-----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, LQMYRXD0rR1bP+7P1osKGfpsWqFGCEa/IwQSSr2hCDQEpEZfUY35pZRZTPAJYHol CA/ZvkUUiyeyAhIqHHIrvw== 0001019687-04-002447.txt : 20041112 0001019687-04-002447.hdr.sgml : 20041111 20041112100938 ACCESSION NUMBER: 0001019687-04-002447 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20041110 DATE AS OF CHANGE: 20041112 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: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-120390 FILM NUMBER: 041135940 BUSINESS ADDRESS: STREET 1: 54 DANBURY ROAD STREET 2: #207 CITY: RIDGEFIELD STATE: CT ZIP: 06877 BUSINESS PHONE: 203-894-9700 MAIL ADDRESS: STREET 1: 54 DANBURY ROAD STREET 2: #207 CITY: RIDGEFIELD STATE: CT ZIP: 06877 FORMER COMPANY: FORMER CONFORMED NAME: QUEST NET CORP DATE OF NAME CHANGE: 20000320 FORMER COMPANY: FORMER CONFORMED NAME: PARPUTT ENTERPRISES INC DATE OF NAME CHANGE: 20000107 SB-2 1 markland_sb2-110504.txt AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 2004 REGISTRATION NO. 333-[ ] - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MARKLAND TECHNOLOGIES, INC. --------------------------- (Name of small business issuer in its charter) FLORIDA 84-1334434 ------- ---------- (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification number) 3829 ---- (Primary Standard Industrial Classification Code Number) 54 DANBURY ROAD, #207 RIDGEFIELD, CT 06877 (203) 894-9700 (Address and telephone number of principal executive offices) KENNETH DUCEY, JR. PRESIDENT AND CHIEF FINANCIAL OFFICER 54 DANBURY ROAD, #207 RIDGEFIELD, CT 06877 (203) 894-9700 (Name, address and telephone number of agent for service) COPIES TO: DAVID A. BROADWIN, ESQ. FOLEY HOAG LLP 155 SEAPORT BOULEVARD BOSTON, MASSACHUSETTS 02210 (617) 832-1000 ---------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ---------------- CALCULATION OF REGISTRATION FEE
Proposed Proposed Maximum Maximum Title of Each Class of Securities Amount to be Offering Price Aggregate Amount of to be Registered Registered (1) Per Share Offering Price Registration Fee - ---------------- -------------- --------- -------------- ---------------- Common Stock, par value $0.0001 per share 6,500,000 (2) $0.8000(3) $ 5,200,000.00 $ 658.84 Common Stock, par value $0.0001 per share 6,500,000 (4) $1.5000(5) $ 9,750,000.00 $ 1,235.33 Common Stock, par value $0.0001 per share 1,500,000 (6) $1.5000(5) $ 2,250,000.00 $ 285.08 Common Stock, par value $0.0001 per share 1,625,000 (7) $0.6875(8) $ 1,117,187.50 $ 141.55 Common Stock, par value $0.0001 per share 7,875,000 (9) $0.6875(8) $ 5,414,062.50 $ 685.96 Common Stock, par value $0.0001 per share 3,396,529 (10) $0.6875(11) $ 2,335,113.69 $ 295.86 Common Stock, par value $0.0001 per share 3,000,000 (12) $0.6875(8) $ 2,062,500.00 $ 261.32 Common Stock, par value $0.0001 per share 2,193,750 (13) $0.8000(3) $ 1,755,000.00 $ 222.36 Common Stock, par value $0.0001 per share 2,193,750 (14) $1.5000(5) $ 3,290,625.00 $ 416.92 Common Stock, par value $0.0001 per share 548,438 (15) $0.6875(8) $ 377,051.13 $ 47.77 Common Stock, par value $0.0001 per share 2,657,813 (16) $0.6875(8) $ 1,827,246.44 $ 231.51 Common Stock, par value $0.0001 per share 1,012,500 (17) $0.6875(8) $ 696,093.75 $ 88.20 ---------- $ 4,570.70 ==========
(1) Pursuant to Rule 416(a), the number of shares of common stock being registered will be adjusted to include any additional shares which may become issuable as a result of stock splits, stock dividends, or similar transactions in accordance with the anti-dilution provisions contained in certain notes and warrants we issued in connection with the September 21, 2004 and November 9, 2004 private placements, the underlying shares of which are being registered hereunder. (2) Represents the number of shares of our common stock issuable upon an assumed conversion as of November 5, 2004 of notes issued to the investors in the September 21, 2004 private placement. (3) Represents the conversion price as of November 5, 2004 of the notes issued to the investors in the September 21, 2004 and November 9, 2004 private placements (assuming, solely for the purpose of calculating the registration fee, that all such notes were outstanding as of November 5, 2004). (4) Represents the number of shares of our common stock issuable upon the exercise of warrants issued to the investors in the September 21, 2004 private placement. (5) Represents the exercise price as of November 5, 2004 of the warrants issued in connection with the September 21, 2004 and November 9, 2004 private placements (assuming, solely for the purpose of calculating the registration fee, that all such warrants were outstanding as of November 5, 2004). (6) Represents the number of shares of our common stock issuable upon the exercise of warrants issued as compensation in connection with the September 21, 2004 private placement. (7) We are registering 125% of the number of shares presently issuable upon conversion of the notes issued to the investors in the September 21, 2004 private placement, representing our good faith estimate of the number of shares that may become issuable in the future as a result of conversion price adjustments. Under the terms of the note, in the event a prepayment is not made by March 15, 2005, the conversion price will be adjusted from a fixed price of $0.80 per share to a floating rate equal to the average closing price per share of our common stock for the five trading days preceding conversion or $0.80, whichever is less. The conversion price of the notes is also subject to adjustment in the event of issuance of common stock or common stock equivalents at an issue price, or conversion or exercise price, as the case may be, of less than the conversion price of the warrants in effect at the time of such issuance. If the number of shares issuable upon conversion of the notes exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (8) Conversion price which would become applicable in the event additional shares of our common stock become issuable as a result of price adjustments are unknown as of the time of filing of this registration statement. In accordance with Rule 457(g)(3) of Regulation C, the maximum offering price represents the offering price of securities of the same class included in the registration statement. The maximum offering price has been estimated solely for the purpose of determining our registration fee pursuant to Rule 457(c) as the average of the high and low sales prices of our common stock on November 5, 2004, as quoted on the OTC Bulletin Board by the National Association of Securities Dealers, Inc., of $0.705 and $0.670, respectively. (9) We are registering approximately 220% of the number of shares presently issuable upon exercise of the warrants issued in connection with the September 21, 2004 private placement, representing a good faith estimate of the number of shares that may become issuable in the future as a result of exercise price adjustments. In the event we do not make a prepayment by March 15, 2005 on the notes issued to the investors in the September 21, 2004 private placement, the exercise price of the warrants will be reduced to from $1.50 to $0.792 (equal to 110% of the closing price of our common stock on the date of grant) or 80% of the average closing price of our common stock for the five trading days preceding March 15, 2005, whichever is less. The exercise price of the warrants is also subject to adjustment in the event of issuance of common stock or common stock equivalents at an issue price, or conversion or exercise price, as the case may be, of less than the exercise price of the warrants in effect at the time of such issuance. Upon the occurrence of any of the foregoing adjustments to the exercise price, the number of shares into which the warrants are exercisable will be increased such that the aggregate exercise price of the underlying shares following the adjustment will be equal to the aggregate exercise price prior to the adjustment. If the number of shares issuable upon exercise of the warrants exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (10) Outstanding shares of our common stock being registered pursuant to piggy-back rights. (11) Estimated solely for the purpose of determining our registration fee pursuant to Rule 457(c), based on the average of the high and low sales prices of our common stock on November 5, 2004, as reported on the OTC Bulletin Board of by the National Association of Securities Dealers, Inc., of $0.705 and $0.670, respectively. (12) Represents a good faith estimate of the number of shares which may become issuable in satisfaction of liquidated damages arising from the Registration Rights Agreement dated September 21, 2004. (13) Represents the number of shares of our common stock issuable upon an assumed conversion as of November 5, 2004 of notes issued to the investors in the November 9, 2004 private placement (assuming, solely for the purpose of calculating the registration fee, that all such notes were outstanding as of November 5, 2004). (14) Represents the number of shares of our common stock issuable upon the exercise of warrants issued to the investors in the November 9, 2004 private placement. (15) We are registering 125% of the number of shares presently issuable upon conversion of the notes issued to the investors in the November 9, 2004 private placement, representing our good faith estimate of the number of shares that may become issuable in the future as a result of conversion price adjustments. Under the terms of the note, in the event a prepayment is not made by March 15, 2005, the conversion price will be adjusted from a fixed price of $0.80 per share to a floating rate equal to the average closing price per share of our common stock for the five trading days preceding conversion or $0.80, whichever is less. The conversion price of the notes is also subject to adjustment in the event of issuance of common stock or common stock equivalents at an issue price, or conversion or exercise price, as the case may be, of less than the conversion price of the warrants in effect at the time of such issuance. If the number of shares issuable upon conversion of the notes exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (16) We are registering approximately 220% of the number of shares presently issuable upon exercise of the warrants issued in connection with the November 9, 2004 private placement, representing a good faith estimate of the number of shares that may become issuable in the future as a result of exercise price adjustments. In the event we do not make a prepayment by March 15, 2005 on the notes issued to the investors in the November 9, 2004 private placement, the exercise price of the warrants will be reduced to from $1.50 to $0.781 (equal to 110% of the closing price of our common stock on the date of grant) or 80% of the average closing price of our common stock for the five trading days preceding March 15, 2005, whichever is less. The exercise price of the warrants is also subject to adjustment in the event of issuance of common stock or common stock equivalents at an issue price, or conversion or exercise price, as the case may be, of less than the exercise price of the warrants in effect at the time of such issuance. Upon the occurrence of any of the foregoing adjustments to the exercise price, the number of shares into which the warrants are exercisable will be increased such that the aggregate exercise price of the underlying shares following the adjustment will be equal to the aggregate exercise price prior to the adjustment. If the number of shares issuable upon exercise of the warrants exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (17) Represents a good faith estimate of the number of shares which may become issuable in satisfaction of liquidated damages arising from our Securities Purchase Agreement dated November 9, 2004. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE SELLING STOCKHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES. IN ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 10, 2004 39,002,780 SHARES OF COMMON STOCK MARKLAND TECHNOLOGIES, INC. ---------------------- This prospectus relates to the resale, from time to time, of up to 39,002,780 shares of our common stock by the stockholders referred to throughout this prospectus as "selling stockholders" including: o 3,396,529 shares of our common stock which are currently outstanding; o 24,000,000 shares of our common stock which are issuable upon the exercise of warrants and conversion of notes issued on September 21, 2004, or which may become issuable as a result of adjustments contemplated by the terms of the notes and warrants; o 7,593,751 shares of our common stock which are issuable upon the exercise of warrants and conversion of notes issued on November 9, 2004, or which may become issuable as a result of adjustments contemplated by the terms of the notes and warrants; o 3,000,000 shares of our common stock which may be issued as liquidated damages as contemplated by a Registration Rights Agreement dated September 21, 2004; and o 1,012,500 shares of our common stock which may be issued as liquidated damages as contemplated by a Securities Purchase Agreement dated November 9, 2004. The selling stockholders may sell the common stock being offered pursuant to this prospectus from time to time (directly or through agents or dealers) on terms to be determined at the time of sale. The prices at which the selling stockholders may sell their shares may be determined by the prevailing market price for the shares or in negotiated transactions. The selling stockholders will receive all of the proceeds from the sales made under this prospectus. Accordingly, we will receive no part of the proceeds from sales made under this prospectus. We are paying the expenses incurred in registering the shares, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders. ---------------------- Our common stock is quoted on the OTC Bulletin Board by the National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." On November 9, 2004, the last reported sale price of our common stock on the OTC Bulletin Board was $0.675 per share. ---------------------- INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 9 OF THIS PROSPECTUS. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- The date of this prospectus is [ ], 2004 ---------------------- TABLE OF CONTENTS Prospectus Summary...............................................................................1 Risk Factors.....................................................................................9 Special Note Regarding Forward-Looking Statements...............................................16 Use of Proceeds.................................................................................17 Price Range for Common Stock and Dividend Policy................................................17 Selling Stockholders............................................................................17 Management's Discussion and Analysis of Financial Condition and Results of Operations...........25 Changes in Accountants..........................................................................35 Business........................................................................................36 Property........................................................................................43 Legal Proceedings...............................................................................43 Directors, Executive Officers, Promoters and Control Persons....................................45 Compensation of Directors and Executive Officers................................................46 Security Ownership of Certain Beneficial Owners and Management..................................49 Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............50 Certain Relationships and Related Transactions..................................................50 Description of Securities.......................................................................53 Plan of Distribution............................................................................58 Available Information...........................................................................60 Legal Matters...................................................................................60 Experts.........................................................................................61
---------------- No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this prospectus in connection with the offer contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in our affairs since the date hereof. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities other than those specifically offered hereby or of any securities offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies. This prospectus has been prepared based on information provided by us and by other sources that we believe are reliable. This prospectus summarizes certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents, if any, for a more complete understanding of what we discuss in this prospectus. In making a decision to invest in the common stock, you must rely on your own examination of our company and the terms of the offering and the common stock, including the merits and risks involved. We are not making any representation to you regarding the legality of an investment in the common stock by you under any legal investment or similar laws or regulations. You should not consider any information in this prospectus to be legal, business, tax or other advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the common stock. ---------------- In this prospectus, "Markland," "the Company," "we," "us" and "our" refer to Markland Technologies, Inc. and its subsidiaries, taken as a whole, unless the context otherwise requires. ---------------- The information in this prospectus reflects our 1-for-60 reverse stock split effective October 27, 2003. ---------------- This prospectus contains trademarks, service marks and registered marks of Markland Technologies, Inc. and its subsidiaries and other companies, as indicated. Unless otherwise provided in this prospectus, as amended and supplemented from time to time, trademarks identified by (R) and (TM) are registered trademarks or trademarks, respectively, of Markland Technologies, Inc. or its subsidiaries. All other trademarks are the properties of their respective owners. ---------------- Our executive offices are located at 54 Danbury Road, #207, Ridgefield, CT 06877, and our phone number is (203) 894-9700. ---------------- PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS CERTAIN MATERIAL ASPECTS OF THE OFFERING FOR RESALE OF COMMON STOCK BY THE SELLING STOCKHOLDERS COVERED BY THIS PROSPECTUS BUT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING THE OFFERING, OUR COMPANY, OUR COMMON STOCK AND OUR FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE "RISK FACTORS" BEGINNING ON PAGE 9. BUSINESS Markland Technologies, Inc. ("Markland", the "Company" or "we") is an integrated homeland security and defense company incorporated under the laws of the State of Florida. WHO WE ARE We are the successor to a variety of businesses dating back to 1995. Our business, as it exists today, consists of four business areas: o sensor systems for military and intelligence applications; o chemical detectors; o border security systems; and o advanced technologies. We provide to the United States Department of Defense ("DOD") and to various other United States Intelligence Agencies ("INTEL") remote sensing technology products, and services to protect our country's military personnel and infrastructure assets. We also provide to the Department of Homeland Security ("Homeland Security"); products, services and emerging technologies to protect our country's borders, infrastructure assets and personnel. Our mission is to build world-class integrated solutions for the Homeland Security, DOD and INTEL marketplaces through expansion of our existing contracts, development of our emerging technologies and acquisition of synergistic revenue producing assets. Prior to the acquisition of E-OIR Technologies, Inc. ("EOIR"), our primary sources of operating revenue were sales of our automatic chemical agent detection and alarm system, border security logistics products and services, and Small Business Investment Research ("SBIR") funded research grants for the development of gas plasma antenna technology. As result of the acquisition of EOIR, now a wholly-owned subsidiary of Markland, our primary sources of operating revenues will be the sales of remote sensing technology products and services to the United States Department of Defense and to various other United States Intelligence Agencies. We expect that our remote sensing technology products and services will continue to be our most significant revenue-producing business areas going forward. Our strategy is to grow through organic means through increased acceptance by our customers of our present products and services offerings and also through synergistic acquisitions of assets that provide products or services to Homeland Security, DOD, or INTEL. RECENT DEVELOPMENTS ACQUISITION OF EOIR This summary highlights selected information regarding the acquisition of EOIR. We have included a description of the acquisition and the agreements we entered into in order to effect this transaction in our current report on Form 8-K filed with the Securities and Exchange Commission (SEC) on June 30, 2004 (File No. 000-28863). The Stock Purchase Agreement, the form of promissory note, the Security Agreement, the 2004 Stock Incentive Plan, forms of non-statutory stock options, the Preferred Securities Purchase Agreement, the Pledge and Security Agreement related to this acquisition were also filed with the SEC on June 30, 2004 as exhibits to our current report on Form 8-K (File No. 000-28863). In addition, on September 13, 2004, we also filed with the SEC a current report on Form 8-K/A (File No. 000-28863) with EOIR audited financial statements for the years ended December 31, 2003 and December 31, 2002 and EOIR unaudited financial statements for the quarter ended March 31, 2004. These filings are public documents available on the SEC's web site at www.sec.gov. We urge you to obtain and read carefully copies of these documents and this registration statement before making an investment decision. 