-----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, JdhOJgj0pNAntbFZ1ogBiEIol25dPEhnD5veHoljwZjr8pAQytvDzkVHUtdLbCXn tcctkiKDByyQw5EDlZJ3Vw== 0001019687-04-001175.txt : 20040524 0001019687-04-001175.hdr.sgml : 20040524 20040524171302 ACCESSION NUMBER: 0001019687-04-001175 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKLAND TECHNOLOGIES INC CENTRAL INDEX KEY: 0001102833 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 841331134 STATE OF INCORPORATION: FL FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28863 FILM NUMBER: 04827662 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 10QSB 1 markland_10q-033104.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ COMMISSION FILE NUMBER 000-28863 _________________________ MARKLAND TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) FLORIDA 84-1334434 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) #207 - 54 DANBURY ROAD RIDGEFIELD, CT 06877 (Address of principal executive offices and zip code) (203) 894-9700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 19, 2004, there were 27,074,899 shares of common stock, $0.0001 par value, of the registrant issued and outstanding. Transitional Small Business Disclosure Format (CHECK ONE): Yes [ ] No [X] ================================================================================ MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-QSB (UNAUDITED MARCH 31, 2004 Page Nos. PART I - FINANCIAL INFORMATION: --------- ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEET 1 At March 31, 2004 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2 For the Nine Months Ended March 31, 2004 and 2003 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 3 For the Three Months Ended March 31, 2004 and 2003 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) 4 - 7 For the Nine Months Ended December 31, 2003 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 8 - 9 For the Nine Months Ended March 31, 2004 and 2003 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10 - 25 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 26 ITEM 3 - CONTROLS AND PROCEDURES 33 PART II - OTHER INFORMATION 34 ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEDURES 34 ITEM 6 - EXHIBITS AND REPORTS ON 8-K 36 SIGNATURES 40 - -------------------------------------------------------------------------------- Statements contained in this Form 10-QSB, which are not historical facts constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may", "will", "expect", "anticipate", "believe", "estimate", "continue", and similar words. You should read statements that contain these words carefully. All forward-looking statements included in this Form 10-QSB are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Each forward-looking statement should be read in conjunction with the financial statements and notes thereto in Part I, Item 1, of this quarterly report and with the information contained in Item 2 together with Management's Discussion and Analysis or Plan of Operation contained in our annual report on Form 10-KSB for the year ended June 30, 2003, including, but not limited to, the section therein entitled "Risk Factors." PART I. FINANCIAL INFORMATION. MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT MARCH 31, 2004 ASSETS ------ CURRENT ASSETS: Cash $ 445,777 Accounts receivable (including $373,326 due from related party) 474,612 Accounts receivable - long-term contracts 1,153,446 Inventoried costs relating to long-term contracts in process, net of progress payments 67,615 Other current assets 73,446 ------------- TOTAL CURRENT ASSETS 2,214,896 ------------- OTHER ASSETS: Property and Equipment, net of accumulated depreciation of $9,000 44,467 Intangible assets - ERGO, net of amortization of $166,669 233,331 Intangible assets - ASI, net of amortization of $166,666 833,334 Technology rights (Acoustic Core) 1,300,000 Intangible assets - STR, net of amortization of $300,000 5,706,808 ------------- TOTAL OTHER ASSETS 8,117,940 ------------- TOTAL ASSETS $ 10,332,836 ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES: Accounts payable (including $288,256 due to related party) $ 985,649 Accrued expenses and other current liabilities 440,898 Secured Convertible Promissory Note, less debt discount of $20,831 479,169 Notes payable 744,838 Income taxes payable 151,800 ------------- TOTAL LIABILITIES 2,802,354 ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: 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; 1,774 issued and outstanding; liquidation preference of $1,911,000 1 Series D convertible preferred stock - $.0001 par value; 40,000 authorized; 20,096 issued and outstanding; liquidation preference of $20,096,000 2 Common stock - $.0001 par value; 500,000,000 authorized; 11,307,676 shares issued and outstanding 1,132 Additional paid-in capital 24,706,912 Unearned compensation (2,828,034) Accumulated deficit (14,649,531) ------------- TOTAL STOCKHOLDERS' EQUITY 7,530,482 ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,332,836 ============= See accompanying notes to condensed consolidated financial statements. 1
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED March 31, 2004 AND 2003 (UNAUDITED) 2004 2003 ------------ ------------ REVENUES (including $261,074 of revenue from related parties) $ 5,382,341 $ 322,451 COST OF REVENUES (including $260,934 of costs incurred to a related party) 4,486,512 85,798 ------------ ------------ GROSS PROFIT 895,829 236,653 ------------ ------------ OPERATING EXPENSES: Research and development expenses 49,139 -- Selling, general and administrative 2,337,298 643,193 Compensatory element of stock issuances for selling, general and administrative fees 2,543,561 1,480,468 Amortization of intangible assets 566,667 -- Depreciation and amortization 9,000 33,334 ------------ ------------ TOTAL OPERATING EXPENSES 5,505,665 2,156,995 ------------ ------------ OPERATING LOSS (4,609,836) (1,920,342) ------------ ------------ OTHER EXPENSES, NET: Interest expense 266,960 198,120 Other expense (income) -- (25,250) ------------ ------------ TOTAL OTHER EXPENSES, NET 266,960 172,870 ------------ ------------ NET LOSS (4,876,796) (2,093,212) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 1,180,500 320,882 PREFERRED STOCK DIVIDEND - SERIES C 186,322 81,007 ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(6,243,618) $(2,495,101) ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.97) $ (0.50) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 6,438,758 4,998,495 ============ ============ See accompanying notes to condensed consolidated financial statements. 2 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED) 2004 2003 ------------ ------------ REVENUES (including $35,864 of revenue from related parties) $ 1,818,846 $ 322,451 COST OF REVENUES (including $68,000 of costs incurred to a related party) 2,156,931 85,798 ------------ ------------ GROSS PROFIT (LOSS) (338,085) 236,653 ------------ ------------ OPERATING EXPENSES: Research and development expenses 49,139 -- Selling, general and administrative 1,210,332 475,641 Compensatory element of stock issuances for selling, general and administrative fees 1,004,419 1,476,468 Amortization of intangible assets 416,666 33,334 Depreciation and amortization (222) -- ------------ ------------ TOTAL OPERATING EXPENSES 2,680,334 1,985,443 ------------ ------------ OPERATING LOSS (3,018,419) (1,748,790) ------------ ------------ OTHER EXPENSES, NET: Interest expense 119,232 28,334 Other expense (income) -- 403 ------------ ------------ TOTAL OTHER EXPENSES, NET 119,232 28,737 ------------ ------------ NET LOSS (3,137,651) (1,777,527) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 1,044,250 272,502 PREFERRED STOCK DIVIDEND - SERIES C 55,782 65,018 ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(4,237,683) $(2,115,047) ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.50) $ (0.41) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,458,556 5,135,109 ============ ============ See accompanying notes to condensed consolidated financial statements. 3 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2004 (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 3,630,376 363 -- -- 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 1,231,077 124 -- -- Variable accounting adjustment of prior/ Unearned compensation -- -- -- -- Preferred stock dividend - Series C ($12.50 per share) -- -- -- -- Stock issued in connection with consulting agreements 159,029 17 -- -- 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 - March 31, 2004 11,307,676 $ 1,132 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. 4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2004 (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 -- -- 3,666 -- 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 (3,621) -- -- -- 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 - March 31, 2004 1,774 $ 1 20,096 $ 2 ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements. 5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED) Additional Unearned Paid-in Compensation Capital ------------- ------------- Balance - July 1, 2003 $ (4,381,379) $ 13,900,104 Issuance of Series D convertible preferred stock -- 3,402,000 Preferred stock dividend - beneficial conversion feature - Series D -- 1,180,500 Preferred stock dividend - beneficial conversion feature - Series D -- (1,180,500) Conversion of Series C convertible preferred stock into common stock -- 201,315 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 -- 730,455 Variable accounting adjustment of prior unearned compensation 273,633 (273,633) Preferred stock dividend - Series C ($12.50 per share) -- (186,322) Stock issued in connection with consulting agreements (350,000) 366,058 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 1,764,112 -- Net loss -- -- ------------- ------------- Balance - March 31, 2004 $ (2,828,034) $ 24,706,912 ============= ============= See accompanying notes to condensed consolidated financial statements. 6 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED) Total Accumulated Stockholders' Deficit Equity ------------- ------------- Balance - July 1, 2003 $ (9,772,735) $ 46,360 Issuance of Series D convertible preferred stock -- 3,402,000 Preferred stock dividend - beneficial conversion feature - Series D -- 1,180,500 Preferred stock dividend - beneficial conversion feature - Series D -- (1,180,500) Conversion of Series C convertible preferred stock into common stock -- 201,678 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 -- 730,579 Variable accounting adjustment of prior unearned compensation -- -- Preferred stock dividend - Series C ($12.50 per share) -- (186,322) Stock issued in connection with consulting agreements -- 16,075 Stock issued in connection with employment agreement -- 32,796 Acquisition of Science and Technology Research Corporation, Inc. -- 5,100,000 Amortization of employment/and consulting agreements -- 1,764,112 Net loss (4,876,796) (4,876,796) ------------- ------------- Balance - March 31, 2004 $(14,649,531) $ 7,530,482 ============= ============= See accompanying notes to condensed consolidated financial statements. 7 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED) For the Nine Months Ended March 31, 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(4,876,796) $(2,093,212) Adjustment to reconcile net loss to net cash used in operating activities: Amortization of intangible assets 566,667 33,334 Compensatory stock issuances 2,543,561 1,480,468 Amortization of debt discount 62,503 -- Depreciation expense 9,000 -- Changes in operating assets and liabilities: Accounts receivable (875,041) (158,287) Inventoried costs 28,915 -- Prepaid expenses and other current assets (18,027) 21,750 Advances on purchase of ASI 65,000 (15,000) Accounts payable 29,439 (49,143) Accrued expenses and other current liabilities 104,496 408,828 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (2,360,283) (371,262) ------------ ------------ CASH USED IN INVESTING ACTIVITIES: Cash used for acquisitions, net of cash acquired (934,170) (112,220) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of note payable - James LLC -- (11,500) Proceeds from sale of common stock in private placement -- 340,000 Convertible preferred stock 3,402,000 170,000 Proceeds from note payable - Bayview 1,400,000 -- Repayments of note payable - Bayview (1,050,231) -- Principal payments on note payable - insurance financing (17,004) -- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 3,734,765 498,500 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 440,312 15,018 CASH AND CASH EQUIVALENTS - BEGINNING 5,465 4,911 ------------ ------------ CASH AND CASH EQUIVALENTS - ENDING $ 445,777 $ 19,929 ============ ============ See accompanying notes to condensed consolidated financial statements. 8 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - ------------------------------------------------- 2004 2003 ----------- ----------- Cash paid during the periods for: Interest $ -- $ -- =========== =========== Taxes $ -- $ -- =========== =========== Non-cash investing and financing activities: Conversion of notes payable, accrued interest and dividends into preferred stock $ 201,678 $ 5,225,000 =========== =========== Acquisition of technology rights by issuance of common stock $ -- $ 1,300,000 =========== =========== Deemed dividend preferred beneficial conversion feature $ 1,180,500 $ 320,882 =========== =========== Dividends on preferred stock $ 186,322 $ 81,007 =========== =========== Conversion of accounts payable into common stock $ 450,000 $ -- =========== =========== During the nine months ended March 31, 2004 and 2003, the Company acquired the assets and assumed the liabilities of various entities. The transactions had the following non-cash impact on the balance sheet: 2004 2003 ----------- ----------- Accounts receivable $ 438,795 -- Inventoried costs 96,530 -- Equipment 53,467 -- Other current assets 32,502 -- Intangibles 7,006,808 400,000 Accrued liabilities (368,932) -- Notes payable to sellers (375,000) (287,780) Equity (5,950,000) -- ----------- ----------- Net Cash Used for Acquisitions, net of cash acquired of $215,830 $ 934,170 $ 112,220 =========== =========== See accompanying notes to condensed consolidated financial statements. 9 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. Operating results for the nine months ended March 31, 2004 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"). 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. STR provides a full range of electrical and mechanical engineering support as well as fabrication and assembly of electrical and mechanical systems. STR 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 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 United States Government 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. The accompanying condensed 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 $4,876,796 and $2,093,212 for the nine months ended March 31, 2004 and 2003, respectively. Additionally, the Company had a working capital deficiency of $587,458 at March 31, 2004. The Company has limited finances and requires additional funding in order to market and license its products. Subsequent to March 31, 2004, the Company sold equity securities and received net proceeds of approximately $9 million (see Note 13). 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. 10 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Use of Estimates in Preparation of Financial Statements - ------------------------------------------------------- The preparation of the accompanying condensed consolidated 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 March 31, 2004. 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 March 31, 2004. 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 over a three-year life 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. 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. As of March 31, 2004, two of these contracts were completed and a third Contract has unshipped backlog of approximately $1,001,000. 11 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------ Fair Value of Financial Instruments - ----------------------------------- The financial statements include various estimated fair value information at March 31, 2004, 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 March 31, 2004 and 2003, advertising and promotion expenses were approximately $8,849 and $-0-, respectively. Shipping Costs - -------------- Delivery and shipping costs are included in contract costs in the accompanying condensed consolidated 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. 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 and diluted 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 condensed 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 March 31, 2004, 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. 12 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------ 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. 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. 13 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. INVENTORIED COSTS ----------------- Inventoried cost relating to long-term contracts include the following: Inventoried costs relating to U.S. Government contracts, net of amounts attributed to revenues recognized to date $ 504,497 Progress billings 436,882 ----------- Net $ 67,615 =========== 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 amount of general and administrative costs incurred by STR During the nine months ended March 31, 2004 was $212,257. 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 March 31, 2004 are estimated at $30,270. 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. 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. The closing of this transaction occurred on September 30, 2003. The purchase price of the ASI assets consisted of $150,000 in cash, of which $65,000 was paid by June 30, 2003 and $85,000 was paid by December 31, 2003 and 283,333 shares of 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. 14 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ACQUISITIONS (Continued) ------------ Purchase of Intangible Assets of ASI Technology Corporation (Continued) - ----------------------------------------------------------- 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 $45,000 has been paid to ASI under this agreement and is included in selling, general and administrative expenses for the nine months ended March 31, 2004. 