its best efforts, solicit orders, provide marketing services and promote sales of the Product and try to develop the full sales potential in the Territory. Markland agrees that it will sell the Product exclusively to Tradeways for resale in the Territory. In addition, Markland shall advise Tradeways of all inquiries for the Product involving the Territory. Markland shall not knowingly issue price quotations for sale or delivery of the Product to the Territory. Special care will be taken by Markland to screen inquiries from U.S. or foreign export trading companies or third parties so that quotations are not issued for ultimate delivery to the Territory. Such inquiries will be referred to Tradeways. This Agreement shall be valid until December 31, 2005. Validity of this Agreement can be extended upon mutual consent of both parties. This agreement may be amended by mutual consent of both parties. This Agreement can be terminated by either party to this agreement sixty (60) days after notice by email to other party to this agreement. In the event of expiration or termination of this Agreement, Markland shall pay Tradeways a ten percent (10%) commission for any orders received for sale or delivery to the Territory within a one (1) year period from the date of such expiration or termination, if a proposal has been submitted by Tradeways to a customer or if other substantial negotiations have commenced with a customer. Upon such expiration or termination, Tradeways shall submit a list of such proposals and negotiations to Markland and Markland shall abide by this list. AGREED: MARKLAND TECHNOLOGIES TRADEWAYS, LTD. By: /s/ Kenneth P. Ducey, Jr. By: /s/ Jason Hinsch ----------------------------- --------------------------------- Title: President Jason Hinsch Project Manger Date: Date: ---------------------------- ------------------------------- page 2 of 2 EX-23.1 21 markland_sb2ex23-1.txt EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT The Board of Directors and Stockholders Markland Technologies, Inc.: We consent to the incorporation by reference in the registration statement (No. ______________) on Form SB-2 or Markland Technologies, Inc., filed on May 11, 2004, of our report dated October 4, 2002, with respect to the consolidated balance sheets of Markland Technologies, Inc. as of June 30, 2002, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year ended June 30, 2002. /s/ Sherb & Co., LLP - ------------------------- Sherb & Co., LLP New York, New York may 11, 2004 EX-23.4 22 markland_ex23-4.txt EXHIBIT 23.4 MARCUM & KLEIGMAN LLP --------------------- Certified Public Accountants & Consultants CONSENT OF INDEPENDENT AUDITORS ------------------------------- We consent to the use of the Registration Statement of Markland Technologies, Inc., ("the Company" on Form SB-2 filed on May 11, 2004 (the "Registration Statement") of our report dated February 25, 2004 relating to the financial statements of Science and Technology Research, Inc., appearing in the current report on Form 8-K filed with the Securities and Exchange Commission on March 23, 2004 File # 000-28863, which is a part of such Registration Statement, and to the use of our name as it appears under the caption "Experts". /s/ Marcum & Kliegman LLP May 11, 2004 -----END PRIVACY-ENHANCED MESSAGE-----