1 On June 29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000 in cash and $11,000,000 in principal amount of five-year notes secured by the assets and stock of EOIR. EOIR is a provider of technology and services to the United States Army Night Vision and Electronic Sensors Directorate, as well as other United States Department of Defense and Intelligence Agencies. It has significant expertise in wide-area remote sensing using both electro-optic and infrared technologies. We intend to continue to use the assets of EOIR for this purpose and to also broaden our product base and offerings to the Department of Homeland Security. We plan to combine certain EOIR technology assets in the areas of chemical detection with those of our other operating subsidiary Science and Technology Research Inc. to provide a more complete integrated product line offering for both "stand off" and "point" chemical detection systems. EOIR will represent a vast majority of our revenue as we expect that EOIR will continue to be our most significant revenue producing business area in the next fiscal year. In connection with this acquisition, we have also adopted a Stock Incentive Plan pursuant to which we have issued options to purchase 9,345,740 shares of our common stock to key employees of EOIR who are continuing employment following the acquisition for an exercise price of $.3775 per share These options will vest in five equal annual installments. We have also granted to the other key employees of EOIR who are continuing employment following the acquisition options to purchase an additional number of shares equal to $471,983 divided by one-half of the market price for the common stock at the date of vesting. These options will vest in five equal annual installments. We have also agreed to grant options to purchase an additional 5,000,000 shares of common stock to employees of EOIR in the future. We expect these options to vest over five years after the date of grant and to have an exercise price equal to the fair market value of the common stock on the date of grant. We intend to file a registration statement on Form S-8 to register 27,030,000 shares of our common stock issued or issuable, as applicable, under (i) our 2004 Stock Incentive Plan and (ii) our employment agreements with Kenneth P. Ducey, Robert Tarini and Darylene Wanek. In connection with this acquisition, we have also raised $2 million through a private placement of an additional 3,500 shares of its Series D Preferred Stock to a single institutional investor. 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% - -------------------- (1) After an adjustment for a 1-for-60 reverse stock split effective October 27, 2003. The Series D preferred stock can be converted only to the extent that the Series D stockholder will not, as a result of the conversion, hold in excess of 9.999% of the total outstanding shares of our common stock. For a complete description of the terms and conditions of the Series D Preferred Stock please refer to Markland's annual report on Form 10-KSB for the fiscal year ended June 30, 2003. 2 SEPTEMBER 21, 2004 PRIVATE PLACEMENT THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION REGARDING THIS RECENT PRIVATE PLACEMENT. A PURCHASE AGREEMENT, A SECURITY AGREEMENT, FORMS OF WARRANTS AND CONVERTIBLE NOTES, A REGISTRATION RIGHTS AGREEMENT, LOCK-UP AGREEMENTS AND WAIVER AGREEMENTS WERE FILED WITH THE SEC ON SEPTEMBER 23, 2004 AS EXHIBITS TO OUR CURRENT REPORT ON FORM 8-K (FILE NO. 000-28863). THESE FILINGS ARE PUBLIC DOCUMENTS AVAILABLE ON THE SEC'S WEB SITE AT WWW.SEC.GOV. WE URGE YOU TO OBTAIN AND READ CAREFULLY THESE DOCUMENTS AND THIS REGISTRATION STATEMENT BEFORE MAKING AN INVESTMENT DECISION. On September 21, 2004, we entered into a Purchase Agreement (the "Purchase Agreement") with DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd. (together the "Initial Investors") pursuant to which we sold warrants to purchase shares of our common stock and secured convertible promissory notes for the aggregate consideration of $4,000,000. We received net proceeds of $3,480,000 from this private placement. We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 1,500,000 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is covered by this registration statement. We intend to use the proceeds from this offering for working capital. The offer and sale of these notes and warrants was made in reliance on Section 4(2) of Securities Act of 1933, as amended. The Initial Investors are stockholders of the Company and "accredited investors" within the meaning of Regulation D. Subject to conditions set forth in the Purchase Agreement, we may require the Initial Investors to purchase $1,000,000 of additional notes by delivering to the Investors a written notice between March 15, 2005 and March 30, 2005. We may only exercise the right to require the purchase of additional notes on a single occasion. Shares issuable upon the conversion of additional notes, if any, have not been registered in this registration statement. The Purchase Agreement also contains standard representations, covenants and events of default. Occurrence of an event of default allows the Initial Investors to accelerate the payment of the notes and/or exercise other legal remedies, including foreclosing on collateral. The Notes --------- The notes issued in connection with this private placement are in the aggregate principal amount of five million two hundred thousand dollars ($5,200,000) and accrue interest daily at the rate of eight percent (8%) per year on the then outstanding and unconverted principal balance of the notes. The notes will mature on September 21, 2005. At any time, and at the option of the Initial Investors, the outstanding principal and accrued interest of the notes may be converted into shares of our common stock at an initial conversion price per share of $0.80. Under the terms of these notes, we are required to pay to the Initial Investors $4,000,000 of the outstanding principal and interest by March 15, 2005, and the remaining outstanding balance by September 21, 2005. If we do not make the March 15, 2005 prepayment, the conversion price will be adjusted from $0.80 per share to the lower of (i) $0.80 and (ii) a floating rate equal to 80% of average closing price per share of our common stock for the five trading days preceding conversion. In the event we issue common stock or common stock equivalents at a price per share below the then effective conversion price of the convertible notes, the conversion price will be reduced to that lower price per share. The Warrants ------------ The warrants issued in connection with this private placement entitle the Initial Investors to purchase an aggregate of 6,500,000 shares of our common stock, at any time and from time to time, through September 21, 2009, at an initial exercise price of $1.50 per share. The warrants are subject to the following adjustments provisions: o Under the terms of the warrants, if we do not make a prepayment of an aggregate of $4,000,000 in principal, plus any interest having accrued thereon, on the notes issued to the Initial Investors in this private placement by March 15, 2005, the exercise price of the warrant will be reduced from $1.50 to the lesser of (i) $0.792 and (ii) 80% of the average closing price per share of our common stock on the date the adjustment is made. 3 o Adjustments are also required in the event that we issue common stock or common stock equivalents at a price per share below the then effective exercise price of the warrants. The exercise price will be reduced to that lower price per share. o In the event any of the foregoing adjustments are made, the warrants will become exercisable for a number of shares equal to the aggregate exercise price (i.e., the exercise price per share multiplied by the number of underlying shares) prior to the adjustment divided by the adjusted exercise price per share. Liquidated Damages ------------------ If either: (i) this registration statement is not declared effective by December 20, 2004, or within five trading days after the SEC notifies us that the registration will not be reviewed or is not subject to further review or comments; or (ii) this registration statement is suspended for more than an aggregate of 20 trading days, whether or not consecutive, in any twelve-month period, we will be required to pay each of the investors in this private placement liquidated damages in an amount equal to 2% of such Initial Investor's investment amount, half of which may, at our option, be paid in common stock of equivalent value. Such value shall be determined based on the lower of (i) the average of the closing price of our common stock for the five days preceding the payment date and (ii) the closing price of our common stock on the day preceding the date that stock is delivered to the Initial Investors. As a result, we are registering 3,000,000 shares of our common stock representing our good faith estimate of the shares we may be required to issue in satisfaction of the liquidiated damages provisions. Other Agreements ---------------- In connection with this private placement: o We have granted a security interest in and a lien on substantially all of our assets to the Initial Investors pursuant to the terms of a Security Agreement dated September 21, 2004. o We have agreed to prepare and file with the SEC this registration statement covering the resale of all of the shares of our common stock issuable upon conversion of the notes and the exercise of the warrants issued in this private placement, as provided in the Registration Rights Agreement dated September 21, 2004. o We entered into a lock-up agreement with James LLC, the holder of 17,627 shares of our Series D Convertible Preferred Stock (the "Series D Shares"), pursuant to which James LLC has agreed not to sell any Series D Shares until the first to occur of (i) notice from us and the Initial Investors that the transactions contemplated by the Purchase Agreement have been terminated in accordance with their terms, or (ii) March 15, 2005. However, under to the terms of the lock-up agreement, James LLC may still convert their Series D shares and sell the underlying shares of common stock in accordance with Rule 144 of the Securities Act of 1933, as amended. In exchange, we agreed that under certain conditions, if we did not redeem the Series D stock by January 15, 2005, we would issue to James LLC a warrant to purchase 1,088,160 shares of our common stock at $0.80 per share. o We entered into a lock-up agreement with Robert Tarini, our Chief Executive Officer, and Kenneth P. Ducey, Jr., our Chief Financial Officer, dated September 21, 2004. Pursuant to this agreement, Mr. Tarini and Mr. Ducey have agreed not to sell any securities of the Company until the earlier of (i) notice from us and the Initial Investors that the transactions contemplated by the Purchase Agreement have been terminated in accordance with their terms or (ii) sixty days after the effectiveness of the registration statement related to the Registration Rights Agreement. 4 o Certain investors waived their rights of first refusal and entered into other agreements in accordance with the terms of a Waiver Agreement dated September 21, 2004. NOVEMBER 9, 2004 PRIVATE PLACEMENT THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION REGARDING THIS RECENT PRIVATE PLACEMENT. A SECURITIES PURCHASE AGREEMENT, A SUBORDINATION AGREEMENT, FORMS OF WARRANTS AND CONVERTIBLE NOTES AND A CONDITIONAL WAIVER AND CONSENT AGREEMENT WERE FILED WITH THE SEC ON NOVEMBER 10, 2004 AS EXHIBITS TO THIS REGISTRATION STATEMENT. BECAUSE THESE AGREEMENTS REFER TO THE SEPTEMBER 21, 2004 PRIVATE PLACEMENT YOU SHOULD ALSO REVIEW OUR CURRENT REPORT ON FORM 8-K (FILE NO. 000-28863). THESE FILINGS ARE PUBLIC DOCUMENTS AVAILABLE ON THE SEC'S WEB SITE AT WWW.SEC.GOV. WE URGE YOU TO OBTAIN AND READ CAREFULLY THESE DOCUMENTS AND THIS REGISTRATION STATEMENT BEFORE MAKING AN INVESTMENT DECISION. On November 9, 2004, we entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Harborview Master Fund L.P. and Southridge Partners LP (the "Additional Investors") pursuant to which we sold warrants to purchase shares of our common stock and secured convertible promissory notes for the aggregate consideration of $1,350,000. We received net proceeds of $1,174,500 from this private placement. We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 337,500 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is not covered by this registration statement. We intend to use the proceeds from this offering for working capital. The offer and sale of these securities was made in reliance on Section 4(2) of Securities Act of 1933, as amended. The Additional Investors are stockholders of the Company and "accredited investors" within the meaning of Regulation D. Unless otherwise noted, the terms of the notes and warrants issued in this private placement are identical to the terms of the notes and warrants issued on September 21, 2004. The Securities Purchase Agreement contains standard representations, covenants and events of default. Occurrence of an event of default allows the Additional Investors to accelerate the payment of the notes and/or exercise other legal remedies, including foreclosing on collateral. The Notes --------- The notes issued in connection with this private placement are in the aggregate principal amount of one million seven hundred and fifty-five thousand dollars ($1,755,000) and accrue interest daily at the rate of eight percent (8%) per year on the then outstanding and unconverted principal balance of the notes. The notes will mature on November 9, 2005. At any time, and at the option of the Additional Investors, the outstanding principal and accrued interest of the notes may be converted into shares of our common stock at an initial conversion price per share of $0.80. Under the terms of each these notes, we are required to pay a principal amount on each note equal to the consideration paid by the Additional Investor holding such note plus any accrued interest by March 15, 2005, and the remaining outstanding balance by November 9, 2005. In the event we do not make these prepayments, the conversion price of the note will be subject to the adjustment described in connection with the September 21, 2004 private placement. The Warrants ------------ The warrants issued in connection with this private placement entitle the Additional Investors to purchase an aggregate of 2,193,750 shares of our common stock, at any time and from time to time, through November 9, 2009. The warrants are subject to substantially the same adjustment provisions as the warrants issued in connection with the September 21, 2004 private placement. Liquidated Damages ------------------ We are subject to substantially the same liquidated damages provisions as those discussed in connection with the September 21, 2004 private placement. We are registering an additional 1,012,500 shares of our common stock representing our good faith estimate of the number of shares of common stock we may be required to issue in satisfaction of liquidated damages arising from the Securities Purchase Agreement with the Additional Investors. 