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 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, as amended, as follows: June 15, 2004 $ 75,000 July 15, 2004 75,000 August 15, 2004 75,000 September 15, 2004 75,000 October 15, 2004 75,000 -------- $375,000 ======== 15 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ACQUISITIONS (Continued) ------------ Purchase of Science and Technology Research, Inc. (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: Cash $ 900,000 Promissory note 375,000 Common Stock 5,100,000 Acquisition costs 100,000 ---------- Total Purchase Price $6,475,000 ---------- Fair value of net assets acquired: Current assets, including cash of $215,830 $ 783,657 Property and equipment 53,467 Liabilities assumed: Accounts payable & accrued expenses and taxes (368,932) ---------- Fair value of identifiable net tangible assets acquired 468,192 Intangible assets (a) 6,006,808 ---------- Total Purchase Price 6,475,000 ========== (a) The company has currently hired an independent firm to value the intangible assets and allocate the purchase price in accordance with FASB Statement #141. 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. The results of operations of STR have been included in the Company's condensed consolidated Statements of operations commencing October 1, 2003. Unaudited proforma financial information for the nine months ended March 31, 2004 and 2003, had the acquisition been completed as of July 1, 2002, is as follows: 2004 2003 --------------- --------------- Revenues $ 6,721,000 $ 3,259,000 Loss from operations $ (4,664,000) $ (2,181,000) Net loss $ (4,974,000) $ (2,843,000) Net loss per common share $ (0.98) $ (0.57) 16 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 nine months ended March 31,2004 was $100,000. 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 nine months ended March 31,2004 was $166,666. The excess of the purchase price of STR over the net tangible assets acquired is $6,006,808. This amount was initially allocated 50% to goodwill and 50% to amortizable intangible assets with a five-year estimated economic life resulting in amortization expense of $300,000 for the six months ended March 31, 2004. The Company has retained the services of an independent appraiser to perform a FASB #141 valuation, which is expected to be completed by the filing of its June 30, 2004 10-KSB. Future amortization expense related to the above-acquired intangible assets is as follows: Years Ending June 30, Amount --------------- ---------- 2004 (3 months) $ 266,666 2005 1,066,669 2006 999,993 2007 683,334 2008 600,000 2009 150,000 ---------- $3,166,662 ========== The intangible assets entitled "Acoustic Core" which has a carrying value of $1,300,000 are not available for commercial sale as of March 31, 2004. Accordingly, no amortization expense has been recorded through March 31, 2004. 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 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 March 31, 2004, approximately $39,250 of interest has been accrued on this note and is included in accrued expenses on the condensed 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 nine months ended March 31, 2004 was $62,503. Subsequent to March 31, 2004, the remaining principal and accrued interest were converted into 404,265 shares of the Company's common stock. 17 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 three (3) (not necessarily consecutive) trading days during the ten (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 March 31, 2004, the Company has not drawn down on this equity line. 8. NOTES PAYABLE ------------- Note Payable - NPAI - ------------------- In December 2003, the Company signed a note to finance an insurance premium. The unpaid balance of this note was $20,069. Note Payable - Bay View Capital - ------------------------------- 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 4). 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 March 31, 2004 was $349,769 and is currently classified as a current liability. The balance of the note, plus accrued interest, was paid in full in April of 2004. 18 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. - - Series C 5% Cumulative Convertible Preferred Stock -------------------------------------------------- The shares of the Series C Preferred Stock are non-voting and have 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 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 common stock. 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. During February 2003, the Company sold 170 shares of Series C Preferred Stock for $170,000. During July 2003, 570 shares of Series C 5% Cumulative Preferred Stock were converted into 208,333 shares of the Company's common stock. During the quarter ended March 31, 2004, the holder of Series C Convertible Preferred Stock converted 3,051 shares of Series C Convertible Preferred Stock together with accrued dividends of $201,679 into 3,422,043 shares of the Company's common stock. As of March 31, 2004, accumulated dividends of $137,360 were accrued for the Series C Preferred Stock. Series D Convertible Preferred Stock - ------------------------------------ Shares of the Series D Convertible Preferred Stock have a liquidation preference of $1,000 per share, are non-voting, do not accrue dividends, are redeemable by the Company anytime and are convertible into shares of the Company's common stock at a conversion price ranging from 65% to 80% of the common stock's market price at the time of the conversion. During the nine months ended March 31,2004, the Company sold to a third party 3,666 shares of Series D Preferred Stock for gross proceeds of $3,402,000. The Company has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $1,180,500. The Company recorded this deemed dividend of $1,180,500 during the nine months ended March 31, 2004, 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. 19 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued) -------------------- 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. 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 consultant's 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 issued 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. During the quarter ended March 31, 2004, the Company issued to various consultants 116,203 shares of its common stock for services rendered valued at $192,436. 20 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 Potentially Issuable --------------------------- Convertible notes payable (convertible at 80% of market) 404,266 Series A Redeemable Convertible Preferred Stock 30,000 Series C 5% Cumulative Convertible Preferred Stock plus accrued dividends (convertible at 80% of market) 1,526,036 Series D Convertible Preferred Stock (convertible at 80% of market) 20,096,000 ------------ Total as of March 31, 2004 22,056,302 ============ Subsequent equity issuances: Conversion of convertible debt 404,266 Common shares and warrants issued in connection with Private Placements 26,752,299 Conversion of Series C Convertible Preferred Stock 1,526,036 Conversion of Series D Convertible Preferred Stock 604,839 Shares issuable under compensation agreements (see note 13)
21 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. COMMITMENTS ----------- Facility Rental - --------------- STR leases its 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 March 31, 2004 was $46,561. Compensation 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. New agreements were entered into in May of 2004 (see Note 13). During the quarter ended March 31, 2004, the Company accrued $600,000 of bonus compensation under these agreements. 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. All of the shares issuable under the four agreements were earned as of January 1, 2004. Accordingly, a total of 1,410,723 shares were issued, of which 155,754 were issued during the year ended June 30, 2003 and 1,254,969 were issued during the nine months ended March 31, 2004. In connection with the STR acquisition, the Company entered into a one year consulting agreement, as amended on March 17, 2004, with the former President and principal of 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: $25,000 is payable on July 15, 2004, a second payment in the amount of $35,000, is payable on August 15, 2004, a third payment in the amount of $60,000 is payable on September 15, 2004, a fourth payment in the amount of $60,000 is payable on October 15, 2004, a fifth payment in the amount of $60,000 is payable on November 15, 2004 and the sixth and final payment in the amount of $45,000 is payable on December 15, 2004. 22 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. LITIGATION ---------- 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. 13. SUBSEQUENT EVENTS ----------------- Conversion of Preferred Stock - ----------------------------- Subsequent to March 31, 2004, the holders of the Series C Convertible Preferred Stock converted all of the shares of Series C Convertible Preferred stock together with accrued dividends into 1,526,036 shares of Markland common stock. Subsequent to March 31, 2004, the holders of Series D Convertible Preferred Stock converted 810 shares of Series D Convertible Preferred Stock into 604,839 shares of common stock. Conversion of Convertible Secured Debt. - -------------------------------------- Subsequent to March 31, 2004, a secured lender converted the principal amount of $500,000 and all accrued interest into 404,266 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. 23 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. SUBSEQUENT EVENTS (Continued) ----------------- Private Placement Transaction Completed on April 2, 2004 (Continued) - -------------------------------------------------------- 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. 24 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. SUBSEQUENT EVENTS (Continued) ----------------- Private Placement Transaction Completed on May 3, 2004 (Continued) - ------------------------------------------------------ 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 March 31, 2004, the Company paid in the full balance of a note payable to Bay View Capital of $349,769 and all accrued interest. Compensation Agreements - ----------------------- On May 12, 2004, the Company entered into five-year compensation agreements with two executives and a consultant. These agreements provide for the following remuneration: o Base annual remuneration of $300,000 each (an aggregate of $900,000) payable over the five-year period ending January 2, 2009; o Discretionary bonuses over the term of the agreement of up to 300% of the base remuneration; and o Conditional stock grants over the period commencing April 1, 2004 through January 2, 2008, based on defined performance criteria. The stock grants, if all earned, entitle each of the three parties to receive up to 7.5% of the Company's common stock on a fully diluted basis. These grants are earned according to the following schedule: ---------------------- ------------------- -------------------- Grant 1 2.5% April 1, 2004 ---------------------- ------------------- -------------------- Grant 2 1.0% July 1, 2004 ---------------------- ------------------- -------------------- Grant 3 1.0% October 1, 2004 ---------------------- ------------------- -------------------- Grant 4 1.0% January 2, 2005 ---------------------- ------------------- -------------------- Grant 5 1.0% January 2, 2006 ---------------------- ------------------- -------------------- Grant 6 0.5% January 2, 2007 ---------------------- ------------------- -------------------- Grant 7 0.5% January 2, 2008 ---------------------- ------------------- -------------------- The number of shares of common stock to be granted on each grant date is equal to the product of (a) the number of fully diluted shares outstanding at the grant date and (b) the stock percentage associated with that grant date. o In the event of a change in control of the Company during the period covered by the agreement, each executive/consultant will automatically be granted all remaining stock grants and will be due cash and expense compensation for the shorter of (i) three years from the date of the change in control, or (ii) until the end of the term of the agreement. A change in control is defined by the agreements as a change in the majority ownership of the equity of the company, or the resignation or termination of the majority of the board of directors within a two month period, or the replacement of the CEO or the President of the Company. 25 ITEM 2. 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 REPORT ON FORM 10-QSB. 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. STATEMENTS CONTAINED IN THIS FORM 10-QSB, WHICH ARE NOT HISTORICAL FACTS CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE MADE UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "BELIEVE", "ESTIMATE", "CONTINUE", AND SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO IN PART I, ITEM 1, OF THIS QUARTERLY REPORT AND WITH THE INFORMATION CONTAINED IN ITEM 2 TOGETHER WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CONTAINED IN OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2003, INCLUDING, BUT NOT LIMITED TO, THE SECTION THEREIN ENTITLED "RISK FACTORS." 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 three months ended March 31, 2004 and March 31, 2003, and the nine months ended March 31, 2004 and March 31, 2003. This analysis is presented on a consolidated basis. o FINANCIAL CONDITION AND LIQUIDITY. This section provides an analysis of Markland's cash flows for the nine months ended March 31, 2004, 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 require 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 in the last two years. 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 nine months ended March 31, 2004, we derived revenue of approximately $4,369,000, $752,000 and $261,000, respectively, from our contracts with the U.S. Navy, our border security products and services, and our SBIR research grants performed for the development of gas plasma antenna technology. During the nine months ended March 31, 2004 we incurred a net loss of approximately $4,876,796. 26 Our strategy is to grow through acquisitions and marketing of our products. No assurances can be given that we can complete an acquisition of revenue producing assets. 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 report, 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 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. At this time we changed our name to Markland Technologies, Inc. There is currently no Series B Preferred Stock outstanding. 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 from discontinued operations 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 disposition of Vidikron. 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 the 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. 27 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 certain milestones which are related to research efforts. During the nine month period ended March 31, 2004, we realized $752,000 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 nine months ended March 31, 2004 we realized $261,000 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 nine months ended March 31, 2004, we realized $4,369,000 from sales of our automatic chemical agent detection and alarm system to the U.S. Navy. FINANCING ACTIVITIES AFTER MARCH 31, 2004. 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 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. The selected consolidated financial data for each of the three month periods ended March 31, 2004 and 2003 and each of the nine month periods ended March 31, 2004 and March 31, 2003 have been derived from the unaudited consolidated financial statements of Markland. 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 Quarterly Report. 28
THREE MONTHS ENDING NINE MONTHS ENDING MARCH 31, MARCH 31, --------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Revenue 1,818,846 322,451 5,382,341 322,451 Cost of revenue 2,156,931 85,798 4,486,512 85,798 Selling, general and administrative 1,210,332 475,641 2,337,298 643,193 Compensatory element of stock issuances 1,004,419 1,476,468 2,543,561 1,480,468 Research and development 49,139 -- 49,139 -- Amortization & depreciation expense 416,444 33,334 575,667 33,334 Interest and other expenses 119,232 28,737 266,960 172,870 Net loss (3,137,651) (1,777,527) (4,876,796) (2,093,212)