5 OTHER RELATED AGREEMENTS ------------------------ In connection with this transaction: o We have granted a security interest in and a lien on substantially all of our assets to the Additional Investors pursuant to the terms of a Security Agreement, dated November 9, 2004. This security interest is subordinated to the security interests granted in connection with the acquisition of EOIR and the September 21, 2004 private placement, as contemplated in the Subordination Agreement dated November 9, 2004. o We have agreed to prepare and file with the SEC this registration statement covering the resale of all of the shares of our common stock issuable upon conversion of the notes and the exercise of the warrants issued in connection with this private placement, as provided in the Securities Purchase Agreement dated November 9, 2004. o The Initial Investors have consented to Markland filing the registration statement related to the September 21, 2004 private placement on November 10, 2004, instead of November 5, 2004. The Initial Investors have also agreed to waive other rights contemplated in the Registration Rights Agreements dated September 21, 2004. o Under the terms of the Securities Purchase Agreement dated November 9, 2004, the Additional Investors in this private placement are prohibited from selling any of the securities issued to them in connection with this transaction (including any securities issued upon conversion or exercise thereof) until the 40th trading day following the date the SEC declares this registration statement effective. o Under the terms of the Subordination Agreement between the Company, the Initial Investors and the Additional Investors, the Additional Investors have agreed that their security interest in our assets are subordinated to the security interest of the Initial Investors. Moreover, the Additional Investors are not entitled to any payments under their notes (other than periodic interest payments and liquidated damages, if any), and they may not declare any amounts payable or exercise any rights or remedies it may have under the notes, until the Initial Investors' notes are paid in full. RESIGNATION OF GREGORY A. WILLIAMS On November 1, 2004, Gregory A. Williams notified our Board of Directors of his resignation from the Board and his positions as Director, Executive Vice President, Chief Financial Officer, and Chief Operating Officer of our wholly owned subsidiary, EOIR Technologies, Inc. Mr. Williams was a shareholder of EOIR prior to the acquisition of EOIR on June 29, 2004. To our knowledge, Mr. Williams' resignation was not in connection with any disagreement concerning matters relating to the Company's operations, policies or practices. On November 1, 2004, we entered into an agreement with Mr. Williams and EOIR detailing the terms and conditions of Mr. Williams' resignation, including, among other things, (a) payment to Mr. Williams of twelve months of severance and all accrued and unused vacation time, (b) continuation of benefits until the earlier of December 31, 2005 or when Mr. Williams finds new employment, (c) acceleration of vesting of 40% of the non-statutory stock options held by Mr. Williams; and (d) reaffirmation by Mr. Williams of his confidentiality and non-competition obligations and an agreement not to compete with or solicit employees from EOIR for a period of twelve (12) months. After giving effect to the resignation of Mr. Williams, our board of directors consists of the following members: Robert Tarini, Kenneth P. Ducey, Jr. and Joseph P. Mackin. 6 THE OFFERING The selling stockholders are offering up to 39,002,780 shares of our common stock consisting of 3,396,529 outstanding shares of our common stock, 31,593,751 shares of common stock issuable upon the exercise of warrants and conversion of notes issued in connection with the September 21, 2004 and November 9, 2004 private placements or which may become issuable as a result of conversion or exercise price adjustments and 4,012,500 shares of our common stock which may be issued as liquidated damages under our Registration Rights Agreement dated September 21, 2004 and our Securities Purchase Agreement dated November 9, 2004. ISSUER: Markland Technologies, Inc. SECURITIES OFFERED: up to 39,002,780 shares of our common stock. OTC SYMBOL: MRKL.OB USE OF PROCEEDS: We will not receive any of the proceeds from the sale by any selling stockholder of our common stock. OFFERING PRICE: To be determined by the prevailing market price for the shares at the time of the sale or in negotiated transactions. RISK FACTORS: You should read the "Risk Factors" section beginning on page 9 (along with other matters referred to and incorporated by reference in this prospectus) to ensure that you understand the risks associated with an investment in our common stock. TERMS OF THE SALE: To be determined at the time of the sale. TOTAL SHARES OF OUR COMMON STOCK 51,564,458 OUTSTANDING AS OF NOVEMBER 5, 2004:
The selling stockholders acquired the securities covered by this registration statement in connection with the following transactions. SEPTEMBER 21, 2004 PRIVATE PLACEMENT Some of the selling stockholders are offering up to 27,000,000 shares of our common stock, including o 24,000,000 shares of our common stock which (i) are issuable upon the exercise of warrants and conversion of notes issued in connection with the September 21, 2004 private placement or (ii) may become issuable as a result of adjustments contemplated by our agreements with certain selling stockholders; and o 3,000,000 shares of our common stock which may be issued as liquidated damages as contemplated by our agreements with certain selling stockholders. We received gross proceeds of $4,000,000 and net proceeds of $3,480,000 from this private placement (after deducting fees and transaction costs). We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 1,500,000 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is covered by this registration statement. NOVEMBER 9, 2004 PRIVATE PLACEMENT TRANSACTION Some of the selling stockholders are offering up to 8,606,251 shares of our common stock, including o 7,593,751 shares of our common stock which (i) are issuable upon the exercise of warrants and conversion of notes issued in connection with the November 9, 2004 private placement or (ii) may become issuable as a result of adjustments contemplated by our agreements with certain selling stockholders; and o 1,012,500 shares of our common stock which may be issued as liquidated damages as contemplated by our Securities Purchase Agreement dated November 9, 2004. 7 We received gross proceeds of $1,350,000 and net proceeds of $1,174,500 from this private placement (after deducting fees and transaction costs). We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 337,500 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is not covered by this registration statement. ADDITIONAL SELLING STOCKHOLDERS WITH ADDITIONAL PIGGY BACK REGISTRATION RIGHTS Some of the selling stockholders are offering up to 3,396,529 outstanding shares of our common stock as follows: o 2,246,381 shares of our common stock held by Verdi Consulting, Inc. pursuant to consulting agreements for services rendered to us; and o 1,150,148 shares of our common stock held David Stefansky. We have agreed to registered these securities pursuant to piggy back registration rights granted with respect to these shares of our common stock. SUMMARY FINANCIAL INFORMATION The following table provides selected financial and operating data for the years ended June 30, 2004 and June 30, 2003. YEAR ENDED JUNE 30, 2004 2003 -------------- ------------- Revenue $ 6,013,930 $ 658,651 Gross Profit $ 1,339,337 $ 213,433 Loss from Continuing Operations $ (10,150,866) $ (3,614,093) Net Loss $ (10,511,213) $ (2,836,881) Current Assets $ 6,740,425 Current Liabilities $ 9,481,147 Total Assets $ 32,963,963 Long-term Debt $ 7,774,980 8 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE ADVERSELY AFFECTED. IN THOSE CASES, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF OPERATING LOSSES, AND THERE IS NO ASSURANCE THAT WE WILL ACHIEVE PROFITABILITY IN THE FUTURE. We have a history of operating losses. We cannot predict when, or if, we will ever achieve profitability. Our current business operations began in 2002 and have resulted in losses in each fiscal year. As of June 30, 2004, we had an accumulated deficit of $20,283,948. If we continue to experience operating losses, an investment in our common stock is at risk of being lost. WE HAVE A GOING-CONCERN QUALIFICATION IN THE REPORTS BY OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS FOR OUR FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2004, AND JUNE 30, 2003, WHICH MAY MAKE CAPITAL RAISING MORE DIFFICULT AND MAY REQUIRE US TO SCALE BACK OR CEASE OPERATIONS, PUTTING OUR INVESTORS' FUNDS AT RISK. The reports of our independent registered public accounting firms, for fiscal years 2004 and 2003, includes a going-concern qualification, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing operations. If we are unable to obtain additional funding, we may not be able to continue operations. In fiscal year 2004, we have raised a total of $15,345,000 in new capital. Subsequent to June 30, 2004, we raised $4,000,000 in the form of convertible promissory notes. There is no guarantee that we will be able to attract additional equity or debt investors. To date, we have funded our operations through equity investments and issuances of debt. Additionally, we have an accumulated deficit of $20,283,948 as of June 30, 2004. This deficit indicates that we may be unable to meet our future obligations unless additional funding sources are obtained. WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH. The development of our technologies will require additional capital, and our business plan is to acquire additional revenue-producing assets. We incurred net losses applicable to our common stockholders of $15,095,461 and $7,598,852 for the fiscal years ended June 30, 2004 and June 30, 2003 respectively. Additionally, we had a working capital deficiency of $2,740,722 at June 30, 2004. We may be unable to obtain additional funds in a timely manner or on acceptable terms, which would render us unable to fund our operations or expand our business. If we are unable to obtain capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. Although we have been successful in the past in obtaining financing for working capital and acquisitions, we will have ongoing capital needs as we expand our business. If we raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. 9 WE MAY FAIL TO REALIZE SOME OR ALL OF THE OF THE ANTICIPATED BENEFITS FROM OUR ACQUISITION OF EOIR TECHNOLOGIES Our combined company may fail to realize some or all of the anticipated benefits and synergies of the transaction as a result of, among other things, lower than expected order rates from customers of EOIR, unanticipated costs, deterioration in the U.S. economy and other factors. There can be no assurance that we will receive new orders under our existing contract with the United States Army Night Vision and Electronic Sensors Directorate. In addition, the integration of EOIR business and operations with those of Markland may take longer than anticipated, may be more costly than anticipated and may have unanticipated adverse results relating to Markland's or EOIR's existing businesses or customer base. FAILURE TO COMPLETE OUR INCOME TAX FILINGS MAY ADVERSELY AFFECT OUR RESULTS We have failed to complete our federal and state income tax filings for the years 2001 through 2003. The Company has been organized as a C corporation under the laws of the State of Florida and expects to be treated as such for federal income tax purposes. In addition to federal income taxes, we are subject to tax regulation in each state and city in which we operate. We believe that the Company does not currently have any material income tax liability. However, if there is any material difference between our assumptions concerning the tax regulatory environment and the actual regulatory requirements, we may have an additional tax liability. In addition, if we are required to pay penalties or fines, our results of operations and our business projections may be materially and adversely affected. OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF CUSTOMERS SUCH THAT THE LOSS OF ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES. During the fiscal year ended June 30, 2004, and 2003, we derived substantially all of our revenue from contracts with the U.S. Government, including the U.S. Navy, the Department of Defense, and the Department of Homeland Security. We have a contract with the United States Army Night Vision and Electronic Sensors Directorate that may provide for revenues of up to approximately $406,000,000 depending upon the U.S. Army's needs of which our subsidiary EOIR recognized in excess of $35,000,000 in revenues for calendar year ended December 31, 2003. We expect this contract to account for a substantial majority of our revenues in fiscal 2005. The loss of this customer due to cutbacks, competition, or other reasons would materially reduce our revenue base. Annual or quarterly losses may occur if there are material gaps or delays in orders from one of our largest customers that are not replaced by other orders or other sources of income. MANY OF OUR TECHNOLOGIES ARE UNPROVEN AND THEIR SUCCESS IN THE MARKETPLACE IS UNKNOWN. Our Gas plasma antenna, Vehicle stopping system, Acoustic Core(TM) signature analysis, APTIS(TM) human screening portal, and cryptography software have not reached commercial viability. There is no guarantee that these products will be successful in the marketplace. Although we currently sell automatic chemical detection and alarm systems, we do not know for how long the U.S. Navy will continue to buy this product, nor do we know if we will be able to sell this product or others like it to other customers. If we do not successfully exploit our technology, our financial condition, results of operations and business prospects would be adversely affected. The development of our technology is subject to certain factors beyond our control, including the production of certain components by our suppliers. Commercially viable plasma antenna technology systems may not be successfully and timely produced by our original equipment manufacturers due to the inherent risk of technology development, new product introduction, limitations on financing, competition, obsolescence, loss of key technical personnel or other factors. The development and introduction of our technologies could be subject to additional delays. Our various projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or a determination that further exploitation is unfeasible. 10 THE HOMELAND SECURITY INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS, AND UNLESS WE KEEP PACE WITH THE CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS. Our future success will depend, in part, upon our ability to develop and introduce a variety of new products and services and enhancements to these new product and services in order to address the changing and sophisticated needs of the homeland security marketplace. Delays in introducing new products, services and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products and services at competitive prices may cause customers to forego purchases of our products and services and purchase those of our competitors. Frequently, technical development programs in the homeland security industry require assessments to be made of the future directions of technology and technology markets generally, which are inherently risky and difficult to predict. WE FACE INTENSE COMPETITION, WHICH COULD RESULT IN LOWER REVENUES AND HIGHER RESEARCH AND DEVELOPMENT EXPENDITURES AND COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Current political tensions throughout the world have heightened interest in the homeland security industry, and we expect competition in this field, which is already substantial, to intensify. If we do not develop new and enhanced products, or if we are not able to invest adequately in our research and development activities, our business, financial condition and results of operations could be negatively impacted. Many of our competitors have significantly more cash and resources than we have. Our competitors may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented. To remain competitive, we must continue to develop, market and sell new and enhanced systems and products at competitive prices, which will require significant research and development expenditures. SOME OF OUR COMPETITORS ARE MUCH LARGER THAN WE ARE, HAVE BETTER NAME RECOGNITION THAN WE DO AND HAVE FAR GREATER FINANCIAL AND OTHER RESOURCES THAN WE DO. With the U.S. government's large appropriation of money for homeland security programs, many companies are competing for the same homeland security contracts and there can be no assurance that Markland will effectively compete with large companies who have more resources and funds than we do. Several companies have been working on issues relevant to the safety of the American people for the past several years. Lockheed Martin and Northrop Grumman are providers of hardware engineering and systems engineering solutions. Computer Sciences Corporation and EDS provided computer and computer software solutions. Defense companies, such as General Dynamics, Boeing and Raytheon are solutions providers that could easily expand their business into the homeland security business and are currently allocating resources to develop programs in this area. Because of the services and additional human and financial resources that these larger companies can provide, they may be more attractive to the U.S. Government. IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER. Recently, we have expanded our operations to pursue existing and potential new market opportunities. This growth has placed, and is expected to continue to place, a strain on our personnel, management, financial and other resources. To manage our growth effectively, we must, among other things: o upgrade and expand our manufacturing facilities and capacity in a timely manner; o successfully attract, train, motivate and manage a larger number of employees for manufacturing, sales and customer support activities; o control higher inventory and working capital requirements; and o improve the efficiencies within our operating, administrative, financial and accounting systems, procedures and controls. If we fail to manage our growth properly, we may incur unnecessary expenses and the efficiency of our operations may decline. 11 WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO EXPAND OUR OPERATIONS. To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial and sales and marketing personnel. If we fail to attract and retain the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which could lead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academic institutions, government entities and other organizations. OUR SUCCESS DEPENDS ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES. Our future success depends to a significant degree on the skills and efforts of Robert Tarini, our chief executive officer. If we lost the services of Mr. Tarini, our business and operating results could be adversely affected. We also depend on the ability of our other executive officers and members of senior management to work effectively as a team. The loss of one or more of our executive officers or senior management members could impair our ability to manage our business effectively. OUR LARGEST CUSTOMERS ARE THE U.S. ARMY, THE U.S. NAVY, THE DEPARTMENT OF HOMELAND SECURITY, AND VARIOUS OTHER U.S. INTELLIGENCE AGENCIES WHOSE OPERATIONS ARE SUBJECT TO UNIQUE POLITICAL AND BUDGETARY CONSTRAINTS, INVOLVE COMPETITIVE BIDDING, AND OUR CONTACTS WITH THESE CUSTOMERS MAY BE SUBJECT TO CANCELLATION WITH OR WITHOUT PENALTY, WHICH MAY PRODUCE VOLATILITY IN OUR EARNINGS AND REVENUE. Our largest customers are the U.S. Army, the U.S. Navy, the Department of Homeland Security, and various other U.S. Intelligence agencies. Due to political and budgetary processes and other scheduling delays that may frequently occur relating to the contract or bidding process, some government agency orders may be canceled or delayed, and the receipt of revenues or payments may be substantially delayed. This irregular and unpredictable revenue stream makes it difficult for our business to operate smoothly. Obtaining contracts from government agencies is challenging, and government contracts often include provisions that are not standard in private commercial transactions. For example, government contracts may: o include provisions that allow the government agency to terminate the contract without penalty under some circumstances; o be subject to purchasing decisions of agencies that are subject to political influence; o contain onerous procurement procedures; and o be subject to cancellation if government funding becomes unavailable. In addition, federal government agencies routinely audit government contracts. These agencies review a contractor's performance on its contract, pricing practices, cost structure and compliance with applicable laws, regulations and standards. These audits may occur several years after completion of the audited work. An audit could result in a substantial adjustment to our revenues because we would not be reimbursed for any costs improperly allocated to a specific contract, and we would be forced to refund any improper costs already reimbursed. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with federal government agencies. In addition, our reputation could be harmed if allegations of impropriety were made against us. OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR PROPRIETARY TECHNOLOGY. Our ability to compete depends significantly upon our patents, our trade secrets, our source code and our other proprietary technology. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged, invalidated or circumvented, in which case the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the United States, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technology without violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could seriously harm our competitive position, which could lead to a substantial reduction in net sales. 12 If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we would prevail. CLAIMS BY OTHERS THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS AND FINANCIAL CONDITION. Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others. We do not conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. We may face claims by third parties that our products or technology infringe their patents or other intellectual property rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations. NEW CORPORATE GOVERNANCE REQUIREMENTS ARE LIKELY TO INCREASE OUR COSTS AND MAKE IT MORE DIFFICULT TO ATTRACT QUALIFIED DIRECTORS. We face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC. We expect that these laws, rules and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming and costly. We also expect that these new requirements will make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher costs to obtain coverage. These new requirements are also likely to make it more difficult for us to attract and retain qualified individuals to serve as members of our board of directors or committees of the board, particularly the audit committee. FUTURE ACQUISITIONS OF OTHER COMPANIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND ADDITIONAL EXPENSES. We have completed the acquisitions of several companies, we plan to review potential acquisition candidates, and our business and our strategy may include building our business through acquisitions. However, acceptable acquisition candidates may not be available in the future or may not be available on terms and conditions acceptable to us. Acquisitions involve numerous risks including among others, difficulties and expenses incurred in the consummation of acquisitions and assimilations of the operations, personnel, and services and products of the acquired companies. Additional risks associated with acquisitions include the difficulties of operating new businesses, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired company. If we do not successfully integrate the businesses we may acquire in the future, our business will suffer. WE FACE RISKS ASSOCIATED WITH OUR PLANS TO MARKET, DISTRIBUTE AND SERVICE OUR PRODUCTS INTERNATIONALLY. We intend to market, distribute and service our products internationally subject to applicable U.S. Governmental approval and regulation on sales of sensitive U.S. technology. Our success in international markets will depend, in part, on our ability to secure relationships with foreign sub-distributors and on our ability to meet foreign regulatory and commercial requirements. 13 In March 2004, Markland signed an agreement with Tradeways, Ltd. Tradeways, founded in 1974, is the principal worldwide exporter of U.S. Military Special Nuclear, Biological and Chemical (NBC) Equipment, and has fulfilled contracts for NBC products in more than 30 countries. Tradeways provides a complete range of NBC products, as well as training and service. The process of selling to foreign militaries is lengthy, and Markland cannot give any assurances that it will be successful. If Tradeways is unsuccessful in selling Markland's products, it would decrease Markland's success with foreign military sales. To date, we have not sold any products through this channel. WE ARE NOT SUBJECT TO THE SAME CORPORATE GOVERNANCE STANDARDS AS LISTED COMPANIES, INCLUDING WITHOUT LIMITATION, THE REQUIREMENT THAT THE COMPANY HAVE A MAJORITY OF INDEPENDENT DIRECTORS. Registered exchanges and the Nasdaq National Market have enhanced corporate governance requirements that apply to issuers that list their securities on those markets. Our common stock is quoted on the OTC Bulletin Board, which does not have comparable requirements. For instance, we are not required to have any independent directors or to adopt a code of ethics. Currently, we have no independent directors and therefore management has significant influence over decisions made on behalf of the stockholders. In certain circumstances, management may not have the same interests as the shareholders and conflicts of interest may arise. Furthermore, certain relationships with our officers, directors and affiliates may also involve inherent conflicts of interest. We do not have a policy to resolve conflicts of interest. Notwithstanding the exercise of their fiduciary duties as directors and executive officers and any other duties that they may have to us or our other stockholders in general, these persons may have interests different than yours. RISKS RELATED TO OUR COMMON STOCK IT MAY BE DIFFICULT FOR YOU TO RESELL YOUR SHARES IF AN ACTIVE AND LIQUID MARKET FOR OUR COMMON STOCK DOES NOT DEVELOP Our common stock is not actively traded on a registered securities exchange and we do not meet the initial listing criteria for any registered securities exchange or the NASDAQ National Market System. It is quoted on the less recognized OTC Bulletin Board. This factor may further impair your ability to sell your shares when you want and/or could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our company may be reduced. These factors could result in lower prices and larger spreads in the bids and ask prices for our shares. Due to the current price of our common stock, many brokerage firms may not be willing to effect transactions in our securities, particularly because low-priced securities are subject to an SEC rule that imposes additional sales requirements on broker-dealers who sell low-priced securities (generally those below $5.00 per share). These factors severely limit the liquidity of our common stock, and would likely have a material adverse effect on its market price and on our ability to raise additional capital. We cannot predict the extent to which investor interest in our stock, if any, will lead to an increase in its market price or the development of a more active trading market or how liquid that market might become. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE. Our stock price has been volatile. From July 1, 2003 to November 5, 2004, the trading price of our common stock ranged from a low price of $0.13 per share to a high price of $9.00 per share. Many factors may cause the market price of our common stock to fluctuate, including: o variations in our quarterly results of operations; o the introduction of new products by us or our competitors; o acquisitions or strategic alliances involving us or our competitors; o future sales of shares of common stock in the public market; and 14 o market conditions in our industries and the economy as a whole. In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company's stock drops significantly, stockholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business. IF WE ISSUE SUBSTANTIAL SHARES OF OUR COMMON STOCK (I) PURSUANT TO OUR PRIVATE EQUITY CREDIT AGREEMENT, (II) UPON CONVERSION OF THE OUTSTANDING SERIES D CONVERTIBLE PREFERRED STOCK, (III) UPON EXERCISE OF OUR COMMON STOCK PURCHASE WARRANTS, (IV) UPON CONVERSION OF THE SECURED CONVERTIBLE PROMISSORY NOTES, AND (V) PURSUANT TO EMPLOYMENT AGREEMENTS AND OUR STOCK INCENTIVE PLAN, YOU COULD SUFFER SUBSTANTIAL DILUTION OF YOUR INVESTMENT AND OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY. We have entered into a private equity credit agreement with Brittany Capital Management Limited, an offshore investment fund, on September 10, 2003, whereby we can require Brittany Capital to purchase up to $10,000,000 of our common stock at a discount, provided we have an effective registration statement on file with the SEC covering these shares. While we have not filed a registration statement with the SEC to cover these shares of common stock, we intend to file one in the future. In addition, our 2004 Stock Incentive Plan contemplates the issuance of up to 25,000,000 shares of our common stock, and our agreements with two of our executives and a consultant contemplate a series of issuances expressed as a percentage of our fully diluted outstanding common stock (i.e., including shares of our common stock for which any options, warrants, convertible preferred, or other common stock equivalents are currently convertible or exercisable, as applicable), currently estimated at 10,416,496 shares (based on our fully diluted outstanding common stock as of November 5, 2004). Moreover, because these grants are expressed as a percentage of our fully diluted common stock, any increase to the fully diluted common stock (whether the result of new issuances or, with respect to future-priced instruments, decreases in our stock price) will result in an increase in the number of shares granted under these agreements. We are also obligated to issue a substantial number of shares of common stock upon (i) the conversion of our Series D convertible preferred stock and common stock purchase warrants; (ii) the conversion of our secured convertible promissory notes issued on September 21, 2004 and on November 9, 2004; and (iii) the exercise of our warrants issued on September 21, 2004 and on November 9, 2004. Should a significant number of these securities be issued, exercised or converted, the resulting increase in the amount of the common stock in the public market could have a substantial dilutive effect on our outstanding common stock. The conversion and exercise of a substantial amount of the aforementioned securities or the issuance of new shares of common stock may also adversely affect the terms under which we could obtain additional equity capital. The price, which we may receive for the shares of common stock, that are issuable upon conversion or exercise of such securities, may be less than the market price of the common stock at the time of such conversions or exercise. FLUCTUATIONS IN OUR QUARTERLY NET SALES AND RESULTS OF OPERATIONS COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. Our future net sales and results of operations are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that our net sales or results of operations in a quarter will fall below the expectations of securities analysts or investors. If this occurs, the market price of our common stock could fall significantly. Our results of operations in any quarter can fluctuate for many reasons, including: o Timing of orders from our largest customers, the U.S. Navy, the Department of Defense, the Department of Homeland Security and the United States Night Vision and Electronic Sensors Directorate; o our ability to manufacture, test and deliver products in a timely and cost-effective manner; o our success in winning competitions for orders; 15 o the timing of new product introductions by us or our competitors; o the mix of products we sell; o competitive pricing pressures; and o general economic climate. A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed. Accordingly, if our net sales decline or do not grow as much as we anticipate, we might be unable to maintain or improve our operating margins. Any failure to achieve anticipated net sales could therefore significantly harm our operating results for a particular fiscal period. THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS AND PRIVILEGES THAT ARE SENIOR TO OUR COMMON STOCKHOLDERS, AND WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WITHOUT STOCKHOLDER APPROVAL THAT COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our board of directors has the authority to issue, without any further vote or action by you and the other common stockholders, a total of up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges, and restrictions, including voting rights, of the preferred stock, which typically are senior to the rights of the common stockholders. We have issued and outstanding 30,000 shares of our Series A Non-Voting Redeemable Convertible Preferred Stock, 17,725 shares of our Series D Convertible Preferred Stock and may, from time to time in the future, issue additional preferred stock for financing or other purposes with rights, preferences or privileges senior to the common stock. Your rights will be subject to, and may be adversely affected by, the rights of the holders of the preferred stock that have been issued or might be issued in the future. Preferred stock also could make it more difficult for a third party to acquire a majority of our outstanding voting stock. This could delay, defer or prevent a change in control. Furthermore, holders of preferred stock may have other rights, including economic rights, senior to the holders of our common stock. As a result, the existence and issuance of preferred stock could have a material adverse effect on the market value of the common stock. WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK, AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. We have not paid dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. In addition, the terms of our Exchange Agreement with Eurotech, Ltd. prohibit us from declaring dividends. In addition, pursuant to the Purchase Agreement between the Company and DKR Soundshore Oasis Holding Fund, Ltd, and DKR Soundshore Strategic Holding Fund, Ltd., dated September 21, 2004, we have covenanted that so long as any of the notes issued pursuant to such agreement are outstanding, we will not declare, pay or make any provision for any cash dividend or cash distribution with respect to our common stock or preferred stock, without first obtaining the approval of the investors party the agreement. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for historical facts, the statements in this prospectus are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this prospectus and the other documents that we file with the Securities and Exchange Commission. You can read these documents at WWW.SEC.GOV. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR ANY OTHER REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS PROSPECTUS OR THE DATE OF ANY APPLICABLE PROSPECTUS SUPPLEMENT OR THE DATE OF DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS THAT INCLUDE FORWARD-LOOKING STATEMENTS. 16 USE OF PROCEEDS The shares of common stock offered by this prospectus are being offered by the selling stockholders. We will not receive any proceeds from the sale of shares by the selling stockholders. For information about the selling stockholders, see "Selling Stockholders." PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY MARKET INFORMATION Our common stock is quoted on the OTC Bulletin Board by The National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." The following table provides, for the periods indicated, the high and low closing prices for our common stock as reported on the OTC Bulletin Board. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The prices reflect a 1-for-60 reverse stock split effective October 27, 2003. Prior to December 2003, the common stock of the Company was thinly traded. We believe that the variability of the share price may, in part, be due to thin trading. YEAR ENDED JUNE 30, 2003 HIGH LOW ----------------------------- --------- -------- First quarter $ 4.80 $ 1.20 Second quarter $ 33.00 $ 0.60 Third quarter $ 18.60 $ 7.80 Fourth quarter $ 15.00 $ 3.36 YEAR ENDED JUNE 30, 2004 ----------------------------- --------- --------- First quarter $ 9.00 $ 2.40 Second quarter $ 5.70 $ 1.90 Third quarter $ 2.70 $ 0.69 Fourth quarter $ 4.40 $ 0.59 There is no public trading market for our preferred stock. HOLDERS On November 5, 2004, the last sale price of our common stock as reported on the OTC Bulletin Board was $0.68 per share. On November 5, 2004, we had approximately 716 holders of record of our common stock and 3 holders of records of our Series D Convertible Preferred Stock respectively. This number does not include stockholders for whom shares were held in a "nominee" or "street" name. DIVIDENDS We have never declared or paid cash dividends on our capital stock, and we do not plan to pay any cash dividends in the foreseeable future. We currently intend to retain any future earnings to finance our operations and future growth. RESTRICTIONS ON MARKLAND'S ABILITY TO PAY DIVIDENDS ON COMMON STOCK Pursuant to the Exchange Agreement dated December 9, 2002, with Eurotech, Ltd., and the other parties named therein, any and all cash and other liquid assets held by our Company or its subsidiaries shall be exclusively used for working capital or investment purposes, and we shall not, and shall not permit our subsidiaries to, directly or indirectly divert or upstream cash or other current assets whether in the form of a loan, contract for services, declaration of dividend, or other arrangement in contravention of such restriction until the second anniversary of the closing date of the exchange transaction. Pursuant to the Purchase Agreement between the Company and DKR Soundshore Oasis Holding Fund, Ltd, and DKR Soundshore Strategic Holding Fund, Ltd. dated September 21, 2004, we have covenanted that so long as any of the notes issued pursuant to such agreement are outstanding, we will not declare, pay or make any provision for any cash dividend or cash distribution with respect to our common stock or preferred stock, without first obtaining the approval of the investors party the agreement. SELLING STOCKHOLDERS Up to 39,002,780 shares are being offered under this prospectus, all of which are being registered for sale for the account of the selling stockholders. 