RESULTS OF OPERATIONS COMPARISON OF NINE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2004 REVENUE. Revenue for the quarter ending March 31, 2004 was $1,818,846, an increase of $1,496,395 from the $322,451 recognized during the quarter ended March 31, 2003. The increase was primarily attributable to our acquisition of Science and Technology Research Corporation (STR). During the nine month period ended March 31, 2003 we recognized revenue of $322,451. Revenue for the nine months ended March 31, 2004 was $5,382,341. Of our revenues, approximately $4,369,000 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 March 2003 our subsidiary STR recognized approximately $14,411,000 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 $752,000 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 up to $2,000,000. Our SBIR grants provide for payments of $1,000,000 over a 12-month period. Approximately $261,000 of revenue was derived from funded SBIR research performed for the U.S. military for gas plasma antenna technology. COST OF REVENUES. We had no costs of revenues prior to the three month period ended March 31, 2003. During the three month period ended March 31, 2003 we had cost of revenues of $85,798 and a gross profit of $236,653. Cost of revenues for the three months ended March 31, 2004 was $2,156,931 and for the nine months ended March 31, 2004 was $4,486,512. We had a gross loss of $338,085 for the three months ended March 31, 2004 and a gross profit of $895,829 for the nine months ended March 31, 2004. Our cost of revenues for long term contracts includes direct labor and related fringe benefits, subcontracting costs, material purchases, and allocable general and administrative expenses. The increase in our costs of revenues for the three month period ended March 31, 2004 is primarily due to the following factors: (1) During the quarter ended March 31, 2004, we closed out a purchase order under our U.S. Navy contract. Our actual costs of goods exceeded our estimated costs of goods for products delivered to the U.S. Navy, and we recorded an adjustment in the quarter ended March 31, 2004. This excess also resulted in a reduction in gross margin and (2) Our deliveries during this period also reflect higher contract costs and consequently a lower gross margin. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased to $1,210,332 for the quarter ending March 31, 2004 from $475,641 for the comparable period for 2003. Selling, general and administrative expense for the nine months ended March 31, 2003 was $643,193. Selling, general and administrative expense for the nine months ended March 31, 2004 was $2,337,298. 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 a $600,000 accrual for bonus compensation paid to Verdi Consulting and 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. 29 COMPENSATORY ELEMENT OF STOCK ISSUANCES. Compensatory element of stock issuances decreased during the quarter ended March 31, 2004 by $472,049 to $1,004,419, from the comparable period for 2003. During the nine months ended March 31, 2003 we had $1,480,468 charges for compensatory element of stock issuances. Compensatory element of stock issuances for selling, general and administrative fees for the nine months ended March 31, 2004 was $2,543,561. 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 increased to $119,232 for the quarter ended March 31, 2004, from $28,334 for the comparable period of 2003. Interest expense for the nine months ended March 31, 2003 was $198,120. Interest and financing expense for the nine months ended March 31, 2004 was $266,960. Interest and financing expense was from our loan payable to Bay View Capital, LLC, and other notes payable. The loan to Bay View Capital was paid in full in April of 2004. NET LOSS. Our net loss for the three months ended March 31, 2004 was $3,137,651. Our net loss for the same quarter in 2003 was $1,777,527. Net loss for the nine months ended March 31, 2003 was $2,093,212. For the nine months ended March 31, 2004, we incurred a net loss of $4,876,796. This net loss was primarily due to the increase in selling, general, and administrative expense, and compensatory element of stock issuances for selling, general and administrative fees for the nine months ended March 31, 2004. PREFERRED STOCK DIVIDENDS. Our Series C Preferred Stock accrues dividends at a stated rate of five percent (5%) per year on the sum of the liquidation preference and any accrued and unpaid dividends. Accrued stated dividends for the three months ended March 31, 2004 decreased to $55,782, from $65,018 for the comparable quarter of 2003. Accrued stated dividends for the Series C Preferred Stock for the nine months ended March 31, 2004 and 2003 totaled $186,322 and $81,007, respectively. Our Series C and Series D Preferred Stock accumulate deemed dividends which are non-cash charges for the beneficial conversion features of such securities Deemed dividends related to our Series C and Series D Preferred Stock were $1,044,250 and $1,180,500 for the three months and nine months ended March 31, 2004, respectively. Deemed dividends for the comparable periods of 2003 were $272,502 and $320,882. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders for the quarter ended March 31, 2004 increased to $ $4,237,683 ($.50 per share) compared to a net loss applicable to common stockholders for the quarter ended March 31, 2003 of $2,115,047 ($.41 per share). Net loss applicable to common stockholders for the nine months ended March 31, 2004 was $6,243,618 ($.97 per share). Net loss applicable to common stockholders for the nine months ended March 31, 2003 was $2,495,101 ($.50 per share). LIQUIDITY AND CAPITAL RESOURCES During the nine months ended March 31, 2004, we experienced $2,360,283 of negative cash flow from operating activities. The negative cash flow was a result of a net loss of $4,876,796, an increase of accounts receivable of approximately $875,041, mitigated by non-cash charges of $3,181,731, and increased accounts payable and accrued expenses of $133,935. In addition, we experienced $934,170 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 and ASI. 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 $1,050,231 of that amount. We also raised an aggregate of $3,402,000 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. 30 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 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 nine months ended March 31, 2004, we incurred a net loss of $4,876,796 and had a working capital deficiency of $587,458. 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 January 1, 2004, we have raised an aggregate of $12,448,000 in new equity capital through private placements of our Series D Preferred Stock and common stock and warrants. At various times between March 31, 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, 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. 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 March 31, 2004, and the effect such obligations are expected to have on liquidity and cash flows in the future periods. CONTRACTED OBLIGATIONS LONG-TERM DEBT TERM LESS THAN 1 YEAR ------------------------------ -------------- -------------- Secured convertible note $ 479,169 $ 479,169(1) Note payable - BayView Capital 349,769 349,769(2) Insurance premium financing 20,069 20,069 Acquisition note 375,000 375,000 _________________________ (1) Converted to common stock April 2004. (2) Repaid out of private placements completed in April 2004. 31 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 nine months ended March 31, 2004, the U.S. Navy accounted for 81% of our total revenues and the Department of Homeland Security accounted for 14% of our total revenues. 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. 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. 32 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 report. The March 31, 2004 financial statements were prepared assuming that 50% of the excess of the purchase price over the net intangible assets ($3,000,000) was allocated to amortizable intangible assets and accordingly, amortization expense of $300,000 was included in the March 31, 2004 statement of operations. 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. ITEM 3. CONTROLS AND PROCEDURES. Our management, with the participation of our Chief Executive Officer and President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms. Based upon that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were reasonably effective. During the three month period ended March 31, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 33 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. The transactions discussed below reflect our 1-for-60 reverse stock split in October 2003. During the quarter ended March 31, 2004, the holder of Series C Convertible Preferred Stock converted 3,051 shares of Series C Convertible Preferred Stock together with accrued dividends of $201,679 into 3,422,043 shares of the Company's common stock. As of March 31, 2004, accumulated dividends of $137,360 were accrued for the Series C Preferred Stock. Subsequent to March 31, 2004, the holders of the Series C Convertible Preferred Stock converted all of the shares of Series C Convertible Preferred stock together with accrued dividends into 1,526,036 shares of Markland common stock. During the quarter ended March 31, 2004, the Company issued to various consultants 116,203 shares of its common stock for services rendered valued at $192,436. We issued these shares 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. Subsequent to March 31, 2004, a secured lender converted the principal amount of $500,000 and all accrued interest into 404,266 shares of Markland's common stock. 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 2,769 shares of our Series D Preferred Stock to an institutional investor. We issued these shares 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. 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. 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% - -------------------- 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. 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. Subsequent to March 31, 2004, the holders of Series D Convertible Preferred Stock converted 810 shares of Series D Convertible Preferred Stock into 604,839 shares of common stock. 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, with an exercise price of $1.00, 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, with an exercise price of $1.50, 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 redeemable warrants to purchase 7,098,750 shares of our common stock, with an exercise price of $1.50, for $5,679,000 to 34 accredited investors. We paid $533,140 and issued warrants to purchase 529,800 shares of common stock to finders in connection with these private placements. 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. We issued these shares in these private placements 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. 34 All the warrants issued in the three April private placements 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. 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. On April 20, 2004, we issued 300,000 shares of our common stock and warrants to purchase 50,000 shares of our common stock, with an exercise price of $1.00 to the investors in the April 2, 2004 private placement, and their counsel, in consideration for their consent to the May 3, 2004 private placement. We issued these shares 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 May 12, 2004, the Company entered into five-year compensation agreements with two of its top executives and one consultant. These agreements provide for the following remuneration: o Base annual remuneration of $300,000 each (an aggregate of $900,000) payable over the five-year period ending January 2, 2009; o Discretionary bonuses over the term of the agreement of up to 300% of the base remuneration; and o Conditional stock grants over the period commencing April 1, 2004 through January 2, 2008, based on defined performance criteria. The stock grants, if all earned, entitle each of the three executives to receive 7.5% of the Company's common stock on a fully diluted basis. These grants are earned according to the following schedule: Grant 1 2.5% April 1, 2004 Grant 2 1.0% July 1, 2004 Grant 3 1.0% October 1, 2004 Grant 4 1.0% January 2, 2005 Grant 5 1.0% January 2, 2006 Grant 6 0.5% January 2, 2007 Grant 7 0.5% January 2, 2008 The number of shares of common stock to be granted on each grant date is equal to the product of (a) the number of fully diluted shares outstanding at the grant date and (b) the stock percentage associated with that grant date. o In the event of a change in control of the Company during the period covered by the agreement, each executive/consultant will automatically be granted all remaining stock grants and will be due cash and expense compensation for the shorter of (i) three years from the date of the change in control, or (ii) until the end of the term of the agreement. A change in control is defined by the agreements as a change in the majority ownership of the equity of the company, or the resignation or termination of the majority of the board of directors within a two month period, or the replacement of the CEO or the President of the Company. 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB 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 SB-2 May 11, 2004 3.5 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 SB-2 May 11, 2004 4.2 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 SB-2 May 11, 2004 4.3 April 2, 2004 4.4 Form of Common Stock Purchase Warrant dated SB-2 May 11, 2004 4.4 April 16, 2004 4.5 Form of Common Stock Purchase Warrant dated SB-2 May 11, 2004 4.5 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 SB-2 May 11, 2004 4.9 Markland Technologies, Inc. and Commonwealth Acquisitions, Ltd., dated March 24, 2003. 4.10 Consulting Agreement by and between ECON SB-2 May 11, 2004 4.10 Investor Relations, Inc., dated January 18, 2003. 4.11 Consulting Agreement by and between SB-2 May 11, 2004 4.11 Markland Technologies, Inc. and Marketshare Recovery, Inc., dated October 29, 2003 36 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB FORM FILING DATE NO. - ---------- ------------------------------------------- ---------- ------- -------------------- --------- 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 SB-2 May 11, 2004 4.13 Technologies, Inc. and The Research Works, Inc., dated October 29, 2003 4.14 Employment Agreement by and between SB-2 May 11, 2004 4.14 Markland Technologies, Inc. and Jo-Ann Nichols, dated October 27, 2003. 10.1 Securities Purchase Agreement, between SB-2 May 11, 2004 10.1 Markland Technologies, Inc., Montana View Corporation, Elite Properties, Ltd., and Sparrow Ventures, Inc., dated April 2, 2004 10.2 Securities Purchase Agreement by and among SB-2 May 11, 2004 10.2 Markland Technologies, Inc. and the Investors named therein, dated April 16, 2004 10.3 Securities Purchase Agreement by and SB-2 May 11, 2004 10.3 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 SB-2 May 11, 2004 10.6 Technologies, Inc. and George Yang, dated September 30, 2003. 10.7 Guaranty by Markland Technologies, Inc. in SB-2 May 11, 2004 10.7 favor of George Yang, dated September 30, 2003. 10.8 Amendment and Payment Extension Agreement SB-2 May 11, 2004 10.8 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 SB-2 May 11, 2004 10.11 Technology, Inc. and Bay View Capital LLC, dated September 30, 2003. 10.12 Security Agreement by and between Markland SB-2 May 11, 2004 10.12 Technologies, Inc. and Bay View Capital LLC. 10.13 Sublicense Agreement by and between SB-2 May 11, 2004 10.13 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2004. 10.14 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, 10.15 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.4 by and among Markland Technologies, Inc., Market LLC, and James LLC. 10.16 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. 10.17 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. 37 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB FORM FILING DATE NO. - ---------- ------------------------------------------- ---------- ------- -------------------- --------- 10.18 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. 10.19 Letter from Sherb & Co., LLP to the 8-K March 17, 2003 16.1 Commission, datedMarch 12, 2003, concerning change in certifying accountant. 10.20 Technology Purchase Agreement between 8-K April 4, 2003 10.1 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2003. 10.21 Exchange Agreement, dated March 27, 2003, 8-K April 4, 2003 10.2 by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.22 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.12 27, 2003, by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 Nonexclusive License Agreement by and SB-2 May 11, 2004 10.31 Science & Technology Research, Inc. and the Secretary of the Day, dated 11/4/03 10.29 International Distribution Agreement SB-2 May 11, 2004 10.32 between Markland Technologies, Inc. and Tradeways 10.30 Science & Technology Research contract SB-2 May 11, 2004 10.33 Naval Surface Warfare Center, dated January 31, 2003 10.31 Subcontract Agreement by and between ERCO SB-2 May 11, 2004 10.34 Systems, Inc. and computer sciences corporation ,dated December 8, 2003 10.32 Employment Agreement by and between X Markland Technologies, Inc. and Robert Tarini, dated May 12, 2004 10.33 Employment Agreement by and between X Markland Technologies, Inc. and Kenneth Ducey, Jr., dated May 12, 2004 10.34 Strategic Operations Contractor Agreement X by and between Markland Technologies, Inc. and Asset Growth Company, dated May 12, 2004 10.35 Consulting Agreement by and between X Markland Technologies, Inc. and Chad A. Verdi, dated May 12, 2004 31.1 Certification by CFO of Periodic Report X Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 31.2 Certification by CFO of Periodic Report X Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 32.1 Certification by CEO and CFO of Periodic X Report Pursuant to 18 U.S.C. Section 1350
38 (b) REPORTS ON FORM 8-K On February 24, 2004, the Company filed a Current Report on Form 8-K, reporting Item 12 and containing financial information for the quarter ended December 31, 2003 and forward-looking statements, all as presented in a press release of February 24, 2004. On March 23, 2004, the Company filed a Current Report on Form 8-K/A, reporting Item 7 and containing certain audited and pro-forma financial information relating to its acquisition of Science and Technology Research, Inc. in 2003. 39 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKLAND TECHNOLOGIES, INC. Date: May 24, 2004 By: /s/ Robert Tarini ------------------------------- ROBERT TARINI CHAIRMAN, DIRECTOR, AND CHIEF EXECUTIVE OFFICER 40 EXHIBIT TABLE
INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB 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 SB-2 May 11, 2004 3.5 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 SB-2 May 11, 2004 4.2 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 SB-2 May 11, 2004 4.3 April 2, 2004 4.4 Form of Common Stock Purchase Warrant dated SB-2 May 11, 2004 4.4 April 16, 2004 4.5 Form of Common Stock Purchase Warrant dated SB-2 May 11, 2004 4.5 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 SB-2 May 11, 2004 4.9 Markland Technologies, Inc. and Commonwealth Acquisitions, Ltd., dated March 24, 2003. 4.10 Consulting Agreement by and between ECON SB-2 May 11, 2004 4.10 Investor Relations, Inc., dated January 18, 2003. 4.11 Consulting Agreement by and between SB-2 May 11, 2004 4.11 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 SB-2 May 11, 2004 4.13 Technologies, Inc. and The Research Works, Inc., dated October 29, 2003 INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB FORM FILING DATE NO. - ---------- ------------------------------------------- ---------- ------- -------------------- --------- 4.14 Employment Agreement by and between SB-2 May 11, 2004 4.14 Markland Technologies, Inc. and Jo-Ann Nichols, dated October 27, 2003. 10.1 Securities Purchase Agreement, between SB-2 May 11, 2004 10.1 Markland Technologies, Inc., Montana View Corporation, Elite Properties, Ltd., and Sparrow Ventures, Inc., dated April 2, 2004 10.2 Securities Purchase Agreement by and among SB-2 May 11, 2004 10.2 Markland Technologies, Inc. and the Investors named therein, dated April 16, 2004 10.3 Securities Purchase Agreement by and SB-2 May 11, 2004 10.3 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 SB-2 May 11, 2004 10.6 Technologies, Inc. and George Yang, dated September 30, 2003. 10.7 Guaranty by Markland Technologies, Inc. in SB-2 May 11, 2004 10.7 favor of George Yang, dated September 30, 2003. 10.8 Amendment and Payment Extension Agreement SB-2 May 11, 2004 10.8 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 SB-2 May 11, 2004 10.11 Technology, Inc. and Bay View Capital LLC, dated September 30, 2003. 10.12 Security Agreement by and between Markland SB-2 May 11, 2004 10.12 Technologies, Inc. and Bay View Capital LLC. 10.13 Sublicense Agreement by and between SB-2 May 11, 2004 10.13 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2004. 10.14 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, 10.15 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.4 by and among Markland Technologies, Inc., Market LLC, and James LLC. 10.16 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. 10.17 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. 10.18 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. INCORPORATED BY REFERENCE FILED WITH -------------------------------------------- EXHIBIT THIS FORM EXHIBIT NO. DESCRIPTION 10-QSB FORM FILING DATE NO. - ---------- ------------------------------------------- ---------- ------- -------------------- --------- 10.19 Letter from Sherb & Co., LLP to the 8-K March 17, 2003 16.1 Commission, datedMarch 12, 2003, concerning change in certifying accountant. 10.20 Technology Purchase Agreement between 8-K April 4, 2003 10.1 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2003. 10.21 Exchange Agreement, dated March 27, 2003, 8-K April 4, 2003 10.2 by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.22 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.12 27, 2003, by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 Nonexclusive License Agreement by and SB-2 May 11, 2004 10.31 Science & Technology Research, Inc. and the Secretary of the Day, dated 11/4/03 10.29 International Distribution Agreement SB-2 May 11, 2004 10.32 between Markland Technologies, Inc. and Tradeways 10.30 Science & Technology Research contract SB-2 May 11, 2004 10.33 Naval Surface Warfare Center, dated January 31, 2003 10.31 Subcontract Agreement by and between ERCO SB-2 May 11, 2004 10.34 Systems, Inc. and computer sciences corporation, dated December 8, 2003 10.32 Employment Agreement by and between X Markland Technologies, Inc. and Robert Tarini, dated May 12, 2004 10.33 Employment Agreement by and between X Markland Technologies, Inc. and Kenneth Ducey, Jr., dated May 12, 2004 10.34 Strategic Operations Contractor Agreement X by and between Markland Technologies, Inc. and Asset Growth Company, dated May 12, 2004 10.35 Consulting Agreement by and between X Markland Technologies, Inc. and Chad A. Verdi, dated May 12, 2004 31.1 Certification by CFO of Periodic Report X Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 31.2 Certification by CFO of Periodic Report X Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 32.1 Certification by CEO and CFO of Periodic X Report Pursuant to 18 U.S.C. Section 1350
EX-10.32 2 markland_10qex-tarini.txt EXHIBIT 10.32 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "AGREEMENT") dated as of May 12, 2004, and with an effective date of January 1, 2004 ("EFFECTIVE DATE") between Markland Technology, Inc. (including, as the context may require, its subsidiaries, the "COMPANY"), a Florida corporation, and Robert Tarini, (the "EMPLOYEE"), located in Richmond, Rhode Island, 02892. WHEREAS, the Company and Employee had previously entered into an employment agreement dated January 1, 2003 (the "PRIOR AGREEMENT"); and 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 terms and conditions; and WHEREAS, to accomplish the foregoing, the Company and Employee wish to supplant the prior Agreement with this Agreement retroactive from the Effective Date. 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. TERMINATION OF PRIOR AGREEMENT; CURRENT ENGAGEMENT -The Prior Agreement is hereby deemed performed through the Effective Date and is hereby terminated as of the Effective Date. The Company hereby employs the Employee, and the Employee accepts such engagement and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. TERM - Unless terminated at an earlier date in accordance with Section 8 of this Agreement or otherwise extended by agreement of the parties, the term of the Employee's engagement hereunder shall be for a period of five years, commencing on January 2, 2004. The period of engagement may be extended by written agreement or e-mail between the parties, provided that certain provisions relating to compensation may change upon commencement of any extension hereto. 3. POSITION AND DUTIES (a) SERVICE WITH COMPANY - During the term of the Employee's engagement, the Employee agrees to perform such reasonable services as the Board of Directors of the Company (the "BOARD") shall assign to Employee from time to time. The Employee shall commence as a Director and an officer of the Company with the title of Chairman and Chief Executive Officer. (b) PERFORMANCE OF DUTIES - The Employee agrees to serve the Company faithfully and to the best of Employee's ability and to devote a reasonable amount of time, attention and efforts to the business and affairs of the Company during Employee's engagement by the Company. The Employee hereby confirms that Employee is under no contractual commitments inconsistent with Employee's obligations set forth in this Agreement and that during the term of this Agreement, Employee will not render or perform services for any other corporation, firm, entity or person, which are inconsistent with the provisions of this Agreement. While Employee remains 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 Employee's obligations under this Agreement. 4. COMPENSATION (a) BASE CONSIDERATION - As compensation for services to be rendered by the Employee under this Agreement, the Company shall pay to the Employee during the term of the contract a base payment of $25,000.00 gross per month (total of $300,000 per year, the "ANNUAL SALARY"), which payment shall be paid in arrears in accordance with the Company's normal procedures and policies. (b) INCENTIVE COMPENSATION - In addition to the base payment, the Employee shall be eligible to participate in any bonus or incentive compensation plans that may be established by the Board from time to time applicable to the Employee's services. (c) EXPENSES- The Company will pay or reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred by Employee in the performance of Employee's duties under this Agreement, subject to the Company's normal policies for expense verification. In addition, Company agrees to provide Employee with up to $5,000 monthly for auto expense, business office expense, medical and life insurance expenses. (d) INITIAL GRANT OF STOCK - The company agrees to CONDITIONALLY grant to Employee shares of common stock in the Company (the "COMMON STOCK") at seven different periods: (i) the first ("GRANT ONE") being upon the conclusion of a 90 day period following the Effective Date, (ii) the second ("GRANT TWO") being upon the conclusion of a 180 day period following the Effective Date, (iii) the third ("GRANT THREE") being upon the conclusion of a 210 day period following the Effective Date, (iv) the fourth ("GRANT FOUR") being upon conclusion of a 1 year period following the Effective Date , the fifth ("GRANT FIVE") being upon conclusion of a 2 year period following the Effective Date, the sixth ("GRANT SIX") being upon conclusion of a 3 year period following the Effective Date and the seventh the ("GRANT SEVEN") being upon conclusion of a 4 year period following the Effective Date (Grant One, Grant Two, Grant Three, Grant Four, Grant Five, Grant Six and Grant Seven may be referred to as "GRANT" or "GRANTS"). Each Grant shall be equivalent to a "STOCK PERCENTAGE" of the Common Stock Equity of the Company (defined below) calculated as of the "FINAL DATE" associated with that Grant, as follows: -2- -------------------- ----------------------- ------------------------------ GRANT STOCK PERCENTAGE FINAL DATE -------------------- ----------------------- ------------------------------ Grant One 2.5 April 1, 2004 -------------------- ----------------------- ------------------------------ Grant Two 1.00% July 1, 2004 -------------------- ----------------------- ------------------------------ Grant Three .1.00% Oct 1, 2004 -------------------- ----------------------- ------------------------------ Grant Four 1.0% January 2, 2005 -------------------- ----------------------- ------------------------------ Grant Five 1% January 2, 2006 Grant Six .5% Janaury 2, 2007 Grant Seven .5% Janaury 2, 2008 -------------------- ----------------------- ------------------------------ The Grant will be earned based upon PERFORMANCE CRITERIA achieved by the Company as defined below. AT ANY TIME AFTER THE COMPANY HAS IMPLEMENTED AN EFFECTIVE ESOP PROGRAM THE EMPLOYEE MAY OPT TO ACCEPT OPTION GRANTS IN LIEU OF RESTRICTED COMMON STOCK GRANTS ON A ONE FOR ONE BASIS. THE EMPLOYEE MAY DO SO AT EACH INDIVIDUAL GRANT DATE. The number of shares of Common Stock reflected by the Stock Percentage ("Employee's Shares") shall be calculated against all issued and outstanding capital stock or other equity or conversion right in the Company inclusive of warrants (in aggregate the "Company Equity"). With respect to any convertible stock of the Company, including without limitation preferred stock classes C and D, and any other conversion right, the calculation determining the number of Employee's Shares shall be made as if each such conversion had taken place in accordance with the conversion rights associated with such security, (without regard to limitations on the number of shares that may be converted in a single instance or in a defined period), on the Final Date ("Imputed Conversion"). The price of the Common Stock to be used for calculating the Imputed Conversion shall be the average price of the Common Stock for the 10 business days prior to the Final Date reflected on the NASD/OTCBB Market or if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded, including the pink sheets. With respect to each Grant the final calculation of the total number of Employee's Shares shall be made within fifteen days of the Final Date, in accordance with the following formula ("Formula"): Total # Employee's Shares = applicable Stock Percentage x the Equity The Equity = Company Equity outstanding as of the Final Date + number of Common Shares resulting from Imputed Conversion -3- Each Grant is CONDITIONED upon the Company achieving its year-end performance objectives for revenue and profitability, based on a plan to be ratified by the Board of the Company during regularly scheduled meetings for each of the applicable years. For example, whether Grant One occurs will be measured against the plan set forth by the Board in the first quarter of year 2004 for year 2004. The subject shares issued via each share grant are non transferable and subject to forfeiture. (e) Registration - All Employee's Shares and Accrued Shares (collectively hereafter referred to as "Employee's Shares") may be unregistered, unless registered prior to issuance. Such unregistered shares shall bear the following legend. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. Employee's Shares shall not contain the legend set forth above or any other restrictive legend if all of the following conditions are satisfied: (i) there is an effective Registration Statement under the Securities Act at such time, (ii) the Employee has delivered a certificate to the Company to the effect that the Employee will comply with all applicable prospectus delivery requirements under the Securities Act in any sale or transfer of the Employee's Shares by the Employee, and (iii) the Employee has delivered to the Company an opinion of counsel (acceptable to the Company) that such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide the Employee, upon request, with a certificate or certificates representing Employee's Shares, free from such legend at such time as such legend is no longer required hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. The Company covenants that it will take such further action as any holder of Employee Shares may reasonably request, all to the extent required from time to time to enable such holder to sell the Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion of counsel to the Company pursuant in a written letter to such effect, addressed and acceptable to the Company's transfer agent for the benefit of and enforceable by the Employee or successor in interest thereto. Upon the request of any such holder, the Company shall deliver to such holder a written certification of a duly authorized officer as to whether it has complied with such requirements. -4- (f) REGISTRATION RIGHTS - In the event of a registration of Company common stock following the Final Date, Employee shall have the right to participate in such registration at Company's expense. Additionally, for a period of five years from the date of this Agreement, Employee shall have preemptive rights in the event of any potentially dilutive event (excluding exercise of any conversion rights accounted for in the Imputed Conversion in Paragraph 4 (d) above), such that Employee may, within a reasonable time, elect to participate in such dilutive event under the terms thereof to maintain Employee's then current percentage interest in the Company. (g) BONUS: Employee shall be eligible to receive a bonus as may be payable pursuant to the performance criteria as described below in Section (h). The Bonus shall be based on 300% of the Employee's annual salary. (h) PERFORMANCE CRITERIA: For any quarter of the company's operation the employee may be eligible for a portion of his bonus if the company achieves revenue or revenue and profit milestones set forth by the Board in its periodic meetings. For the first year of this Agreement, the milestone shall be $ 1.0 million in each quarter and $6 million for the calendar year 2004. (i) CHANGE OF CONTROL - In the event of a change of control of the Company during the period covered by this Agreement, all stock grants listed above shall be granted immediately and all cash and expense compensation due for the earlier of 1) three years from the date of change of control, or 2) until the end of the Term of this Agreement, shall be placed in escrow in an account established by the company with the designated escrow agent. The designated escrow agent shall be Mr. David Broadwin Esq. of Foley & Hoag of Boston, MA. A change of control will be defined as a change in the majority ownership of the Equity of the Company, or the resignation or termination of the majority of the directors on the Board within a 2 month period or the replacement of either the CEO or President of the Company. 5. CONFIDENTIAL INFORMATION - Except as permitted or directed by the Company's Board of Directors, during the term of Employee's engagement 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 Employee's engagement by the Company (including engagement by the Company or any affiliated companies prior to the date of this Agreement) whether developed by Employee self/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 Employee's engagement, 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 and publicly available 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. -5- 6. VENTURES - If, during the term of Employee's engagement 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, unless prior written consent from the Company is obtained. Except as approved by the Company's Board of Directors, 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. The Employee shall not enter into any arrangement through which Employee acquires or may acquire any interest, direct or indirect, in any vendor or customer of the Company other than Employee. 7. PATENT AND RELATED MATTERS; DISCLOSURE AND ASSIGNMENT - The Employee will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Employee, either solely or in collaboration with others, during the term of this Agreement, whether or not during regular working hours, relating either directly or significantly and indirectly to the business, products, practices or techniques of the Company ("Developments"). The Employee, to the extent that Employee has the legal right to do so, hereby acknowledges that any and all of the Developments are the property of the Company and agrees to assign and hereby assigns to the Company any and all of the Employee's right, title and interest in and to any and all of the Developments ("Assignment"). During the period commencing upon the day after the Employee's last day performing services for the Company and ending one year after termination of the Employee's engagement with the Company, at the reasonable request of the Company, the Employee will confer with the Company and its representatives for the purpose of disclosing all Developments to the Company, provided that such conference is at the Company's expense and Employee is compensated at no less that a rate of $250 per hour for Employee's time. (a) LIMITATION ON SECTION 7(a) - The provisions of Section 7 shall not apply to any Development meeting the following conditions: (i) such Development was developed entirely on the Employee's own time without the use of any Company equipment, supplies, facility or trade secret information; and (ii) such Development does not relate directly or significantly to the business of the Company to the Company's actual or demonstrably anticipated research or development; or result from any work performed by the Employee for the Company. (b) COPYRIGHTABLE MATERIAL - All right, title and interest in all copyrightable material that the Employee shall conceive or originate, either individually or jointly with others, and which arise out of the performance of this Agreement, will be the property of the Company and are by this Agreement assigned to the Company along with -6- ownership of any and all copyrights in the copyrightable material. Upon request and without further compensation therefor, but at no expense to the Employee, the Employee shall execute all papers and perform all other acts necessary to assist the Company to obtain and register copyrights on such materials in any and all countries, except that Employee shall be compensated at no less that a rate of $250 per hour for Employee's time for compliance with this provision following termination or expiration of this Agreement. Where applicable, works of authorship created by the Employee for the Company in performing Employee's responsibilities under this Agreement shall be considered "WORKS MADE FOR HIRE," as defined in the U.S. Copyright Act. To the extent not considered as work made for hire, such works will be considered assigned to the Company under the Assignment provision of this Section 7. (c) KNOW-HOW AND TRADE SECRETS - All know-how and trade secret information conceived or originated by the Employee that arises out of the performance of Employee's obligations or responsibilities under this Agreement or any related material or information shall be the property of the Company, and all rights therein are by this Agreement assigned to the Company. 