17 SEPTEMBER 21, 2004 PRIVATE PLACEMENT TRANSACTION On September 21, 2004, we sold warrants to purchase shares of our common stock and secured convertible promissory notes for the aggregate consideration of $4,000,000. We received net proceeds of $3,480,000 from this private placement. We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 1,500,000 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is covered by this registration statement. We intend to use the proceeds from this offering for working capital. The selling stockholders who participated in the September 21, 2004 private placement transaction are offering up to 27,000,000 shares of our common stock issuable pursuant to convertible notes and warrants issued in connection with this transaction, including: (i) up to 6,500,000 shares of our common stock issuable upon the conversion of notes issued to the investors; (ii) up to 6,500,000 shares of our common stock issuable upon the exercise of warrants issued to the investors; and (iii) up to 1,500,000 shares of our common stock issuable upon the exercise of warrants issued as compensation in connection with this transaction. We are also registering in connection with this transaction an additional 9,500,000 shares to cover shares of our common stock which may become issuable as the result of adjustments to the conversion or exercise prices of the notes and warrants, as discussed below. Finally, we are registering an additional 3,000,000 shares of our common stock which we may be required to issue in satisfaction of liquidated damages arising from the Registration Rights Agreement entered into by the investors and us in connection with this private placement. The circumstances giving rise to future adjustments or liquidated damages are discussed below. Conversion Price Adjustments ---------------------------- We are registering a number of shares of our common stock equal to 125% of the shares issuable, as of November 5, 2004, upon conversion in full of the notes. The additional shares represent a good faith estimate of the number of additional shares that may become issuable in the future as a result of adjustments to the conversion price of the notes. In particular, under the terms of these notes, we are required to pay to the Initial Investors $4,000,000 of the outstanding principal and interest by March 15, 2005, and the remaining outstanding balance by September 21, 2005. If we do not make the March 15, 2005 prepayment, the conversion price will be adjusted from $0.80 per share to the lower of (i) $0.80 and (ii) a floating rate equal to 80% of average closing price per share of our common stock for the five trading days preceding conversion. In the event we issue common stock or common stock equivalents at a price per share below the then effective conversion price of the convertible notes, the conversion price will be reduced to that lower price per share. Exercise Price Adjustments -------------------------- We are registering a number of shares of our common stock equal to approximately 220% of the number of shares issuable, as of November 5, 2004, upon the exercise in full of the warrants issued to investors in this transaction. The additional shares represent a good faith estimate of the number of shares which may become issuable as a result of adjustments to the exercise price of the warrants. In particular, under the terms of the warrants, if we do not make a prepayment of an aggregate of $4,000,000 in principal, plus any interest having accrued thereon, on the notes issued to the Initial Investors in this private placement by March 15, 2005, the exercise price of the warrant will be reduced from $1.50 to the lesser of (i) $0.792 and (ii) 80% of the average closing price per share of our common stock five trading days preceding the date the adjustment is made. In the event we issue common stock or common stock equivalents at a price per share below the then effective exercise price of the warrants, the exercise price will be reduced to that lower price per share. 18 In the event any of the foregoing adjustments are made, the warrants will become exercisable for a number of shares equal to the aggregate exercise price (i.e., the exercise price per share multiplied by the number of underlying shares) prior to the adjustment divided by the post adjustment exercise price per share. Liquidated Damages ------------------ We are registering an additional 3,000,000 shares of our common stock representing a good faith estimate of the number of shares of common stock we may be required to issue in satisfaction of liquidated damages arising from the Registration Rights Agreement entered into by the investors and us in connection with this private placement. Under this agreement, if: (i) this registration statement is not declared effective by December 20, 2004, or within five trading days after the SEC notifies us that the registration will not be reviewed or is not subject to further review or comments; or (ii) this registration statement is suspended for more than an aggregate of 20 trading days, whether or not consecutive, in any twelve-month period, we will be required to pay each of the investors in this private placement liquidated damages in an amount equal to 2% of such investor's investment amount, half of which may, at our option, be paid in common stock of equivalent value (such value to be determined based on the lower of (i) the average of the closing price of our common stock for the five days preceding the payment date and (ii) the closing price of our common stock on the day preceding the date such stock is delivered to the investors). NOVEMBER 9, 2004 PRIVATE PLACEMENT On November 9, 2004, we sold warrants to purchase shares of our common stock and secured convertible promissory notes for the aggregate consideration of $1,350,000. Unless otherwise noted, the terms of the notes and warrants issued in this private placement are substantially the same as the terms of the notes and warrants we issued on September 21, 2004. We received net proceeds of $1,174,500 from this private placement. We also issued to Greenfield Capital Partners, LLC, David Stefansky and Richard Rosenblum warrants to purchase an aggregate of 337,500 shares of our common stock at an exercise price of $1.50 as compensation in connection with this private placement. The resale of the shares underlying these warrants is not covered by this registration statement. We intend to use the proceeds from this offering for working capital. The selling stockholders who participated in the November 9, 2004 private placement transaction are offering up to 7,593,751 shares of our common stock issuable pursuant to convertible notes and warrants issued in connection with this transaction, including: (i) up to 2,193,750 shares of our common stock issuable upon the conversion of notes; (ii) up to 2,193,750 shares of our common stock issuable upon the exercise of warrants. We are also registering up to 3,206,251 shares to cover shares of our common stock which may become issuable as the result of adjustments to the conversion or exercise prices of the notes and warrants, as discussed below. As in the case of the notes and warrants issued in the September 21, 2004 private placement, we are registering a number of shares of our common stock equal to 125% of the shares issuable upon conversion in full of the notes and 220% of the shares issuable upon exercise in full of the warrants in each case as of November 5, 2004, representing a good faith estimate of the number of shares that may become issuable under these instruments in the event of conversion or exercise price adjustments. Under the terms of each of these notes, we are required to pay a principal amount on each note equal to the consideration paid by the Additional Investor holding such note plus any accrued interest by March 15, 2005, and the remaining outstanding balance by November 9, 2005. In the event we do not make these prepayments, the conversion price of the notes and exercise price of the warrants will be subject to the adjustments described above in connection with the September 21, 2004 private placement. Like the notes and warrants issued in the September 21, 2004 private placement, the conversion price of the notes and exercise price of the warrants are also subject to adjustment in the event we issue common stock or common stock equivalents at a price per share below the then effective conversion or exercise price of the notes or warrants, as applicable. 19 Liquidated Damages ------------------ In the event this registration statement is not declared effective on or before February 7th, 2005, we will be required to pay each of the Additional Investors liquidated damages in an amount equal to 2% of such Additional Investor's investment amount, half of which may, at our option, be paid in common stock of equivalent value. The value of the stock to be issued as liquidated damages will be determined based on the lower of: (i) the average of the closing price of our common stock for the five days preceding the payment date and (ii) the closing price of our common stock on the day preceding the date the stock is delivered to the Additional Investors. REGISTRATION RIGHTS IN CONNECTION WITH THE SEPTEMBER 21, 2004 AND NOVEMBER 9, 2004 PRIVATE PLACEMENTS In connection with the September 21, 2004 and November 9, 2004 private placement, we entered into a Registration Rights Agreement with the Initial Investors and a Securities Purchase Agreement with the Additional Investors respectively pursuant to which we agreed to file with the SEC a registration statement covering the resale of the shares of our common stock covered by this prospectus pursuant to Rule 415 of the Securities Act of 1933. In accordance with the terms of the Registration Rights Agreement and the Securities Purchase Agreement, we are filing this registration statement on Form SB-2 covering the resale of the following shares of common stock by the selling stockholders identified in this prospectus. Specifically, in connection with the September 21, 2004 private placement, we are registering an aggregate of 27,000,000 shares representing: (i) 14,500,000 shares of our common stock issuable upon conversion of notes and the exercise of warrants; (ii) 9,500,000 shares of our common stock representing our good faith estimate of the number of shares of our common stock that may become issuable upon adjustments to the conversion price or exercise price of the notes or warrants, respectively, in accordance with their terms; and (iii) 3,000,000 shares of our common stock representing our good faith estimate of the number of shares of our common stock which may become issuable in satisfaction of liquidated damages arising under this Registration Rights Agreement. In the event the number of shares underlying the notes and warrants exceeds the number of shares registered under this registration statement, of which this prospectus is a part, we will be required to file an additional registration statement covering such shares. In connection with the November 9, 2004 private placement, we are registering an aggregate of 8,606,251 shares of our common stock representing: (i) 4,387,500 shares of our common stock issuable upon conversion of notes and the exercise of warrants; (ii) 3,206,251 shares of our common stock representing our good faith estimate of the number of shares of our common stock that may become issuable upon adjustments to the conversion price or exercise price of the notes or warrants, respectively, in accordance with their terms; and (iii) 1,012,500 shares of our common stock representing our good faith estimate of the number of shares of our common stock which may become issuable in satisfaction of liquidated damages arising under this Registration Rights Agreement. In the event the number of shares issuable upon conversion and exercise of the notes and warrants issued in the September 21, 2004 and November 9, 2004 private placements exceeds the number of shares registered under this registration statement, we will file an additional registration statement covering such shares. We do not intend to rely on Rule 416 to cover the issuance of these shares. 20 We have agreed to use our commercially reasonable efforts to cause this registration statement to be declared effective under the Securities Act of 1933, as amendment, as promptly as possible after filing, and to keep it effective until the earlier of: (i) two years following the date of effectiveness; (ii) the date on which all of the shares of our common stock registered hereunder are sold by the selling stockholders; and (iii) the date on which the shares of common stock registered hereunder may be sold pursuant Rule 144(k) of the Securities Act, subject to restrictions. ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS The selling stockholders with piggy-back registration rights are offering up to 3,396,529 shares of our common stock, which are being registered for resale hereunder, consisting of: o 2,246,381 shares of our common stock held directly or indirectly by Verdi Consulting, Inc. and issued as compensation for consulting services; and o 1,150,148 shares of our common stock held by David Stefansky. SELLING STOCKHOLDERS TABLE The following table sets forth the approximate number of shares beneficially owned as of November 5, 2004, by each of the selling stockholders and their pledgees, assignees and successors-in-interest. Please consider the following when reviewing the information presented in the table and the notes: o The number of shares beneficially owned by the selling stockholders is determined under rules promulgated by the SEC. o The "Right to Acquire" column reflects beneficial ownership of shares subject to warrants and convertible preferred stock that may be exercised and converted within 60 days after November 5, 2004. o The "Shares Offered" column reflects all of the shares that each selling stockholder may offer under this prospectus. Percentage ownership is based on 51,564,458 shares of our common stock issued and outstanding as of November 5, 2004. o Information concerning the selling stockholders may change from time to time and changed information will be presented in a supplement to this prospectus if and when necessary and required. o The selling stockholders may have sold, transferred or otherwise disposed of the warrants issued in the September 21, 2004 and November 9, 2004 private placements in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, since the date the selling stockholders provided the information regarding their securities holdings. o As indicated in the notes to this table, certain of the individuals with voting and investment control have indicated that they exercise such control through a corporate or other organizational structure, which structural information has not been included. o The table assumes that the selling stockholders will sell all of the shares. No assurances can be given as to the actual number of shares that will be resold by the selling stockholders or that will be held by the selling stockholders after completion of the resales. 21 BENEFICIAL OWNERSHIP PRIOR TO OFFERING TOTAL OWNERSHIP SHARES --------------------------------------------- WITHOUT REGARD TO OFFERED RIGHT TO CONTRACTUAL UNDER THIS NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL LIMITATIONS PROSPECTUS - ------------------------ ----------- --------------- --------------- ----------------- ------------------ DKR Soundshore Oasis Holding Fund, Ltd. (1) 0 2,713,347(2)(3) 2,713,347(2)(3) 10,400,000(4) 20,400,000(5)(6)(7) DKR Soundshore Strategic Holding Fund, Ltd. (1) 0 2,713,347(2)(3) 2,713,347(2)(3) 2,600,000(4) 5,100,000(5)(6)(7) Harborview Master Fund L.P. (1)(15) 0 2,713,347(2) 2,713,347(2) 3,250,000(4) 6,375,000(8)(9)(10) Southridge Partners LP 584,006 1,137,500 1,721,506 1,721,506 2,231,251(8)(9)(10) Greenfield Capital Partners,LLC (11) 0 750,000(12) 750,000 750,000 750,000 Verdi Consulting, Inc. (1) 2,246,381(14) 0 2,246,381 2,246,381 2,246,381 David Stefansky (15) 1,150,148 375,000(12) 1,525,148 1,525,148 1,525,148 Richard Rosenblum (15) 0 375,000(12) 375,000 375,000 375,000 BENEFICIAL OWNERSHIP AFTER OFFERING ----------------------------------- RIGHT TO NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE PERCENT - ------------------------ ----------- ----------- -------- DKR Soundshore Oasis Holding Fund, Ltd. (1) 0 750,000(16) 1.4% DKR Soundshore Strategic Holding Fund, Ltd. (1) 0 750,000(16) 1.4% Harborview Master Fund L.P. (1)(15) 0 0 * Southridge Partners LP 0 0 * Greenfield Capital Partners, LLC (11) 0 0 * Verdi Consulting, Inc. (1) 0 0 * David Stefansky (10) 0 0 * Richard Rosenblum (10) 0 0 *
(1) The selling securityholder has represented in the Selling Securityholder Notice and Questionnaire that it is not a broker-dealer. (2) Represents the aggregate maximum number of shares that the selling stockholder can own at one time (and therefore, offer for resale at any one time) due to the 4.999% limitation, further described in Note 3 below. (3) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, DKR Soundshore Oasis Holding Fund, Ltd. may be deemed to be the beneficial owners of the shares held by DKR Soundshore Strategic Holding Fund, Ltd. and their holdings have been aggregated for the purposes of determining beneficial ownership. The notes and warrants issued to these entities limit conversion or exercise, as applicable, to the extent necessary to ensure that, after giving effect to such conversion or exercise, the beneficial ownership of each entity, including affiliates, does not exceed 4.999% of our outstanding common stock. (4) Represents the number of shares the selling stockholder would receive upon conversion and exercise in full as of November 5, 2004 of the stockholder's note and warrant without regard to the 4.999% limitation, further described in Note 3. 22 (5) Represents the maximum number of shares which the selling stockholder may offer under this prospectus, including a good faith estimate of shares which may become issuable upon conversion or exercise of notes or warrants issued in connection with the September 21, 2004 private placement, as applicable, in the future as a result of conversion or exercise price adjustments as further described in Notes 6 and 7, and an additional pro rata share (based on the amount of the selling stockholders investment) of 3,000,000 shares which may become issuable in satisfaction of liquidated damages arising from our agreements with the investors in the September 21, 2004 private placement. (6) Includes a good faith estimate of the number of shares issuable upon conversion of the note held by the selling stockholder based on 125% of the number of shares into which such note is convertible as of November 5, 2004. Because the number of shares of common stock issuable upon conversion of the note may become dependent in part upon the market price of the stock at the time of conversion, the actual number of shares that will be issuable upon conversion may fluctuate daily and cannot be determined at this time. Specifically, in the event we do not prepay on March 15, 2005 $4,000,000 in principal amount plus any accrued interest on the notes issued in connection with the September 21, 2004 private placement, the conversion price will be adjusted from a fixed price of $.80 a share to (i) 80% of a floating rate equal to the average closing price per share of our common stock for the five trading days preceding conversion or (ii) $0.80, whichever is less. For the purposes of the note, the market price of our common stock on a given date is equal to the average closing price for the five trading days preceding that date. In addition, the conversion price of the note may be lowered in the event that we issue common stock or common stock equivalents at a price per share below the conversion price then in effect. If the number of shares issuable upon conversion of the note exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (7) Includes a good faith estimate of the number of shares issuable upon exercise of the warrant held by the selling stockholder based on approximately 220% of the number of shares into which the warrant is exercised as of November 5, 2004. Because the number of shares of common stock issuable upon exercise of the warrant may become dependent in part upon the market price of the stock as of March 15, 2005, the actual number of shares that will be issuable upon exercise cannot be determined at this time. Specifically, in the event we do not prepay on March 15, 2005 $4,000,000 in principal amount plus any accrued interest on the notes issued in connection with the September 21, 2004 private placement, the exercise price will be adjusted from $1.50 to $0.792 or 80% of the market price of our common stock on March 15, 2005, whichever is less. In addition, the exercise price of the warrants may be lowered in the event that we issue common stock or common stock equivalents at a price per share below the exercise price then in effect. If the number of shares issuable upon exercise of the warrant exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (8) Represents the maximum number of shares which the selling stockholder may offer under this prospectus, including a good faith estimate of shares which may become issuable upon conversion or exercise of notes or warrants issued in connection with the November 9, 2004 private placement, as applicable, in the future as a result of conversion or exercise price adjustments as further described in Notes 9 and 10 and an additional pro rata share (based on the amount of the selling stockholders investment) of 1,012,500 shares which may become issuable in satisfaction of liquidated damages arising from our agreements with the investors in the November 9, 2004 private placement. (9) Includes a good faith estimate of the number of shares issuable upon conversion of the note held by the selling stockholder based on 125% of the number of shares into which the notes is convertible as of November 5, 2004. Because the number of shares of common stock issuable upon conversion the note may become dependent in part upon the market price of the stock at the time of conversion, the actual number of shares that will be issuable upon conversion may fluctuate daily and cannot be determined at this time. Specifically, in the event we do not prepay on 23 March 15, 2005 a principal amount on each note equal to the amount invested by the holder of such note in the November 9, 2004 transaction (plus any accrued interest) the conversion price for each such note will be adjusted from a fixed price of $0.80 a share to (i) 80% of a floating rate equal to the average closing price per share of our common stock for the five trading days preceding conversion or (ii) $0.80, whichever is less. For the purposes of the note, the market price of our common stock on a given date is equal to the average closing price for the five trading days preceding that date. In addition, the conversion price of the note may be lowered in the event that we issue common stock or common stock equivalents at a price per share below the conversion price then in effect. If the number of shares issuable upon conversion of the note exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (10) Includes a good faith estimate of the number of shares issuable upon exercise of the warrants held by the selling stockholder based on approximately 220% of the number of shares into which the warrant is exercised as of November 5, 2004. Because the number of shares of common stock issuable upon exercise of the warrant may become dependent in part upon the market price of the stock as of March 15, 2005, the actual number of shares that will be issuable upon exercise cannot be determined at this time. Specifically, in the event we do not prepay on March 15, 2005 a principal amount on each note issued in the November 9, 2004 transaction equal to the amount invested by the holder of such note (plus any accrued interest), the exercise price will be adjusted from $1.50 to $0.792 or 80% of the market price of our common stock on March 15, 2005, whichever is less. In addition, the exercise price of the note may be lowered in the event that we issue common stock or common stock equivalents at a price per share below the exercise price then in effect. If the number of shares issuable upon exercise of the warrant exceeds the registered amount, we will not rely on Rule 416 to cover the additional shares, but will instead file a new registration statement. (11) The selling securityholder has represented in the Selling Securityholder Notice and Questionnaire that it is a broker-dealer registered pursuant to the Securities Exchange Act of 1934. (12) Represents shares issuable upon the exercise of warrants issued as compensation in connection with the September 21, 2004 private placement. (13) The selling securityholder has represented in the Selling Securityholder Notice and Questionnaire that it is not a broker-dealer. (14) Includes shares held by (i) Verdi Consulting, Inc., a corporation wholly owned and operated by Chad A. Verdi, and (ii) Chad A. Verdi. We issued these shares pursuant to consulting agreements. (15) The selling securityholder has represented in the Selling Securityholder Notice and Questionnaire that he is an "affiliate" of a broker-dealer. (16) Represents shares issuable upon exercise of a warrant held by DKR Soundshore Oasis Holding Fund, Ltd issued on May 3, 2004 in connection with a private placement. These shares are the subject of a separate registration statement filed with the SEC that was declared effective on June 21, 2004, as amended and supplemented from time to time (File # 333-115395). We have included a description of each selling stockholder's relationship to Markland Technologies, Inc. and how each selling stockholder acquired the shares to be sold in this offering in the table, in the notes to the table and in this registration statement. Please note that: o Other than as may be stated in this registration statement or any supplement and/or amendment, none of the selling stockholders has had any material relationship with us or our affiliates within the past three years. o All of the outstanding shares of our common stock covered by this registration statement were "restricted securities" under the Securities Act prior to this registration statement. 24 VOTING AND INVESTMENT CONTROL The table below sets forth selling stockholders that are entities and the names of individuals having voting and investment control over the securities held by these entities on November 9, 2004. We prepared this table based upon information supplied to us by the selling stockholders. This information is not necessarily indicative of beneficial ownership for any other purpose. ENTITY VOTING AND INVESTMENT CONTROL - ------ ----------------------------- DKR Soundshore Oasis Holding Fund, Ltd Seth Fisher DKR Soundshore Strategic Holding Fund, Ltd Seth Fisher Greenfield Capital Partners LLC Michael James Byl Verdi Consulting, Inc. Chad A. Verdi Harborview Master Fund L.P. Richard Rosenblum/David Stefansky Southridge Partners LP Stephen Hicks 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 FORM 10-KSB. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-KSB AND THE DOCUMENTS INCORPORATED BY REFERENCE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB. WE WILL NOT UPDATE THESE FORWARD-LOOKING STATEMENTS UNLESS THE SECURITIES LAWS AND REGULATIONS REQUIRE US TO DO SO. OVERVIEW The following management's discussion and analysis of financial condition and results of operations is organized as follows: o OVERVIEW. This section provides a general description of Markland, its business and recent developments and events that have occurred since 2002 that we believe are important in understanding the results of operations and financial condition and to anticipate future trends. In addition, we have provided a brief description of our acquisition of EOIR Technologies, Inc., an event that impacts the comparability of the results being analyzed. o RESULTS OF OPERATIONS. This section provides an analysis of Markland's results of operations for the fiscal years ended June 30, 2004 and June 30, 2003. This analysis is presented on a consolidated basis. o LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of Markland's cash flows for the fiscal years ended June 30, 2004 and June 30, 2003, as well as a discussion of recent financing arrangements. o CRITICAL ACCOUNTING POLICIES. This section discusses certain critical accounting policies that we consider important to Markland's financial condition and results of operations, and that required significant judgment and estimates on the part of management in application. Markland's significant accounting policies, including the critical accounting policies discussed in this section, are summarized in the notes to the accompanying consolidated financial statements. 25 OVERVIEW BACKGROUND GENERAL. We provide to the United States Department of Defense ("DOD") and to various other United States Intelligence Agencies ("INTEL"); remote sensing technology products, and services to protect our country's military personnel and infrastructure assets. We also provide to the Department of Homeland Security ("Homeland Security"); products, services and emerging technologies to protect our country's borders, infrastructure assets and personnel. Our mission is to build world-class integrated solutions for the Homeland Security ("Homeland Security"), DOD and INTEL marketplaces via expansion of our existing contracts, development of our emerging technologies and acquisition of synergistic revenue producing assets. We have undergone material changes to our business and our financial structure during the period covered by the financial statements included in this Form 10-KSB. Our business, as it exists today, consists of four business areas: remote sensor systems for military and intelligence applications, chemical detection, border security and advanced technologies. Our primary sources of future operating revenue are from our wholly owned subsidiary EOIR, which was acquired by us on June 29, 2004. EOIR offers products and services which include; (i) design and fabrication of customized remote sensor systems and platforms for DOD, INTEL and Homeland Security applications; (ii) remote sensor data collection, data signal processing and data exploitation; and (iii) training in the use of remote sensor systems and data. These efforts involve systems engineering, system integration, prototyping, manufacturing and field data collections as well as data analysis and processing. Prior to the acquisition of EOIR Technologies, Inc. ("EOIR"), our primary sources of operating revenue were sales of our automatic chemical agent detection and alarm system produced by our wholly owned subsidiary Science and Technology Research Inc. ("STR"), border security logistics products and services provided by our wholly owned subsidiary ERGO Systems ("ERGO"), and Small Business Investment Research ("SBIR") funded research grants for the development of gas plasma antenna technology. Our acquisition of EOIR has materially changed our business. To the extent the following discussion refers to our financial results, you should note that we have reported our quarterly and annual financial results under accounting principles generally accepted in the United States of America ("GAAP"). We did not complete our acquisition of EOIR Technologies, Inc. until June 29, 2004, and therefore, the results of operations of EOIR for the year ended June 30, 2004, are not included in our Statement of Loss for fiscal year 2004. For comparative purposes, we have included a discussion of certain financial information concerning EOIR in our discussion and analysis of our financial condition and results of operations. Information concerning the EOIR acquisition can be found in our Current Report on Form 8-K/A filed with the SEC on September 13, 2004 (File # 000-28863) which includes audited financial statements for EOIR for the years ended December 31, 2003 and December 31, 2002, and unaudited financial statements for the three months ended March 31, 2004, as well as unaudited pro forma information for fiscal year ended June 30, 2003 and the nine months ended March 31, 2004. MARKLAND BUSINESS REMOTE SENSOR SYSTEMS FOR MILITARY AND INTELLIGENCE APPLICATIONS Our acquisition of EOIR on June 29, 2004, a company which provides remote sensing technology products and services to the United States Department of Defense and to various other United States Intelligence Agencies, is a very important part of our ongoing business strategy of creating a world-class integrated portfolio of solutions for the Homeland Security, DOD and INTEL marketplaces. EOIR's most significant source of revenues is an Omnibus Contract with the United States Army Night Vision and Electronic Sensors Directorate which has a total potential value of approximately $406 million over its five year period of performance. Approximately 86% of EOIR revenues for its fiscal year ended December 31, 2003, were derived from this contract. The Omnibus Contract has an extensive and varied scope that requires us to provide a very broad range of products and technical services. For those products and technical services that EOIR does not possess in-house, we have and continue to subcontract to our team members and other subcontractors as necessary. 26 CHEMICAL DETECTOR In October 2003, our subsidiary, Security Technology, Inc., acquired all of the common stock of Science and Technology Research, Inc. ("STR"), a chemical detector manufacturer, as part of our ongoing business strategy of creating an integrated portfolio of homeland security solutions. STR has a contract with the U.S. Navy to be the sole producer of the U.S. Navy's shipboard Automatic Chemical Agent Detection and Alarm System used to detect all classic nerve and blister agents as well as other chemical warfare agent vapors. STR's sole of revenues is this contract with the United States Navy which has a total potential value of approximately $37,000,000 over its period of performance. As of June 30, 2004, we had completed delivery pursuant to all outstanding orders under this contract. We are experiencing a decline in demand for our chemical detector unit from the U.S. Navy. We plan to compensate for this reduced demand by marketing this technology to new customers within the Homeland Security marketplace and by combining it with other technologies for sale to customers other than the US Navy. We are presently working on the design of a next generation "point" chemical detector product, which will also operate using Ion Mobility Spectrography (IMS) cell technology and provide networked wireless communication capability. On December 23, 2003, the U.S. Navy signed a ten-year non-exclusive license agreement with us to transfer certain chemical detection technology intellectual property rights to us. We believe the license will allow us to further expand the applications for the "point" chemical detection technology and market the technology to non-defense customers such as foreign governments and commercial entities. The company is combining "stand off" chemical detection technologies from EOIR which are based on hyper spectral infra red technology with the "point" chemical detection technology of STR which is based on Ion Mobility Spectroscopy. This integrated and combined chemical detection capability we believe will accelerate penetration into new markets for the chemical detection products we now offer and will help to increase our revenues in the next fiscal year for chemical detection products. BORDER SECURITY We acquired the assets of Ergo Systems, Inc., in January 2003. This acquisition provided us with contracts with the Department of Homeland Security to maintain, integrate, and implement design enhancements to border security systems installed at U.S. ports of entry for the Dedicated Commuter Lane, which is part of a larger U.S. Customs and Immigration and Naturalization Service initiative to reduce wait times, improve data accuracy, and improve overall efficiencies at all border crossings for both freight and passengers. During the fiscal year we entered into a teaming agreement with Accenture, who was recently awarded the US VISIT Contract. The purpose of this contract is to secure our borders and expedite the entry/exit process while enhancing the integrity of our immigration system and respecting the privacy of visitors to the US. We have recently been awarded a subcontract which enables the company to derive revenues from the US VISIT Contract. Although during fiscal year 2004, our subsidiary ERGO Systems, Inc. recognized approximately $955,736 of revenue from these contracts. Management believes that the potential for increased revenues has been greatly enhanced by this subcontract award. ADVANCED TECHNOLOGIES Through research and development as well as intellectual property acquisitions, we have established a portfolio of advanced and emerging technologies, which we intend to commercialize and utilize within our own proprietary products or license out for the purpose of revenue generation. These advanced technologies and intellectual property are as follows: o Gas plasma antenna, o Vehicle stopping system, o Acoustic Core(TM) signature analysis, o APTIS(TM) human screening portal, and o Cryptography software. Of these five advanced technologies we believe that the nine issued and pending U.S. patents related to gas plasma antenna technology with demonstrated applications in the fields of ballistic missile defense, phased array radar, and forward deployed decontamination have the most demonstrated potential to create future sustained revenue streams. 27 COMPANY HISTORY 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 Form 10-KSB, our only asset was the stock of a subsidiary, CWTel, Inc. ("CWTel"), 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"), 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. There is no Series B Preferred Stock outstanding. At this time we changed our name to Markland Technologies, Inc. On October 19, 2000 we executed a promissory note for $3,500,000 in favor of James LLC. In July 2001, after the Vidikron acquisition, James LLC elected to convert $2,500,000 of the principal amount of its $3,500,000 promissory note, together with $125,000 accrued interest, into shares of our common stock. In September 2001, we assumed all of Vidikron's rights and obligations under a $3,500,000 secured revolving credit facility with Market LLC. These transactions made Market LLC our senior secured lender. EVENTS DURING FISCAL 2002. In May 2002, we received a notice of default from Market LLC. In June of 2002, we transferred all the stock of Vidikron to Market LLC in partial satisfaction of our indebtedness to Market LLC. After this partial payment, we still owed Market LLC $500,000. Our disposition of the business of Vidikron was 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 a gain of $998,713 resulting from the settlement of certain liabilities and obligations recorded in previous periods in connection with the discontinued operations. EVENTS DURING FISCAL 2003. In December 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(TM) to our subsidiary. o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners, Inc. transferred certain rights to their cryptology technologies to our subsidiary. o 90% of the shares of our common stock held by Market LLC and James LLC were retired. o We issued shares of common stock representing 80% of our then issued and outstanding common stock to Eurotech, Ltd. and shares of common stock representing 10% of our then issued and outstanding shares of common stock to ipPartners, Inc. o We issued $5,225,000 in stated value of our Series C 5% Cumulative Convertible Preferred Stock to Market LLC and James LLC in satisfaction of $5,225,000 of convertible notes held by Market LLC and James LLC and in exchange for their agreement to surrender 4,498,638 shares of our common stock. We are not a majority-owned subsidiary of Eurotech, Ltd. due to the issuances of additional common stock. 28 In January of 2003, we acquired all of the common stock of Ergo Systems, Inc. ("Ergo"), 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 related to our research efforts. During the year ended June 30, 2004, we recognized $955,736 from these services. 