8. TERMINATION OF ENGAGEMENT; (a) GROUNDS FOR TERMINATION - The Employee's engagement shall terminate prior to the expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time: (i) The Employee dies, (ii) The Board elects to terminate this Agreement for "cause" and notifies the Employee in writing of such election, (iii) The Board elects to terminate this Agreement without "cause" and notifies the Employee in writing of such election, (iv) The Employee elects to terminate this Agreement and notifies the Company in writing of such election, or (v) The Employee elects to terminate this Agreement for "good reason" (as defined below) and notifies the Company in writing of such election. If this Agreement is terminated pursuant to clause (i) or (ii) of this Section 8(a), such termination shall be effective immediately. If this Agreement is terminated pursuant to clause (iii), (iv), or (v) of this Section 8(a), 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 Section 5, 6 or 7 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 Employee's engagement 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 engagement. -7- (d) SURRENDER OF RECORDS AND PROPERTY- Upon termination of Employee's engagement with the Company, the Employee shall deliver promptly to the Company all records, manuals, books, 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 Employee's possession or under Employee's control. (e) PAYMENT CONTINUATION - If the Employee's engagement by the Company is terminated by the Company pursuant to clause (iii) of Section 8(a) or by Employee for Good Reason pursuant to clause (v) of Section 8(a), the Company shall continue to pay to the Employee Employee's base payment (less any payments received by the Employee from any disability income insurance policy provided to Employee by the Company) and shall continue to provide health insurance benefits for the Employee through the earlier of (a) the date that the Employee has obtained other full-time engagement, or (b) three (3) months from the date of termination of engagement. If this Agreement is terminated pursuant to clauses (i), (ii) or (iv) of Section 8(a), the Employee's right to base payment and benefits shall immediately terminate, except as may otherwise be required by applicable law. (f) "GOOD REASON" DEFINED - Good Reason shall mean: (i) the assignment of the Employee to any duties inconsistent in any respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii)any termination or reduction of a material benefit under any benefits plan in which the Employee participates unless (1) there is substituted a comparable benefit that is economically substantially equivalent to the terminated or reduced benefit prior to such termination or reduction or (2) benefits under such plan are terminated or reduced with respect to all Employees previously granted benefits thereunder; (iii)without limiting the generality of the foregoing, any material breach of this Agreement by the Company or any successor thereto. 9. 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 Employee is or was a director, officer, or member of a committee of the Board 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, or resulting from any of Employee's actions in any of the foregoing roles Employee shall be indemnified by the Company and the Company shall advance Employee's 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 By Laws as incurred and will start prior to any judicial preceding. The Company further covenants not to amend or repeal any provisions of the Certificate of Incorporation or Bylaws of the Company in any manner which would adversely affect the indemnification or exculpatory provisions -8- contained therein as they pertain to acts. The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each indemnified party and Employee's or her heirs and representatives. If the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to such Person, then and in each such case, proper provisions shall be made so that the successors and assigns of the Company shall assume all of the obligations set forth in this section 9. 10. 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 (d), 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 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. -9- (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: Ken Ducey, Jr. Facsimile: 203-431-8309 Attn: President #207 - 54 Danbury Road Ridgefield, CT 06877 If to the Employee: Robert Tarini 46 Bell School House Road Richmond, RI 02892 Any party may change the address set forth above by notice to the 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 prevailing party shall be entitled to recover its reasonable attorneys' fees and costs in any such action. -10- (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. (l) 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. Robert Tarini By: Ken Ducey, Jr. President - ----------------------------------- ----------------------------------- Date: Date: -11- EX-10.33 3 markland_10qex-ducey.txt EXHIBIT 10.33 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "AGREEMENT") dated as of January 2, 2004, ("EFFECTIVE DATE") between Markland Technology, Inc. (including, as the context may require, its subsidiaries, the "COMPANY"), a Florida corporation, and Kenneth Ducey Jr., (the "EMPLOYEE"), located in Ridgefield, CT 06877. WHEREAS, the Company and Employee had previously entered into an employment agreement dated January 1, 2003 (the "PRIOR AGREEMENT"); and 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 terms and conditions; and WHEREAS, to accomplish the foregoing, the Company and Employee wish to supplant the prior Agreement with this Agreement from the Effective Date. 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. Termination of Prior Agreement; Current ENGAGEMENT -The Prior Agreement is hereby deemed performed through the Effective Date and is hereby terminated as of the Effective Date. The Company hereby employs the Employee, and the Employee accepts such engagement and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. TERM - Unless terminated at an earlier date in accordance with Section 8 of this Agreement or otherwise extended by agreement of the parties, the term of the Employee's engagement hereunder shall be for a period of five years, commencing on January 2, 2004. The period of engagement may be extended by written agreement or e-mail between the parties, provided that certain provisions relating to compensation may change upon commencement of any extension hereto. 3. POSITION AND DUTIES (a) SERVICE WITH COMPANY - During the term of the Employee's engagement, the Employee agrees to perform such reasonable services as the Board of Directors of the Company (the "BOARD") shall assign to Employee from time to time. The Employee shall commence as a Director and an officer of the Company with the title of President/Chief Financial Officer. (b) PERFORMANCE OF DUTIES - The Employee agrees to serve the Company faithfully and to the best of Employee's ability and to devote a reasonable amount of time, attention and efforts to the business and affairs of the Company during Employee's engagement by the Company. The Employee hereby confirms that Employee is under no contractual commitments inconsistent with Employee's obligations set forth in this Agreement and that during the term of this Agreement, Employee will not render or perform services for any other corporation, firm, entity or person, which are inconsistent with the provisions of this Agreement. While Employee remains 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 Employee's obligations under this Agreement. 4. COMPENSATION (a) BASE CONSIDERATION - As compensation for services to be rendered by the Employee under this Agreement, the Company shall pay to the Employee during the term of the contract a base payment of $15,000.00 gross per month (total of $180,000 per year, the "ANNUAL SALARY"), which payment shall be paid in arrears in accordance with the Company's normal procedures and policies. (b) INCENTIVE COMPENSATION - In addition to the base payment, the Employee shall be eligible to participate in any bonus or incentive compensation plans that may be established by the Board from time to time applicable to the Employee's services. (c) EXPENSES- The Company will pay or reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred by Employee in the performance of Employee's duties under this Agreement, including initiation fees for membership in a local club, subject to the Company's normal policies for expense verification. In addition, Company agrees to provide Employee with up to $5,000 monthly for auto expense, business office expense, and life insurance expenses. (d) INITIAL GRANT OF STOCK - The company agrees to CONDITIONALLY grant to Employee shares of common stock in the Company (the "COMMON STOCK") at seven different periods: (i) the first ("GRANT ONE") being upon the conclusion of a 90 day period following the Effective Date, (ii) the second ("GRANT TWO") being upon the conclusion of a 180 day period following the Effective Date, (iii) the third ("GRANT THREE") being upon the conclusion of a 210 day period following the Effective Date, (iv) the fourth ("GRANT FOUR") being upon conclusion of a 1 year period following the Effective Date and the fifth ("GRANT FIVE") being upon conclusion of a 2 year period following the Effective Date, the sixth ("GRANT SIX") being upon conclusion of a 3 year period following the Effective Date and the seventh the ("GRANT SEVEN") being upon conclusion of a 4 year period following the Effective Date (Grant One, Grant Two, Grant Three, Grant Four, Grant Five, Grant Six and Grant Seven may be referred to as "GRANT" or "GRANTS"). Each Grant shall be equivalent to a "STOCK PERCENTAGE" of the Company Equity (defined below) calculated as of the "FINAL DATE" associated with that Grant, as follows: -2- - -------------------------- ------------------------- --------------------------- GRANT STOCK PERCENTAGE FINAL DATE - -------------------------- ------------------------- --------------------------- Grant One .5% April 1, 2004 - -------------------------- ------------------------- --------------------------- Grant Two .25% July 1, 2004 - -------------------------- ------------------------- --------------------------- Grant Three .25% October 1, 2004 - -------------------------- ------------------------- --------------------------- Grant Four .25% January 3, 2005 - -------------------------- ------------------------- --------------------------- Grant Five .25% January 2, 2006 - -------------------------- ------------------------- --------------------------- Grant Six .25% January 1, 2007 - -------------------------- ------------------------- --------------------------- Grant Seven .25% January 1, 2008 - -------------------------- ------------------------- --------------------------- The Grant will be earned based upon PERFORMANCE CRITERIA achieved by the Company as defined below. At any time after the Company has implemented an effective ESOP program the Employee may opt to accept option grants in lieu of restricted Common Stock Grants of an equivalent value to the Common Stock Grant. The Employee may do so at each individual Grant date. The number of shares of Common Stock reflected by the Stock Percentage ("Employee's Shares") shall be calculated against all issued and outstanding capital stock or other equity or conversion right in the Company inclusive of warrants (in aggregate the "Company Equity"). With respect to any convertible stock of the Company, including without limitation preferred stock classes C and D, and any other conversion right, the calculation determining the number of Employee's Shares shall be made as if each such conversion had taken place in accordance with the conversion rights associated with such security, (without regard to limitations on the number of shares that may be converted in a single instance or in a defined period), on the Final Date ("Imputed Conversion"). The price of the Common Stock to be used for calculating the Imputed Conversion shall be the average price of the Common Stock for the 10 business days prior to the Final Date reflected on the NASD/OTCBB Market or if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded, including the pink sheets. With respect to each Grant the final calculation of the total number of Employee's Shares shall be made within fifteen days of the Final Date, in accordance with the following formula ("Formula"): Total # Employee's Shares = applicable Stock Percentage x the Company Equity The Company Equity = total Common Shares outstanding including options and warrants as of the Final Date + number of Common Shares resulting from Imputed Conversion Each Grant is CONDITIONED upon the Company achieving its year-end performance objectives for revenue and profitability, based on a plan to be ratified by the Board of the Company during regularly scheduled meetings for each of the applicable years. For example, whether Grant One occurs will be measured against the plan set forth by the Board in the first quarter of year 2004 for year 2004. -3- The subject shares issued via each share grant are non transferable and subject to forfeiture. (e) Registration - All Employee's Shares and Accrued Shares (collectively hereafter referred to as "Employee's Shares") may be unregistered, unless registered prior to issuance. Such unregistered shares shall bear the following legend. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. Employee's Shares shall not contain the legend set forth above or any other restrictive legend if all of the following conditions are satisfied: (i) there is an effective Registration Statement under the Securities Act at such time, (ii) the Employee has delivered a certificate to the Company to the effect that the Employee will comply with all applicable prospectus delivery requirements under the Securities Act in any sale or transfer of the Employee's Shares by the Employee, and (iii) the Employee has delivered to the Company an opinion of counsel (acceptable to the Company) that such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide the Employee, upon request, with a certificate or certificates representing Employee's Shares, free from such legend at such time as such legend is no longer required hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. The Company covenants that it will take such further action as any holder of Employee Shares may reasonably request, all to the extent required from time to time to enable such holder to sell the Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion of counsel to the Company pursuant in a written letter to such effect, addressed and acceptable to the Company's transfer agent for the benefit of and enforceable by the Employee or successor in interest thereto. Upon the request of any such holder, the Company shall deliver to such holder a written certification of a duly authorized officer as to whether it has complied with such requirements. (f) REGISTRATION RIGHTS - In the event of a registration of Company common stock following the Final Date, Employee shall have the right to participate in such registration at Company's expense. Additionally, for a period of five years from the date of this Agreement, Employee shall have preemptive rights in the event of any potentially dilutive event (excluding exercise of any conversion rights accounted for in the Imputed Conversion in Paragraph 4 (d) above), such that Employee may, within a reasonable time, elect to participate in such dilutive event under the terms thereof to maintain Employee's then current percentage interest in the Company. -4- (g) BONUS: Employee shall be eligible to receive a bonus as may be payable pursuant to the performance criteria as described below in Section (h). The Bonus shall be based on 300% of the Employee's Annual Salary. (h) PERFORMANCE CRITERIA: For any quarter of the company's operation the employee may be eligible for a portion of his bonus if the company achieves revenue or revenue and profit milestones set forth by the Board in its periodic meetings. For the first year of this Agreement, the milestone shall be $1 million in each quarter and $6 million for the calendar year 2004. (i) CHANGE OF CONTROL - In the event of a change of control of the Company during the period covered by this Agreement, all stock grants listed above shall be granted immediately and all cash and expense compensation due for the earlier of 1) three years from the date of change of control, or 2) until the end of the Term of this Agreement, shall be placed in escrow in an account established by the Company with the designated escrow agent. The designated escrow agent shall be Mr. David Broadwin Esq. of Foley & Hoag of Boston, MA. A change of control will be defined as a change in the majority ownership of the Company Equity of the Company, or the resignation or termination of the majority of the directors on the Board within a 2 month period or the replacement of either the CEO, President, or CFO of the Company. 5. CONFIDENTIAL INFORMATION - Except as permitted or directed by the Company's Board of Directors, during the term of Employee's engagement 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 Employee's engagement by the Company (including engagement by the Company or any affiliated companies prior to the date of this Agreement) whether developed by Employee self/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 Employee's engagement, 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 and publicly available 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. -5- 6. VENTURES - If, during the term of Employee's engagement 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, unless prior written consent from the Company is obtained. Except as approved by the Company's Board of Directors, 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. The Employee shall not enter into any arrangement through which Employee acquires or may acquire any interest, direct or indirect, in any vendor or customer of the Company other than Employee. This Section 6 does not include any compensation received by Employee through his involvement with Asset Growth Partners. 