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 valued at $850,000 and agreed to pay $150,000. During the year ended June 30, 2004, we recognized revenue of $261,479 from SBIR research grants related to this technology. EVENTS DURING FISCAL 2004. In October of 2003, we acquired all of the common stock of Science and Technology Research Corporation, Inc. ("STR"). 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 valued at $5,100,000 and paid $900,000 in cash, and issued a promissory note for $375,000. During the year ended June 30, 2004, we recognized revenue of $4,796,715 from sales of our automatic chemical agent detection and alarm system to the U.S. Navy. We also entered into a consulting agreement with the former principal shareholder and employee. On June 29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000 in cash and $11,000,000 in principal amount of five year notes secured by the assets and stock of EOIR. EOIR is a provider of technology and services to the United States Army Night Vision and Electronic Sensors Directorate and has expertise in wide area remote sensing using both electro-optic and infrared technologies. Markland intends to continue to use the assets of EOIR for this purpose. We expect that EOIR will represent a majority of Markland's revenues going forward. We expect that these sensor science products will be our most significant revenue producing business. FINANCING ACTIVITIES. We have financed our business activities through borrowings and private placements of our securities to institutional investors. We have engaged in the following financing activities: o In October 2003, we borrowed $1,400,000 from Bay View Capital, LLC. This borrowing was repaid in April 2004. o At various times between April 2003 and March 2004 we have raised an aggregate of approximately $3,832,000 through private placements of our Series D Preferred Stock to an institutional investor. o On April 2, 2004, we sold 3,333,333 shares of common stock and warrants to purchase 3,333,333 shares of our common stock for gross proceeds of $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 gross proceeds of $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 gross proceeds of $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. o On June 30, 2004, we sold 3,500 shares of Series D Preferred Stock to an institutional investor for $2,000,000 in connection with the acquisition of EOIR. o On September 21, 2004, we sold secured convertible promissory notes and warrants to purchase shares of common stock to two institutional investors for approximately $4,000,000. 29 RESULTS OF OPERATIONS COMPARISON OF FISCAL 2003 AND FISCAL 2004 Our acquisition of EOIR has materially changed our business. To the extent the following discussion refers to our financial results, you should note that we have reported our quarterly and annual financial results under accounting principles generally accepted in the United States of America ("GAAP"). We did not complete our acquisition of EOIR Technologies, Inc. until June 29, 2004, and therefore, the results of operations of EOIR for the year ended June 30, 2004, are not included in our Statement of Loss for fiscal year 2004. For comparative purposes, we have included a discussion of certain financial information concerning EOIR in our discussion and analysis of our financial condition and results of operations. Information concerning the EOIR acquisition can be found in our Current Report on Form 8-K/A filed with the SEC on September 13, 2004 which includes audited financial statements for EOIR for the years ended December 31, 2003 and December 31, 2002, and unaudited financial statements for the three months ended March 31, 2004, as well as unaudited pro forma information for fiscal year ended June 30, 2003 and the nine months ended March 31, 2004. REVENUE: Revenue for the fiscal year ended June 30, 2004 was $6,013,930, compared to $658,651 for the same period in 2003. For the fiscal year ended June 30, 2004, approximately $4,796,715 was from our chemical detection business, including sales of the ACADA product, approximately $955,736 was from sales of our border security products and services, and approximately $261,479 was from SBIR grants for the development of our gas plasma antenna technology. Our revenues in 2003 included approximately $440,276 was from sales of our border security products and services and approximately $218,375 was from SBIR grants for the development of our gas plasma antenna technology. On June 29, 2004 we acquired EOIR. As reported on our current report on Form 8-K /A filed with the SEC on September 13, 2004, EOIR had revenues of $42,680,858 and $30,570,936 for the fiscal years ended December 31, 2003 and December 31, 2002, respectively. EOIR revenues were derived primarily from the remote sensor system products and services of EOIR. On a pro forma basis combining Markland (including our STR subsidiary) and EOIR, our revenues for the period ended June 30, 2004 were $59,920,000. COST OF REVENUES: Cost of revenues for the year ended June 30, 2004 was $4,674,593, compared to $445,218 for fiscal year 2003. Cost of revenues increased year to year as a result of an increase in sales. The increase in costs was primarily the result of the change in revenue mix and costs of materials for the manufacture of the ACADA chemical detector unit. Gross profits for the year ended June 30, 2004 was $1,339,337 compared to $213,433 for fiscal year 2003. Gross profits increased as a result of additional revenue from the acquisition of STR. We had a gross profit margin of approximately 22% for the fiscal year ended June 30, 2004, compared to 32% for the year ended June 30, 2003. We expect the remote sensor system products of EOIR to provide a significant increase to our total gross profit dollars. As reported on our current report on Form 8-K/A filed with the SEC on September 13, 2004, EOIR's gross profit was $8,823,724 and $6,999,370 for the years ended December 31, 2003 and 2002, respectively. For the years ended December 31, 2003 and December 31, 2002, EOIR's gross profit margin has been 20.8% and 23.3% of revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expense for the year ended June 30, 2004 increased by $4,127,069 to $5,313,448, compared to selling, general and administrative expense for the year ended June 30, 2003 which was $1,186,379. Selling, general and administrative expense was primarily composed of payroll, consultants, legal and accounting fees, and vendors. The increase in selling, general and administrative expense was primarily due to increases in staff resulting from the acquisition of STR and increases due to related sales growth. We expect this expense to increase significantly with the acquisition of EOIR. As reported on our current report on Form 8-K/A filed with the SEC on September 13, 2004, EOIR's selling, general and administration expense was $5,622,521 and $5,188,798, for the fiscal years ended December 31, 2003 and 2002 respectively. 30 RESEARCH AND DEVELOPMENT: During fiscal year 2004, we spent $49,289 on research and development. During the fiscal year ended 2003, $522,657 was spent on research and development activities. During the fiscal year ended June 30, 2004, we reduced our research and development efforts to concentrate our financial resources on product marketing activities and as a result of completion of funded SBIR contracts. Included in research and development costs for the year ended June 30, 2003 is $300,000 payable to SyQwest, a related party, for development costs related to a vehicle stopping technology designed for use in protecting our borders. INTEREST EXPENSE: Interest expense for the years ended June 30, 2004 and June 30, 2003 was $360,347 and $226,751 respectively. Interest and financing expense was from notes payable issued for bridge financing, premium financing arrangements and other financing costs. Interest expense for EOIR for the years ended December 31, 2003 and December 31, 2002 was $30,239 and $ 22,291, respectively. Interest expense was from a revolving line of credit used by EOIR and various equipment loans. In connection with our acquisition of EOIR, EOIR issued, and we guaranteed, $11,000,000 in original principal amount of notes due to the former stockholders of EOIR. These notes bear interest at the rate of six (6%) percent per annum and must be repaid within the next five years. The carrying value of these notes is $9,532,044 at June 30, 2004. We expect significant increases in interest expense as a result of this financing and the convertible debt financing completed on September 21, 2004. COMPENSATORY ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Compensatory element of stock issuances for selling, general and administrative expenses for the years ended June 30, 2004 and June 30, 2003 was $5,211,737 and $2,051,822 respectively. In fiscal year 2003, this amount consisted of charges for the issuance of 6,748,465 shares of restricted stock issued at market value. In fiscal year 2004, this amount consisted of charges for the issuance of 5,867,103 shares of restricted stock at a valuation of 100% of market value of unrestricted stock at the time of issuance. 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. LOSS FROM CONTINUING OPERATIONS: Loss from continuing operations for the year ended June 30, 2004 was $10,511,213. This loss resulted primarily from non-cash charges for the compensatory element of stock issuances of $5,211,737 and from selling, general and administrative expenses, which were offset by gross profit. Loss from continuing operations for the years ended June 30, 2003 was $3,835,594. This loss resulted primarily from non-cash charges for the compensatory element of stock issuances of $2,051,822 and from selling, general and administrative expenses, which were offset to a small extent by gross profit. As reported on our current report on Form 8-K/A filed with the SEC on September 13, 2004, operating income for EOIR for the years ended December 31, 2003 and December 31, 2002 was $3,201,203 and $1,810,572, respectively. This income was primarily derived from sales under our Omnibus Contract with the United States Army Night Vision and Electronic Sensors Directorate. Although these sales are highly concentrated in a single customer, we expect these sales to continue and do not anticipate a reduction in orders. On a pro forma basis combining Markland (including our STR subsidiary) and EOIR, loss from operations for the period ended June 30, 2004 was $7,796,000. GAIN FROM DISCONTINUED OPERATIONS. Gain from discontinued operations for the year ended June 30, 2003 was $998,713. This resulted from the settlement of certain liabilities and obligations previously recorded in connection with the discontinued operations. There was no adjustment due to discontinued operations for the year ended June 30, 2004. 31 NET LOSS: Net loss for the year ended June 30, 2004 was $10,511,213 ($1.31 per share). Net loss for the year ended June 30, 2003 was $2,836,881 ($1.72 per share). As reported on our current report on Form 8-K/A filed with the SEC on September 13, 2004, net income for EOIR for the years ended December 31, 2003 and December 31, 2002 was $3,165,346 and $1,791,829, respectively. On a pro forma basis combining Markland (including our STR subsidiary) and EOIR, net loss for the period ended June 30, 2004 was $13,465,000. PREFERRED STOCK DIVIDENDS: Preferred Stock dividends for the year ended June 30, 2004 were $4,584,248. This consisted of deemed dividends to the holder of our Series C Preferred Stock of $844,270, deemed dividends to the holder of our Series D Preferred Stock of $3,555,500, and actual dividends paid upon conversion to common stock to the holder of our Series C Preferred Stock of $184,478. Deemed dividends represent non-cash charges for $4,584,248. Preferred Stock dividends for the year ended June 30, 2003 were $4,761,971. This consisted of deemed dividends to the holder of our Series C Preferred Stock of $501,755, deemed dividends to the holder of our Series D Preferred Stock of $4,107,500, and actual dividends paid upon conversion to common stock to the holder of our Series C Preferred Stock of $152,716. Deemed dividends represent non-cash charges for $4,761,971. We expect to continue to finance our operations with additional debt and equity financing including, possibly, additional sales of our Series D Preferred Stock with beneficial conversion features. Such financing could result in additional charges for preferred stock dividends. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to common stockholders for the year ended June 30, 2004 was $15,095,461 ($1.39 per share). Net loss applicable to common stockholders for the year ended June 30 2003 was $7,598,852 ($1.52 per share). On a pro forma basis combining Markland (including our STR subsidiary) and EOIR, net loss per common share for the year ended June 30, 2004 was $(1.20). LIQUIDITY AND CAPITAL RESOURCES During fiscal 2004, we experienced $3,906,900 of negative cash flow from operating activities. This negative cash flow was the result of a loss of 10,511,213 from continuing operations offset by non-cash charges of $6,377,936 and working capital requirements of $226,377. In addition, we experienced $8,538,386 of negative cash flow from investing activities. These investment activities consisted of cash used primarily for the acquisition of EOIR. Cash flows from financing activities for the year ended June 30, 2004 approximated $13,540,909. On June 29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000 in cash and $11,000,000 in principal amount of five year notes secured by the assets and stock of EOIR. These notes bear interest at the rate of six (6%) percent per annum and must be repaid within the next five years. The carrying value of these notes is $$9,532,044 at June 30, 2004. We expect significant increases in interest expense as a result of this financing. We financed our operations and acquisition activities primarily through sales of common stock and preferred stock as well as through margins from sales of our products and services. During fiscal 2004, we raised $8,226,845 from sales of our common stock, and $5,401,970 from sales of our Series D Preferred Stock. During fiscal 2003, we experienced $764,550 of negative cash flow from operating activities. This negative cash flow was the result of a loss from continuing operations of approximately $3,836,000 mitigated by non-cash charges of approximately $2,160,000 and increases in accounts payable and other liabilities of approximately $940,000. In addition, we experienced $191,900 of negative cash flow from investing activities. These investment activities consisted of payments made in connection with our acquisition of Ergo and technology from ASI Technology Corporation. Cash flows from financing activities for the year ended June 30, 2003 approximated $957,000. We financed our operations and acquisition activities primarily through sales of common stock and preferred stock as well as through margins from sales of our products and services. During fiscal 2003, we raised $340,000 from sales of our common stock, $170,000 from sales of our Series C Preferred Stock, and $430,000 from sales of our Series D Preferred Stock. 32 On September 21, 2004, we sold secured convertible promissory notes for the aggregate consideration of $4,000,000 and in the aggregate principal amount of $5,200,000. These notes accrue interest at the rate of eight (8%) per annum and are due and payable within one year. We believe that required investment capital will be available to us, but there can be no assurance that we will be able to raise funds on terms acceptable to us, or at all. We have the ability to adjust the level of research and development and selling and administrative expenses to some extent based on the availability of resources. However, reductions in expenditures could delay development and adversely affect our ability to generate future revenues. Any equity-based source of additional funds could be dilutive to existing equity holders and the dilution could be material. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our security products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. Accordingly, there can be no assurance that our current expectations regarding required financial resources will prove to be accurate. We anticipate that the commercialization of our technologies may require increased operating costs; however, we cannot currently estimate the amounts of these costs. GOING CONCERN For the fiscal year ended June 30, 2004, we incurred a loss from continuing operations of $10,511,213 and had a working capital deficiency of $2,740,722. For the fiscal year ended June 30, 2003, we incurred a loss from continuing operations of $3,835,594 and had a working capital deficiency of $1,235,306. We have limited finances and require additional funding in order to market and license our products. There is no assurance that we can reverse our operating losses, or that we can raise additional capital to allow us to continue our planned operations. These factors raise substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm for the fiscal year 2004 included elsewhere in this annual report includes an explanatory paragraph as to the uncertainty that we will continue as a going concern. While we have experienced operating losses in the past, due to our acquisition of EOIR, the operating portion of our business is currently cash flow positive. Our business plan is to continue to grow our customer base and our revenues and to control and monitor operating expenses and capital expenditures. In addition, after the conclusion of the 2004 fiscal year, we consummated a financing through which we realized net cash of approximately $4,000,000. We believe that our business as currently constituted will produce positive cash flow which, together with our current cash levels, will enable us to meet our existing financial obligations as they come due during the current fiscal year. However, we can provide no assurance that the performance of our business will meet our expectations. OFF-BALANCE SHEET ARRANGEMENTS We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. EFFECT OF INFLATION AND CHANGES IN PRICES Management does not believe that inflation and changes in price will have a material effect on operations. 33 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 the amounts of revenues and expenses recorded during the reporting periods. 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 Our consolidated financial statements include the accounts of Markland and its wholly-owned subsidiaries, Security Technology, Inc., Ergo Systems, Inc., Science and Technology Research Corporation, Inc. and E-OIR Technologies, Inc. We have eliminated all significant inter-company balances and transactions. CONCENTRATIONS 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. As of June 30, 2004, we had cash balances in banks in excess of the maximum amount insured by the FDIC as of June 30, 2004. In addition, we derive substantially all of our contract revenue from contracts with Federal government agencies. Consequently, substantially all of our accounts receivable are due from Federal government agencies either directly or through other government contractors. 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 as research and development costs the technologies we acquire if they are in process at the date of acquisition or have no alternative uses. IMPAIRMENT OF GOODWILL AND AMORTIZABLE INTANGIBLES 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. ESTIMATED USEFUL LIVES OF AMORTIZABLE 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. and EOIR Technologies, Inc. acquisitions, consistent with independent business valuations, we are amortizing the intangible assets or ten years and nine years respectively. 