7. Patent and Related Matters; Disclosure and Assignment - The Employee will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Employee, either solely or in collaboration with others, during the term of this Agreement, whether or not during regular working hours, relating either directly or significantly and indirectly to the business, products, practices or techniques of the Company ("Developments"). The Employee, to the extent that Employee has the legal right to do so, hereby acknowledges that any and all of the Developments are the property of the Company and agrees to assign and hereby assigns to the Company any and all of the Employee's right, title and interest in and to any and all of the Developments ("Assignment"). During the period commencing upon the day after the Employee's last day performing services for the Company and ending one year after termination of the Employee's engagement with the Company, at the reasonable request of the Company, the Employee will confer with the Company and its representatives for the purpose of disclosing all Developments to the Company, provided that such conference is at the Company's expense and Employee is compensated at no less that a rate of $250 per hour for Employee's time. (a) LIMITATION ON SECTION 7(a) - The provisions of Section 7 shall not apply to any Development meeting the following conditions: (i) such Development was developed entirely on the Employee's own time without the use of any Company equipment, supplies, facility or trade secret information; and (ii) such Development does not relate directly or significantly to the business of the Company to the Company's actual or demonstrably anticipated research or development; or result from any work performed by the Employee for the Company. (b) COPYRIGHTABLE MATERIAL - All right, title and interest in all copyrightable material that the Employee shall conceive or originate, either individually or jointly with others, and which arise out of the performance of this Agreement, will be the property of the Company and are by this Agreement assigned to the Company along with ownership of any and all copyrights in the copyrightable material. Upon request and without further compensation therefor, but at no expense to the Employee, the Employee shall execute all papers and -6- perform all other acts necessary to assist the Company to obtain and register copyrights on such materials in any and all countries, except that Employee shall be compensated at no less that a rate of $250 per hour for Employee's time for compliance with this provision following termination or expiration of this Agreement. Where applicable, works of authorship created by the Employee for the Company in performing Employee's responsibilities under this Agreement shall be considered "WORKS MADE FOR HIRE," as defined in the U.S. Copyright Act. To the extent not considered as work made for hire, such works will be considered assigned to the Company under the Assignment provision of this Section 7. (c) KNOW-HOW AND TRADE SECRETS - All know-how and trade secret information conceived or originated by the Employee that arises out of the performance of Employee's obligations or responsibilities under this Agreement or any related material or information shall be the property of the Company, and all rights therein are by this Agreement assigned to the Company. 8. TERMINATION OF ENGAGEMENT; (a) GROUNDS FOR TERMINATION - The Employee's engagement shall terminate prior to the expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time: (i) The Employee dies, (ii) The Board elects to terminate this Agreement for "cause" and notifies the Employee in writing of such election, (iii) The Board elects to terminate this Agreement without "cause" and notifies the Employee in writing of such election, (iv) The Employee elects to terminate this Agreement and notifies the Company in writing of such election, or (v) The Employee elects to terminate this Agreement for "good reason" (as defined below) and notifies the Company in writing of such election. If this Agreement is terminated pursuant to clause (i) or (ii) of this Section 8(a), such termination shall be effective immediately. If this Agreement is terminated pursuant to clause (iii), (iv), or (v) of this Section 8(a), 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 Section 5, 6 or 7 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 Employee's engagement 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 engagement. -7- (d) SURRENDER OF RECORDS AND PROPERTY- Upon termination of Employee's engagement with the Company, the Employee shall deliver promptly to the Company all records, manuals, books, 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 Employee's possession or under Employee's control. (e) PAYMENT CONTINUATION - If the Employee's engagement by the Company is terminated by the Company pursuant to clause (iii) of Section 8(a) or by Employee for Good Reason pursuant to clause (v) of Section 8(a), the Company shall continue to pay to the Employee Employee's base payment (less any payments received by the Employee from any disability income insurance policy provided to Employee by the Company) and shall continue to provide health insurance benefits for the Employee through the earlier of (a) the date that the Employee has obtained other full-time engagement, or (b) three (3) months from the date of termination of engagement. If this Agreement is terminated pursuant to clauses (i), (ii) or (iv) of Section 8(a), the Employee's right to base payment and benefits shall immediately terminate, except as may otherwise be required by applicable law. (f) "GOOD REASON" DEFINED - Good Reason shall mean: (i) the assignment of the Employee to any duties inconsistent in any respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any termination or reduction of a material benefit under any benefits plan in which the Employee participates unless (1) there is substituted a comparable benefit that is economically substantially equivalent to the terminated or reduced benefit prior to such termination or reduction or (2) benefits under such plan are terminated or reduced with respect to all Employees previously granted benefits thereunder; (iii) without limiting the generality of the foregoing, any material breach of this Agreement by the Company or any successor thereto. 9. 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 Employee is or was a director, officer, or member of a committee of the Board 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, or resulting from any of Employee's actions in any of the foregoing roles Employee shall be indemnified by the Company and the Company shall advance Employee's 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 as incurred and will start prior to any judicial preceeding. The Company further covenants not to amend or repeal any provisions of the Certificate of Incorporation or Bylaws of the Company in any manner which would adversely affect the indemnification or exculpatory provisions contained -8- therein as they pertain to acts. The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each indemnified party and Employee's or her heirs and representatives. If the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to such Person, then and in each such case, proper provisions shall be made so that the successors and assigns of the Company shall assume all of the obligations set forth in this section 9. 10. 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 (d), 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 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. -9- (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: Robert Tarini Facsimile: 203-286-1608 Attn: CEO #207 - 54 Danbury Road Ridgefield, CT 06877 If to the Employee: Ken Ducey, Jr. Suite #204 - 90 Grove Street Ridgefield, CT 06877 Any party may change the address set forth above by notice to the 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 prevailing party shall be entitled to recover its reasonable attorneys' fees and costs in any such action. -10- (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. (l) 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. -11- 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. Ken Ducey, Jr. By: Robert Tarini CEO - ----------------------------- ------------------------------- Date: Date: ------------------------- --------------------------- -12- EX-10.34 4 markland_10qex-asset.txt EXHIBIT 10.34 STRATEGIC OPERATIONS CONTRACTOR AGREEMENT STRATEGIC OPERATIONS CONTRACTOR AGREEMENT (this "AGREEMENT") dated as of May 12, 2004, and with an effective date of January 1, 2004 ("EFFECTIVE DATE") between Markland Technology, Inc. (including, as the context may require, its subsidiaries, the "COMPANY"), a Florida corporation, and Asset Growth Company (the "CONTRACTOR"), a Connecticut corporation. WHEREAS, the Company wishes to engage CONTRACTOR to render services for the Company on the terms and conditions set forth in this Agreement, and the Contractor wishes to be retained and employed by the Company on such terms and conditions; and WHEREAS, to accomplish the foregoing, the Company and Contractor wish for this Agreement to be a memorialization of their Agreement as of the Effective Date. 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. ENGAGEMENT -The Company hereby engages the Contractor, and the Contractor accepts such engagement and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. TERM - Unless terminated at an earlier date in accordance with Section 8 of this Agreement or otherwise extended by agreement of the parties, the term of the Contractor's engagement hereunder shall be for a period of five years, commencing on January 2, 2004. The period of engagement may be extended by written agreement or e-mail between the parties, provided that certain provisions relating to compensation may change upon commencement of any extension hereto. 3. POSITION AND DUTIES (a) SERVICE WITH COMPANY - During the term of the Contractor's engagement, the Contractor agrees to perform such reasonable services as the Board of Directors of the Company (the "BOARD") shall assign to Contractor from time to time. The Contractor shall commence this relationship providing the following services: (i) Advice on proper deal structures for Company business development activities, and (ii) Administrative services and support for Company executive staff and customers. (b) PERFORMANCE OF DUTIES - The Contractor agrees to serve the Company faithfully and to the best of Contractor's ability and to devote a reasonable amount of its employees' time, attention and efforts to the business and affairs of the Company during Contractor's engagement by the Company. The Contractor hereby confirms that Contractor is under no contractual commitments inconsistent with Contractor's obligations set forth in this Agreement and that during the term of this Agreement, Contractor will not render or perform services for any other corporation, firm, entity or person, which are inconsistent with the provisions of this Agreement. As an independent contractor, Contractor may engage in other professional activities so long as such activities do not interfere with the performance of Contractor's obligations under this Agreement. 4. COMPENSATION (a) BASE CONSIDERATION - As compensation for services to be rendered by the Contractor under this Agreement, the Company shall pay to the Contractor during the term of the contract a base payment of $10,000 gross per month (total of $120,000 per year, the "ANNUAL COMPENSATION"), which payment shall be paid in arrears in accordance with the Company's normal procedures and policies. (b) INCENTIVE COMPENSATION - In addition to the base payment, the Contractor shall be eligible to participate in any bonus or incentive compensation plans that may be established by the Board from time to time applicable to the Employee's services. (c) EXPENSES- The Company will pay or reimburse the Contractor for all reasonable and necessary out-of-pocket expenses incurred by Contractor in the performance of Contractor's duties under this Agreement, subject to the Company's normal policies for expense verification. In addition, Company agrees to provide Contractor with up to $5,000 monthly for expenses. (d) INITIAL GRANT OF STOCK - As a further incentive to Contractor's performance under this Agreement, the company agrees to CONDITIONALLY grant to Contractor shares of common stock in the Company (the "COMMON STOCK") at seven different periods: (i) the first ("GRANT ONE") being upon the conclusion of a 90 day period following the Effective Date, (ii) the second ("GRANT TWO") being upon the conclusion of a 180 day period following the Effective Date, (iii) the third ("GRANT THREE") being upon the conclusion of a 210 day period following the Effective Date, (iv) the fourth ("GRANT FOUR") being upon conclusion of a 1 year period following the Effective Date and the fifth ("GRANT FIVE") being upon conclusion of a 2 year period following the Effective Date, the sixth ("GRANT SIX") being upon conclusion of a 3 year period following the Effective Date and the seventh the ("GRANT SEVEN") being upon conclusion of a 4 year period following the Effective Date (Grant One, Grant Two, Grant Three, Grant Four, Grant Five, Grant Six and Grant Seven may be referred to as "GRANT" or "GRANTS"). Each Grant shall be equivalent to a "STOCK PERCENTAGE" of the Company Equity (defined below) calculated as of the "FINAL DATE" associated with that Grant, as follows: -2- - --------------------------- ----------------------------- ---------------------- GRANT STOCK PERCENTAGE FINAL DATE - --------------------------- ----------------------------- ---------------------- Grant One 2.0% April 1, 2004 - --------------------------- ----------------------------- ---------------------- Grant Two .75% July 1, 2004 - --------------------------- ----------------------------- ---------------------- Grant Three .75% October 1, 2004 - --------------------------- ----------------------------- ---------------------- Grant Four .75% January 3, 2005 - --------------------------- ----------------------------- ---------------------- Grant Five .75% January 2, 2006 - --------------------------- ----------------------------- ---------------------- Grant Six .25% January 1, 2007 - --------------------------- ----------------------------- ---------------------- Grant Seven .25% January 1, 2008 - --------------------------- ----------------------------- ---------------------- The Grant will be earned based upon PERFORMANCE CRITERIA achieved by the Company as defined below. At any time after the Company has implemented an effective ESOP program the Contractor may opt to accept option grants in lieu of restricted Common Stock Grants of an equivalent value to the Common Stock Grant. The Contractor may do so at each individual Grant date. The number of shares of Common Stock reflected by the Stock Percentage ("Contractor's Shares") shall be calculated against all issued and outstanding capital stock or other equity or conversion right in the Company inclusive of warrants or options (in aggregate the "Company Equity"). With respect to any convertible stock of the Company, including without limitation preferred stock classes C and D, and any other conversion right, the calculation determining the number of Contractor's Shares shall be made as if each such conversion had taken place in accordance with the conversion rights associated with such security, (without regard to limitations on the number of shares that may be converted in a single instance or in a defined period), on the Final Date ("Imputed Conversion"). The price of the Common Stock to be used for calculating the Imputed Conversion shall be the average price of the Common Stock for the 10 business days prior to the Final Date reflected on the NASD/OTCBB Market or if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded, including the pink sheets. With respect to each Grant the final calculation of the total number of Contractor's Shares shall be made within fifteen days of the Final Date, in accordance with the following formula ("Formula"): Total # Contractor's Shares = applicable Stock Percentage x the Company Equity The Company Equity = total Common Shares outstanding including options and warrants as of the Final Date + number of Common Shares resulting from Imputed Conversion -3- Each Grant is CONDITIONED upon the Company achieving its year-end performance objectives for revenue and profitability, based on a plan to be ratified by the Board of the Company during regularly scheduled meetings for each of the applicable years. For example, whether Grant One occurs will be measured against the plan set forth by the Board in the first quarter of year 2004 for year 2004. The subject shares issued via each share grant are non transferable and subject to forfeiture. (e) Registration - All Contractor's Shares and Accrued Shares (collectively hereafter referred to as "Contractor's Shares") may be unregistered, unless registered prior to issuance. Such unregistered shares shall bear the following legend. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. Contractor's Shares shall not contain the legend set forth above or any other restrictive legend if all of the following conditions are satisfied: (i) there is an effective Registration Statement under the Securities Act at such time, (ii) the Contractor has delivered a certificate to the Company to the effect that the Contractor will comply with all applicable prospectus delivery requirements under the Securities Act in any sale or transfer of the Contractor's Shares by the Contractor, and (iii) the Contractor has delivered to the Company an opinion of counsel (acceptable to the Company) that such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide the Contractor, upon request, with a certificate or certificates representing Contractor's Shares, free from such legend at such time as such legend is no longer required hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. The Company covenants that it will take such further action as any holder of Contractor Shares may reasonably request, all to the extent required from time to time to enable such holder to sell the Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion of counsel to the Company pursuant in a written letter to such effect, addressed and acceptable to the Company's transfer agent for the benefit of and enforceable by the Contractor or successor in interest thereto. Upon the request of any such holder, the Company shall deliver to such holder a written certification of a duly authorized officer as to whether it has complied with such requirements. -4- (f) REGISTRATION RIGHTS - In the event of a registration of Company common stock following the Final Date, Contractor shall have the right to participate in such registration at Company's expense. Additionally, for a period of five years from the date of this Agreement, Contractor shall have preemptive rights in the event of any potentially dilutive event (excluding exercise of any conversion rights accounted for in the Imputed Conversion in Paragraph 4 (d) above), such that Contractor may, within a reasonable time, elect to participate in such dilutive event under the terms thereof to maintain Contractor's then current percentage interest in the Company. (g) BONUS: Contractor shall be eligible to receive a bonus as may be payable pursuant to the performance criteria as described below in Section (h). The Bonus shall be based on 300% of the Contractor's Annual Compensation. (h) PERFORMANCE CRITERIA: For any quarter of the company's operation the Contractor may be eligible for a portion of his bonus if the company achieves revenue or revenue and profit milestones set forth by the Board in its periodic meetings. For the first year of this Agreement, the milestone shall be $1.0 million in each quarter and $6 million for the calendar year 2004. (i) CHANGE OF CONTROL - In the event of a change of control of the Company during the period covered by this Agreement, all stock grants listed above shall be granted immediately and all cash and expense compensation due for the earlier of 1) three years from the date of change of control, or 2) until the end of the Term of this Agreement, shall be placed in escrow in an account established by the Company with the designated escrow agent. The designated escrow agent shall be Mr. David Broadwin Esq. of Foley & Hoag of Boston, MA. A change of control will be defined as a change in the majority ownership of the Company Equity of the Company, or the resignation or termination of the majority of the directors on the Board within a 2 month period or the replacement of either the CEO, President, or CFO of the Company. 5. CONFIDENTIAL INFORMATION - Except as permitted or directed by the Company's Board of Directors, during the term of Contractor's engagement or at any time thereafter, the Contractor 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 Contractor has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of Contractor's engagement by the Company (including engagement by the Company or any affiliated companies prior to the date of this Agreement) whether developed by Contractor self/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 Contractor 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 -5- 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 Contractor's engagement, the Contractor 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 and publicly available 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 Contractor. 6. VENTURES - If, during the term of Contractor's engagement the Contractor 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, unless prior written consent from the Company is obtained. Except as approved by the Company's Board of Directors, the Contractor 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 Contractor as provided in this Agreement. The Contractor shall not enter into any arrangement through which Contractor acquires or may acquire any interest, direct or indirect, in any vendor or customer of the Company other than Contractor. 7. Patent and Related Matters; Disclosure and Assignment - The Contractor will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Contractor, either solely or in collaboration with others, during the term and in the course of performance of this Agreement, relating either directly or significantly and indirectly to the business, products, practices or techniques of the Company ("Developments"). The Contractor, to the extent that Contractor has the legal right to do so, hereby acknowledges that any and all of the Developments are the property of the Company and agrees to assign and hereby assigns to the Company any and all of the Contractor's right, title and interest in and to any and all of the Developments ("Assignment"). During the period commencing upon the day after the Contractor's last day performing services for the Company and ending one year after termination of the Contractor's engagement with the Company, at the reasonable request of the Company, the Contractor will confer with the Company and its representatives for the purpose of disclosing all Developments to the Company, provided that such conference is at the Company's expense and Contractor is compensated at no less that a rate of $250 per hour for Contractor's time. (a) LIMITATION ON SECTION 7(a) - The provisions of Section 7 shall not apply to any Development meeting the following conditions: (i) such Development was developed entirely on the Contractor's own time without the use of any Company equipment, supplies, facility or trade secret information; and (ii) such Development does not relate directly or significantly to the business of the Company to the Company's actual or demonstrably anticipated research or development; or result from any work performed by the Contractor for the Company. -6- (b) COPYRIGHTABLE MATERIAL - All right, title and interest in all copyrightable material that the Contractor shall conceive or originate, either individually or jointly with others, and which arise out of the performance of this Agreement, will be the property of the Company and are by this Agreement assigned to the Company along with ownership of any and all copyrights in the copyrightable material. Upon request and without further compensation therefor, but at no expense to the Contractor, the Contractor shall execute all papers and perform all other acts necessary to assist the Company to obtain and register copyrights on such materials in any and all countries, except that Contractor shall be compensated at no less that a rate of $250 per hour for Contractor's time for compliance with this provision following termination or expiration of this Agreement. Where applicable, works of authorship created by the Contractor for the Company in performing Contractor's responsibilities under this Agreement shall be considered "WORKS MADE FOR HIRE," as defined in the U.S. Copyright Act. To the extent not considered as work made for hire, such works will be considered assigned to the Company under the Assignment provision of this Section 7. (c) KNOW-HOW AND TRADE SECRETS - All know-how and trade secret information conceived or originated by the Contractor that arises out of the performance of Contractor's obligations or responsibilities under this Agreement or any related material or information shall be the property of the Company, and all rights therein are by this Agreement assigned to the Company. 8. TERMINATION OF ENGAGEMENT; (a) GROUNDS FOR TERMINATION - The Contractor's engagement shall terminate prior to the expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time: (i) The Contractor dies, (ii) The Board elects to terminate this Agreement for "cause" and notifies the Contractor in writing of such election, (iii) The Board elects to terminate this Agreement without "cause" and notifies the Contractor in writing of such election, (iv) The Contractor elects to terminate this Agreement and notifies the Company in writing of such election, or (v) The Contractor elects to terminate this Agreement for "good reason" (as defined below) and notifies the Company in writing of such election. If this Agreement is terminated pursuant to clause (i) or (ii) of this Section 8(a), such termination shall be effective immediately. If this Agreement is terminated pursuant to clause (iii), (iv), or (v) of this Section 8(a), such termination shall be effective 30 days after delivery of the notice of termination. (b) "CAUSE" DEFINED - "Cause" means: (i) The Contractor has breached the provisions of Section 5, 6 or 7 of this Agreement in any material respect, (ii) The Contractor has engaged in willful and material misconduct, including willful and material failure to perform the Contractor's duties as an officer or Contractor 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 Contractor has committed fraud, misappropriation or embezzlement in connection with the Company's business, or (iv) The Contractor has been convicted or has pleaded NOLO CONTENDERE to criminal misconduct (except for parking violations, occasional minor traffic violations and other similar minor violations). -7- (c) EFFECT OF TERMINATION - Notwithstanding any termination of this Agreement, the Contractor, in consideration of Contractor's engagement 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 Contractor's engagement. (d) SURRENDER OF RECORDS AND PROPERTY- Upon termination of Contractor's engagement with the Company, the Contractor shall deliver promptly to the Company all records, manuals, books, 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 Contractor's possession or under Contractor's control. (e) PAYMENT CONTINUATION - If the Contractor's engagement by the Company is terminated by the Company pursuant to clause (iii) of Section 8(a) or by Contractor for Good Reason pursuant to clause (v) of Section 8(a), the Company shall continue to pay to the Contractor Contractor's base payment (less any payments received by the Contractor from any disability income insurance policy provided to Contractor by the Company) and shall continue to provide health insurance benefits for the Contractor through the earlier of (a) the date that the Contractor has obtained other full-time engagement, or (b) three (3) months from the date of termination of engagement. If this Agreement is terminated pursuant to clauses (i), (ii) or (iv) of Section 8(a), the Contractor's right to base payment and benefits shall immediately terminate, except as may otherwise be required by applicable law. (f) "GOOD REASON" DEFINED - Good Reason shall mean: (i) the assignment of the Contractor to any duties inconsistent in any respect with the Contractor's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Contractor; (ii) any termination or reduction of a material benefit under any benefits plan in which the Contractor participates unless (1) there is substituted a comparable benefit that is economically substantially equivalent to the terminated or reduced benefit prior to such termination or reduction or (2) benefits under such plan are terminated or reduced with respect to all Contractors previously granted benefits thereunder; (iii) without limiting the generality of the foregoing, any material breach of this Agreement by the Company or any successor thereto. 9. INDEMNIFICATION - In the event that Contractor is made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that Contractor is or was a director, officer, or member of a committee of the Board or serves or served any other corporation, partnership, joint venture, trust, Contractor benefit plan or other enterprise in any capacity at the request of the Company, or resulting from any of Contractor's actions in any of the foregoing roles Contractor shall be indemnified by the Company and the Company shall advance Contractor's 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 -8- Certificate of Incorporation and ByLaws as incurred beginning prior to any judicial preceding. The Company further covenants not to amend or repeal any provisions of the Certificate of Incorporation or Bylaws of the Company in any manner which would adversely affect the indemnification or exculpatory provisions contained therein as they pertain to acts. The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each indemnified party and Contractor's or her heirs and representatives. If the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to such Person, then and in each such case, proper provisions shall be made so that the successors and assigns of the Company shall assume all of the obligations set forth in this section 9. 10. 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 (d), 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 Contractor, 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 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. -9- (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 Contractor 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 Contractor shall constitute a waiver of any other right or breach by the Contractor. (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: Robert Tarini Facsimile: 203-286-1608 Attn: , CEO #207 - 54 Danbury Road Ridgefield, CT 06877 If to the Contractor: Ken Ducey, Jr. President Suite #204 - 90 Grove Street Ridgefield, CT 06877 Any party may change the address set forth above by notice to the 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 Contractor and the Company consent to the jurisdiction of such courts. The prevailing party shall be entitled to recover its reasonable attorneys' fees and costs in any such action. -10- (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. (l) 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. -11- 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. ASSET GROWTH COMPANY By: Robert Tarini By: Ken Ducey CEO President - --------------------------- ------------------------------- Date: Date: ----------------------- --------------------------- -12- EX-10.35 5 markland_10qex-verdi.txt EXHIBIT 10.35 CONSULTANT AGREEMENT CONSULTANT AGREEMENT (this "AGREEMENT") dated as of May 12, 2004, and with an effective date of January 1, 2004 ("EFFECTIVE DATE") between Markland Technology, Inc. (including, as the context may require, its subsidiaries, the "COMPANY"), a Florida corporation, and Verdi Consulting, (the "CONSULTANT"), located in East Greenwich, Rhode Island, 02818. WHEREAS, the Company and Consultant had previously entered into an employment agreement dated January 1, 2003 (the "PRIOR AGREEMENT"); and WHEREAS, the Company wishes to employ the CONSULTANT to render services for the Company on the terms and conditions set forth in this Agreement, and the Consultant wishes to be retained and employed by the Company on such terms and conditions; and WHEREAS, to accomplish the foregoing, the Company and Consultant wish to supplant the prior Agreement with this Agreement retroactive from the Effective Date. 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. Termination of Prior Agreement; Current ENGAGEMENT -The Prior Agreement is hereby deemed performed through the Effective Date and is hereby terminated as of the Effective Date. The Company hereby employs the Consultant, and the Consultant accepts such engagement and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. TERM - Unless terminated at an earlier date in accordance with Section 8 of this Agreement or otherwise extended by agreement of the parties, the term of the Consultant's engagement hereunder shall be for a period of five years, commencing on January 2, 2004. The period of engagement may be extended by written agreement or e-mail between the parties, provided that certain provisions relating to compensation may change upon commencement of any extension hereto. 3. POSITION AND DUTIES (a) SERVICE WITH COMPANY - During the term of the Consultant's engagement, the Consultant agrees to perform such reasonable services as the Board of Directors of the Company (the "BOARD") shall assign to Consultant from time to time. The Consultant shall commence as a business development and financing consultant.. (b) PERFORMANCE OF DUTIES - The Consultant agrees to serve the Company faithfully and to the best of Consultant's ability and to devote a reasonable amount of time, attention and efforts to the business and affairs of the Company during Consultant's engagement by the Company. The Consultant hereby confirms that Consultant is under no contractual commitments inconsistent with Consultant's obligations set forth in this Agreement and that during the term of this Agreement, Consultant will not render or perform services for any other corporation, firm, entity or person, which are inconsistent with the provisions of this Agreement. While Consultant remains employed by the Company, the Consultant may participate in reasonable professional, charitable, and/or personal investment activities so long as such activities do not interfere with the performance of Consultant's obligations under this Agreement. 4. COMPENSATION (a) BASE CONSIDERATION - As compensation for services to be rendered by the Consultant under this Agreement, the Company shall pay to the Consultant during the term of the contract a base payment of $25,000.00 gross per month (total of $300,000 per year, the "ANNUAL SALARY"), which payment shall be paid in arrears in accordance with the Company's normal procedures and policies. (b) INCENTIVE COMPENSATION - In addition to the base payment, the Consultant shall be eligible to participate in any bonus or incentive compensation plans that may be established by the Board from time to time applicable to the Consultant's services. (c) EXPENSES- The Company will pay or reimburse the Consultant for all reasonable and necessary out-of-pocket expenses incurred by Consultant in the performance of Consultant's duties under this Agreement, subject to the Company's normal policies for expense verification. In addition, Company agrees to provide Consultant with up to $5,000 monthly for auto expense, business office expense, medical and life insurance expenses. (d) INITIAL GRANT OF STOCK - The company agrees to CONDITIONALLY grant to Consultant shares of common stock in the Company (the "COMMON STOCK") at seven different periods: (i) the first ("GRANT ONE") being upon the conclusion of a 90 day period following the Effective Date, (ii) the second ("GRANT TWO") being upon the conclusion of a 180 day period following the Effective Date, (iii) the third ("GRANT THREE") being upon the conclusion of a 210 day period following the Effective Date, (iv) the fourth ("GRANT FOUR") being upon conclusion of a 1 year period following the Effective Date , the fifth ("GRANT FIVE") being upon conclusion of a 2 year period following the Effective Date, the sixth ("GRANT SIX") being upon conclusion of a 3 year period following the Effective Date and the seventh the ("GRANT SEVEN") being upon conclusion of a 4 year period following the Effective Date (Grant One, Grant Two, Grant Three, Grant Four, Grant Five, Grant Six and Grant Seven may be referred to as "GRANT" or "GRANTS"). Each Grant shall be equivalent to a "STOCK PERCENTAGE" of the Common Stock Equity of the Company (defined below) calculated as of the "FINAL DATE" associated with that Grant, as follows: -2- - -------------------------- --------------------------- ------------------------- GRANT STOCK PERCENTAGE FINAL DATE - -------------------------- --------------------------- ------------------------- Grant One 2.5 April 1, 2004 - -------------------------- --------------------------- ------------------------- Grant Two 1.00% July 1, 2004 - -------------------------- --------------------------- ------------------------- Grant Three 1.00% Oct 1, 2004 - -------------------------- --------------------------- ------------------------- Grant Four 1.0% January 2, 2005 - -------------------------- --------------------------- ------------------------- Grant Five 1% January 2, 2006 - -------------------------- --------------------------- ------------------------- Grant Six .5% Janaury 2, 2007 - -------------------------- --------------------------- ------------------------- Grant Seven .5% Janaury 2, 2008 - -------------------------- --------------------------- ------------------------- The Grant will be earned based upon PERFORMANCE CRITERIA achieved by the Company as defined below. AT ANY TIME AFTER THE COMPANY HAS IMPLEMENTED AN EFFECTIVE ESOP PROGRAM THE CONSULTANT MAY OPT TO ACCEPT OPTION GRANTS IN LIEU OF RESTRICTED COMMON STOCK GRANTS ON A ONE FOR ONE BASIS. THE CONSULTANT MAY DO SO AT EACH INDIVIDUAL GRANT DATE. The number of shares of Common Stock reflected by the Stock Percentage ("Consultant's Shares") shall be calculated against all issued and outstanding capital stock or other equity or conversion right in the Company inclusive of warrants (in aggregate the "Company Equity"). With respect to any convertible stock of the Company, including without limitation preferred stock classes C and D, and any other conversion right, the calculation determining the number of Consultant's Shares shall be made as if each such conversion had taken place in accordance with the conversion rights associated with such security, (without regard to limitations on the number of shares that may be converted in a single instance or in a defined period), on the Final Date ("Imputed Conversion"). The price of the Common Stock to be used for calculating the Imputed Conversion shall be the average price of the Common Stock for the 10 business days prior to the Final Date reflected on the NASD/OTCBB Market or if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded, including the pink sheets. With respect to each Grant the final calculation of the total number of Consultant's Shares shall be made within fifteen days of the Final Date, in accordance with the following formula ("Formula"): Total # Consultant's Shares = applicable Stock Percentage x the Equity The Equity = Company Equity outstanding as of the Final Date + number of Common Shares resulting from Imputed Conversion -3- Each Grant is CONDITIONED upon the Company achieving its year-end performance objectives for revenue and profitability, based on a plan to be ratified by the Board of the Company during regularly scheduled meetings for each of the applicable years. For example, whether Grant One occurs will be measured against the plan set forth by the Board in the first quarter of year 2004 for year 2004. The subject shares issued via each share grant are non transferable and subject to forfeiture. (e) Registration - All Consultant's Shares and Accrued Shares (collectively hereafter referred to as "Consultant's Shares") may be unregistered, unless registered prior to issuance. Such unregistered shares shall bear the following legend. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. Consultant's Shares shall not contain the legend set forth above or any other restrictive legend if all of the following conditions are satisfied: (i) there is an effective Registration Statement under the Securities Act at such time, (ii) the Consultant has delivered a certificate to the Company to the effect that the Consultant will comply with all applicable prospectus delivery requirements under the Securities Act in any sale or transfer of the Consultant's Shares by the Consultant, and (iii) the Consultant has delivered to the Company an opinion of counsel (acceptable to the Company) that such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide the Consultant, upon request, with a certificate or certificates representing Consultant's Shares, free from such legend at such time as such legend is no longer required hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. The Company covenants that it will take such further action as any holder of Consultant Shares may reasonably request, all to the extent required from time to time to enable such holder to sell the Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion of counsel to the Company pursuant in a written letter to such effect, addressed and acceptable to the Company's transfer agent for the benefit of and enforceable by the Consultant or successor in interest thereto. Upon the request of any such holder, the Company shall deliver to such holder a written certification of a duly authorized officer as to whether it has complied with such requirements. -4- (f) REGISTRATION RIGHTS - In the event of a registration of Company common stock following the Final Date, Consultant shall have the right to participate in such registration at Company's expense. Additionally, for a period of five years from the date of this Agreement, Consultant shall have preemptive rights in the event of any potentially dilutive event (excluding exercise of any conversion rights accounted for in the Imputed Conversion in Paragraph 4 (d) above), such that Consultant may, within a reasonable time, elect to participate in such dilutive event under the terms thereof to maintain Consultant's then current percentage interest in the Company. (g) BONUS: Consultant shall be eligible to receive a bonus as may be payable pursuant to the performance criteria as described below in Section (h). The Bonus shall be based on 300% of the Consultant's annual salary. (h) PERFORMANCE CRITERIA: For any quarter of the company's operation the consultant may be eligible for a portion of his bonus if the company achieves revenue or revenue and profit milestones set forth by the Board in its periodic meetings. For the first year of this Agreement, the milestone shall be $ 1.0 million in each quarter and $6 million for the calendar year 2004.. (i) CHANGE OF CONTROL - In the event of a change of control of the Company during the period covered by this Agreement, all stock grants listed above shall be granted immediately and all cash and expense compensation due for the earlier of 1) three years from the date of change of control, or 2) until the end of the Term of this Agreement, shall be placed in escrow in an account established by the company with the designated escrow agent. The designated escrow agent shall be Mr. David Broadwin Esq. of Foley & Hoag of Boston, MA. A change of control will be defined as a change in the majority ownership of the Equity of the Company, or the resignation or termination of the majority of the directors on the Board within a 2 month period or the replacement of either the CEO or President of the Company. 5. CONFIDENTIAL INFORMATION - Except as permitted or directed by the Company's Board of Directors, during the term of Consultant's engagement or at any time thereafter, the Consultant 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 Consultant has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of Consultant's engagement by the Company (including engagement by the Company or any affiliated companies prior to the date of this Agreement) whether developed by Consultant self/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 Consultant 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 -5- 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 Consultant's engagement, the Consultant 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 and publicly available 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 Consultant. 6. VENTURES - If, during the term of Consultant's engagement the Consultant 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, unless prior written consent from the Company is obtained. Except as approved by the Company's Board of Directors, the Consultant 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 Consultant as provided in this Agreement. The Consultant shall not enter into any arrangement through which Consultant acquires or may acquire any interest, direct or indirect, in any vendor or customer of the Company other than Consultant. 7. Patent and Related Matters; Disclosure and Assignment - The Consultant will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Consultant, either solely or in collaboration with others, during the term of this Agreement, whether or not during regular working hours, relating either directly or significantly and indirectly to the business, products, practices or techniques of the Company ("Developments"). The Consultant, to the extent that Consultant has the legal right to do so, hereby acknowledges that any and all of the Developments are the property of the Company and agrees to assign and hereby assigns to the Company any and all of the Consultant's right, title and interest in and to any and all of the Developments ("Assignment"). During the period commencing upon the day after the Consultant's last day performing services for the Company and ending one year after termination of the Consultant's engagement with the Company, at the reasonable request of the Company, the Consultant will confer with the Company and its representatives for the purpose of disclosing all Developments to the Company, provided that such conference is at the Company's expense and Consultant is compensated at no less that a rate of $250 per hour for Consultant's time. (a) LIMITATION ON SECTION 7(a) - The provisions of Section 7 shall not apply to any Development meeting the following conditions: (i) such Development was developed entirely on the Consultant's own time without the use of any Company equipment, supplies, facility or trade secret information; and (ii) such Development does not relate directly or significantly to the business of the Company to the Company's actual or demonstrably anticipated research or development; or result from any work performed by the Consultant for the Company. -6- (b) COPYRIGHTABLE MATERIAL - All right, title and interest in all copyrightable material that the Consultant shall conceive or originate, either individually or jointly with others, and which arise out of the performance of this Agreement, will be the property of the Company and are by this Agreement assigned to the Company along with ownership of any and all copyrights in the copyrightable material. Upon request and without further compensation therefor, but at no expense to the Consultant, the Consultant shall execute all papers and perform all other acts necessary to assist the Company to obtain and register copyrights on such materials in any and all countries, except that Consultant shall be compensated at no less that a rate of $250 per hour for Consultant's time for compliance with this provision following termination or expiration of this Agreement. Where applicable, works of authorship created by the Consultant for the Company in performing Consultant's responsibilities under this Agreement shall be considered "WORKS MADE FOR HIRE," as defined in the U.S. Copyright Act. To the extent not considered as work made for hire, such works will be considered assigned to the Company under the Assignment provision of this Section 7. (c) KNOW-HOW AND TRADE SECRETS - All know-how and trade secret information conceived or originated by the Consultant that arises out of the performance of Consultant's obligations or responsibilities under this Agreement or any related material or information shall be the property of the Company, and all rights therein are by this Agreement assigned to the Company. 8. TERMINATION OF ENGAGEMENT; (a) GROUNDS FOR TERMINATION - The Consultant's engagement shall terminate prior to the expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time: (i) The Consultant dies, (ii) The Board elects to terminate this Agreement for "cause" and notifies the Consultant in writing of such election, (iii) The Board elects to terminate this Agreement without "cause" and notifies the Consultant in writing of such election, (iv) The Consultant elects to terminate this Agreement and notifies the Company in writing of such election, or (v) The Consultant elects to terminate this Agreement for "good reason" (as defined below) and notifies the Company in writing of such election. If this Agreement is terminated pursuant to clause (i) or (ii) of this Section 8(a), such termination shall be effective immediately. If this Agreement is terminated pursuant to clause (iii), (iv), or (v) of this Section 8(a), such termination shall be effective 30 days after delivery of the notice of termination. -7- (b) "CAUSE" DEFINED - "Cause" means: (i) The Consultant has breached the provisions of Section 5, 6 or 7 of this Agreement in any material respect, (ii) The Consultant has engaged in willful and material misconduct, including willful and material failure to perform the Consultant's duties as an officer or Consultant 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 Consultant has committed fraud, misappropriation or embezzlement in connection with the Company's business, or (iv) The Consultant 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 Consultant, in consideration of Consultant's engagement 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 Consultant's engagement. (d) SURRENDER OF RECORDS AND PROPERTY- Upon termination of Consultant's engagement with the Company, the Consultant shall deliver promptly to the Company all records, manuals, books, 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 Consultant's possession or under Consultant's control. (e) PAYMENT CONTINUATION - If the Consultant's engagement by the Company is terminated by the Company pursuant to clause (iii) of Section 8(a) or by Consultant for Good Reason pursuant to clause (v) of Section 8(a), the Company shall continue to pay to the Consultant Consultant's base payment (less any payments received by the Consultant from any disability income insurance policy provided to Consultant by the Company) and shall continue to provide health insurance benefits for the Consultant through the earlier of (a) the date that the Consultant has obtained other full-time engagement, or (b) three (3) months from the date of termination of engagement. If this Agreement is terminated pursuant to clauses (i), (ii) or (iv) of Section 8(a), the Consultant's right to base payment and benefits shall immediately terminate, except as may otherwise be required by applicable law. (f) "GOOD REASON" DEFINED - Good Reason shall mean: (i) the assignment of the Consultant to any duties inconsistent in any respect with the Consultant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Consultant; (ii) any termination or reduction of a material benefit under any benefits plan in which the Consultant participates unless (1) there is substituted a comparable benefit that is economically substantially equivalent to the terminated or reduced benefit prior to such termination or reduction or (2) benefits under such plan are terminated or reduced with respect to all Consultants previously granted benefits thereunder; (iii) without limiting the generality of the foregoing, any material breach of this Agreement by the Company or any successor thereto. -8- 9. INDEMNIFICATION - In the event that Consultant is made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that Consultant is or was a director, officer, or member of a committee of the Board or serves or served any other corporation, partnership, joint venture, trust, Consultant benefit plan or other enterprise in any capacity at the request of the Company, or resulting from any of Consultant's actions in any of the foregoing roles Consultant shall be indemnified by the Company and the Company shall advance Consultant's 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 By Laws as incurred and will start prior to any judicial preceding. The Company further covenants not to amend or repeal any provisions of the Certificate of Incorporation or Bylaws of the Company in any manner which would adversely affect the indemnification or exculpatory provisions contained therein as they pertain to acts. The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each indemnified party and Consultant's or her heirs and representatives. If the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to such Person, then and in each such case, proper provisions shall be made so that the successors and assigns of the Company shall assume all of the obligations set forth in this section 9. 10. 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 (d), 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 Consultant, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or -9- 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 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 Consultant 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 Consultant shall constitute a waiver of any other right or breach by the Consultant. (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: Ken Ducey, Jr. Facsimile: 203-431-8309 Attn: President #207 - 54 Danbury Road Ridgefield, CT 06877 If to the Consultant: Chad A Verdi Verdi Consulting 100 Pheasant Drive East Greenwich, RI 02818 Any party may change the address set forth above by notice to the other party given as provided herein. -10- (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 Consultant and the Company consent to the jurisdiction of such courts. The 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. (l) 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. Verdi Consulting By: Robert Tarini. Chad A. Verdi CEO - --------------------------------- ------------------------------- Date: Date: ----------------------- --------------------------- -11- EX-31.1 6 markland_10qex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Robert Tarini, Chief Executive Officer of Markland Technologies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Markland Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: MAY 24, 2004 /S/ ROBERT TARINI ------------------------------------ ROBERT TARINI CHIEF EXECUTIVE OFFICER EX-31.2 7 markland_10qex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Kenneth P. Ducey, Jr., President and Chief Financial Officer of Markland Technologies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Markland Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: MAY 24, 2004 /S/ KENNETH P. DUCEY, JR. ------------------------------------- KENNETH P. DUCEY, JR. CHIEF FINANCIAL OFFICER EX-32.1 8 markland_10qex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-QSB of Markland Technologies, Inc. (the "Company") for the quarter ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned chief executive officer and chief financial officer of the Company, certify, to their best knowledge and belief, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ ROBERT TARINI /S/ KENNETH P. DUCEY, JR. - -------------------------------- --------------------------------- ROBERT TARINI KENNETH P. DUCEY, JR. CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER DATE: MAY 24, 2004 DATE: MAY 24, 2004 -----END PRIVACY-ENHANCED MESSAGE-----