34 IMPAIRMENT OF LONG-LIVED ASSETS Pursuant to SFAS No. 144, we continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. We recognize an impairment loss when the carrying value of an asset exceeds expected cash flows. Accordingly, when indicators or impairment of assets are present, we evaluate the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying business. Our policy is to record an impairment loss when we determine that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the years ended June 30, 2004 and 2003. 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. As of June 30, 2004, we had completed delivery pursuant to all outstanding orders under this contract. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issues FASB Interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest Entities". FIN 46R expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The adoption of this interpretation did not have any impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. 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 this statement did not have any impact on our financial position or results of operations. CHANGES IN ACCOUNTANTS On July 7, 2004, our Board of Directors determined not to retain Marcum & Kliegman LLP as our independent registered public accounting firm, as reported in our current report on Form 8-K filed on July 13, 2004 (File # 000-28863), as amended from time to time. The audit report of Marcum & Kliegman LLP on our consolidated financial statements for fiscal year ended June 30, 2003 did not contain any adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. However, the report included an explanatory paragraph wherein Marcum & Kliegman LLP expressed substantial doubt about our ability to continue as a going concern. In connection with the audits of the year ended June 30, 2003 and during the subsequent interim period through July 7, 2004, we did not have any disagreement with Marcum & Kliegman LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of Marcum & Kliegman LLP, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on our consolidated financial statements. On July 7, 2004, we engaged Wolf & Company, P.C., an independent registered public accounting firm. During the years ended June 30, 2004 and 2003 and the subsequent interim period through July 7, 2004, we did not consult with Wolf & Company, P.C. regarding either the application of accounting principles to a specified transaction, the type of audit opinion that might be rendered on our consolidated financial statements, or any matter that was the subject of a disagreement or reportable event with Marcum & Kliegman LLP. 35 BUSINESS Markland Technologies, Inc. ("Markland", the "Company" or "we") is an integrated homeland security and defense company incorporated under the laws of the State of Florida. WHO WE ARE We are the successor to a variety of businesses dating back to 1995. Our business, as it exists today, consists of four business areas: o sensor systems for military and intelligence applications; o chemical detectors; o border security systems; and o advanced technologies. We provide to the United States Department of Defense ("DOD") and to various other United States Intelligence Agencies ("INTEL"); remote sensing technology products, and services to protect our country's military personnel and infrastructure assets. We also provide to the Department of Homeland Security ("Homeland Security"); products, services and emerging technologies to protect our country's borders, infrastructure assets and personnel. Our mission is to build world-class integrated solutions for the Homeland Security, DOD and INTEL marketplaces via expansion of our existing contracts, development of our emerging technologies and acquisition of synergistic revenue producing assets. Prior to the acquisition of E-OIR Technologies, Inc. ("EOIR"), our primary sources of operating revenue were sales of our automatic chemical agent detection and alarm system, border security logistics products and services, and Small Business Investment Research ("SBIR") funded research grants for the development of gas plasma antenna technology. As result of the acquisition of EOIR, now a wholly-owned subsidiary of Markland, our primary sources of operating revenues will be the sales of remote sensing technology products and services to the United States Department of Defense and to various other United States Intelligence Agencies. We expect that our remote sensing technology products and services will continue to be our most significant revenue-producing business areas going forward. Our strategy is to grow through organic means via increased acceptance by our customers of our present products and services offerings and also via synergistic acquisitions of assets that provide products or services to Homeland Security, DOD, or INTEL. BUSINESS HISTORY Markland Technologies, Inc. is the successor to A. P. Sales Inc., a corporation incorporated in Colorado in 1995. In December 1998, A. P. Sales was dissolved as a Colorado corporation and re-domiciled in Florida under the name Quest Net Corporation ("Quest Net"). In March 2000, Quest Net acquired CWTel, Inc., a Florida corporation ("CWTel"). CWTel filed a voluntary bankruptcy petition in November 2001 and was issued a final decree in March 2002. In March 2001, Quest Net acquired all of the outstanding stock of Vidikron of America, Inc., a Delaware corporation ("Vidikron"). As a result, Vidikron's sole stockholder, Market LLC, a Cayman Islands limited liability company, became Quest Net's majority stockholder and Vidikron became a wholly-owned subsidiary of Quest Net. Quest Net subsequently changed its name to Markland Technologies, Inc. In order to cure a default in our obligations to Market LLC, we transferred all of our interest in Vidikron to Market LLC in June 2002. As a result, at the end of fiscal 2002, we had no active business operations. In December of 2002, we entered into a transaction with Eurotech, Ltd., ipPartners, Inc., Market LLC, and James LLC. Pursuant to this transaction the following took place: o We formed a subsidiary corporation called Security Technology, Inc. o Eurotech transferred certain rights to its acoustic core technology relating to illicit material detection to our subsidiary. o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners transferred certain rights to their cryptology technologies to our subsidiary. 36 o 90% of the shares of our common stock held by Market LLC and James LLC were retired. o We issued 80% of our then issued and outstanding common stock to Eurotech and shares of common stock representing 10% of our then issued and outstanding shares of common stock to ipPartners. o We issued $5,225,000 in stated value of our Series C 5% Cumulative Convertible Preferred Stock to Market LLC and James LLC in satisfaction of $5,225,000 of convertible notes held by Market LLC and James LLC and in exchange for their agreement to surrender 4,498,638 shares of our common stock. In January 2003, we acquired all the common stock of Ergo Systems, Inc., a company in the business of providing border security logistic support and product development services to the U.S. government. Ergo Systems Inc. has a contract with the Department of Homeland Security to maintain, integrate and implement design enhancements to border security systems. In consideration for this acquisition we agreed to pay $400,000 in cash, payable at certain milestones which are related to research efforts. In March 2003, we entered into an agreement to acquire the intellectual property (including patents), equipment, and government contracts for certain gas plasma antenna technology from ASI Technology Corporation. We closed this transaction in September 2003. We paid a purchase price of $150,000 in cash and 283,333 shares of our common stock valued at $850,000. 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 valued at $5,100,000, paid $900,000 in cash and issued a promissory note for $375,000. We also entered into a consulting agreement with the former principal shareholder and employee. On June 29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000 in cash and $11,000,000 in principal amount of five-year notes secured by the assets and stock of EOIR. EOIR is a provider of technology and services to the United States Army Night Vision and Electronic Sensors Directorate, as well as other United States Department of Defense and Intelligence Agencies. It has significant expertise in wide-area remote sensing using both electro-optic and infrared technologies. Markland intends to continue to use the assets of EOIR for this purpose and to also broaden its product base and offerings to the Department of Homeland Security. Markland will combine certain EOIR technology assets in the areas of chemical detection with those of its other operating subsidiary Science and Technology Research Inc. to provide a more complete integrated product line offering for both "stand off" and "point" chemical detection systems. EOIR will represents a vast majority of Markland's revenues as we expect that EOIR will continue to be our most significant revenue producing business area in the next fiscal year. GENERAL DESCRIPTION OF OUR BUSINESS We classify our business into the following areas: o remote sensor systems for military and intelligence applications; o chemical detection; o border security; and o advanced technologies. REMOTE SENSOR SYSTEMS FOR MILITARY AND INTELLIGENCE APPLICATIONS Our acquisition of EOIR, a company which provides remote sensing technology products and services to the United States Department of Defense and to various other United States Intelligence Agencies, is an important part of our ongoing business strategy of creating a world-class integrated portfolio of solutions for the Homeland Security, DOD and INTEL marketplaces. EOIR offers products and services which include; (i) design and fabrication of customized remote sensor systems and platforms for DOD, INTEL and Homeland Security applications; (ii) remote sensor data collection, data signal processing and data exploitation; and (iii) training in the use of remote sensor systems and data. These efforts involve systems engineering, system integration, prototyping, manufacturing and field data collections as well as data analysis and processing. 37 EOIR's most significant source of revenues is an Omnibus Contract with the United States Army Night Vision and Electronic Sensors Directorate. Approximately 86% of EOIR revenues for the fiscal year ended December 31, 2003, were derived from this contract. The Omnibus Contract has an extensive and varied scope that requires us to provide a very broad range of products and technical services. For those products and technical services that EOIR does not possess in-house, we subcontract to our team members and other subcontractors as necessary. EOIR intellectual property lies in patents pending, trade secrets and the experience and capabilities of its technical staff whom support these research programs. We protect EOIR intellectual property and our competitive position via patent applications, trade secrets, and non-compete agreements with our employees. CHEMICAL DETECTORS In October 2003, our subsidiary, Security Technology, Inc., acquired all of the common stock of Science and Technology Research, Inc., a chemical detector manufacturer, as part of our ongoing business strategy of creating an integrated portfolio of homeland security solutions. We have a contract with the U.S. Navy to be the sole producer of the U.S. Navy's shipboard Automatic Chemical Agent Detection and Alarm System used to detect all classic nerve and blister agents as well as other chemical warfare agent vapors. During fiscal year 2004, our subsidiary STR recognized approximately $4,796,715 of revenue from this contract. As of June 30, 2004, we had delivered all the units requested to date under this existing contract. At the option of the US Navy additional units may be purchased by the US Navy or other government agencies under this contract in the future. We recently entered into an international distribution agreement with Tradeways, Ltd, to market and sell Markland's Shipboard ACADA chemical detection systems to foreign militaries to market our product in Argentina, Australia, Austria, Bahrain, Canada, Chile, Croatia, Denmark, Egypt, Estonia, Finland, Greece, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Malaysia, The Netherlands, New Zealand, Norway, Oman, Pakistan, Portugal, Qatar, Saudi Arabia, Spain, Sweden, Taiwan, Turkey, and the United Arab Emirates. To date, we have not sold any products through this channel. We are presently working on the design of a next generation "point" chemical detector product, which will also operate using Ion Mobility Spectrography ("IMS") cell technology and provide networked wireless communication capability. On December 23, 2003, the U.S. Navy signed a ten-year non-exclusive license agreement with us to transfer certain chemical detection technology intellectual property rights to us. We believe the license will allow us to further expand the applications for the "point" chemical detection technology and market the technology to non-defense customers such as foreign governments and commercial entities. We expect to continue to manufacture the Automatic Chemical Agent Detection and Alarm System for the U.S. Navy and simultaneously pursue opportunities with the Department of Homeland Security as well as foreign military sales. We are experiencing a decline in demand for our chemical detector unit from the U.S. Navy. We plan to compensate for this reduced demand by marketing this technology to new customers within the Homeland Security marketplace and by combining it with other technologies for sale to existing customers. In the interim, we are combining "stand off" chemical detection technologies from EOIR which are based on hyper spectral infra red technology with the "point" chemical detection technology of STR which is based on Ion Mobility Spectroscopy. This integrated and combined chemical detection capability we believe will accelerate penetration into new markets for the chemical detection products we now offer and help to increase revenues in the next fiscal year for chemical detection products. BORDER SECURITY We acquired the assets of Ergo Systems, Inc., in January 2003. This acquisition provided us with contracts with the Department of Homeland Security to maintain, integrate, and implement design enhancements to border security systems installed at U.S. ports of entry for the Dedicated Commuter Lane, which is part of a larger U.S. Customs and Immigration and Naturalization Service initiative to reduce wait times, improve data accuracy, and improve overall efficiencies at all border crossings for both freight and passengers. 38 The Dedicated Commuter Lane (DCL) integrates several important security checks. It employs automatic vehicle identification technology, which allows participants to pass through the border crossing more efficiently than without automatic screening. Participants run a card through a swipe card reader, which instantaneously sends patron information, including a photograph, to the inspector's screen for clearance. The gate rises and allows the patron through. The whole process takes about 30 seconds. The Dedicated Commuter Lane software also controls a variety of security subsystems, including video surveillance, gates, and tire shredders. In conjunction with the DCL maintenance contract awarded by the Department of Homeland Security we were also awarded a contract by Computer Sciences Corporation to perform border maintenance services in multiple ports of entry in the southern United States. During fiscal year 2004, our subsidiary Ergo Systems recognized approximately $955,736 of revenue from these contracts. During the fiscal year we also entered into a teaming agreement with Accenture, who was recently awarded the US VISIT contract. The purpose of this contract is to secure our borders and expedite the entry/exit process while enhancing the integrity of our immigration system and respecting the privacy of visitors to the United States. We have recently been awarded a subcontract which enables the company to derive revenues from the USVISIT contract. Potential revenue amounts from this subcontract are as yet undetermined. Our subcontract for the US VISIT program is part of a larger Department of Homeland Security initiative to increase security, reduce wait times, improve data accuracy, and improve overall efficiencies at all border crossings for both freight and passengers by creating and implementing a "trusted traveler" concept of traffic flow. The "trusted traveler" concept is designed for frequent border crossers who are willing to undergo a background check and travel under certain restrictions in exchange for the use of a commuter lane. This dedicated commuter lane substantially decreases the amount of time it takes to drive through the border. We believe that our experience in integrating solutions will be attractive to the Department of Homeland Security as it confronts the various issues of protecting our borders although there can be no assurances that the trusted traveler concept will result in an increase in sales or revenues. ADVANCED TECHNOLOGIES Through research and development as well as intellectual property acquisitions, we have established a portfolio of advanced and emerging technologies, which we intend to commercialize and utilize within our own proprietary products or license out for the purpose of revenue generation. These advanced technologies and intellectual property are as follows: o Gas plasma antenna, o Vehicle stopping system, o Acoustic Core(TM) signature analysis, o APTIS(TM) human screening portal, and o Cryptography software. GAS PLASMA ANTENNA: We acquired gas plasma antenna technology assets and a sub-license for plasma sterilization and decontamination from ASI Technology Corporation in September 2003. The assets at time of purchase included three ongoing funded SBIR government contracts and nine issued and pending U.S. patents related to gas plasma antenna technology with demonstrated applications in the fields of ballistic missile defense, phased array radar, and forward deployed decontamination. A plasma antenna's performance equals that of a metal antenna, but the gas plasma antenna is lighter. These antennae can be used for any purpose for which a metal antenna is used. A gas plasma antenna weighs substantially less than metal antennas of comparable performance. When a plasma antenna is turned off, it is transparent, immune to electronic countermeasures and allows other adjacent antennas to transmit or receive without interference. Plasma antenna technology employs ionized gas enclosed in a tube (or other enclosure) as the conducting element of an antenna. This is a fundamental change from traditional antenna design that generally employs solid metal wires as the conducting element. Ionized gas is an efficient conducting element with a number of important advantages over wire. Since the gas is ionized only for the time of transmission or reception, "ringing" and associated effects of solid wire antenna design are eliminated. The design allows for extremely short pulses, a feature important to many forms of digital communication and radars. The design further provides the opportunity to construct an antenna that can be compact and dynamically reconfigured for frequency, direction, bandwidth, gain and beam width. We believe plasma antenna technology will enable the design of antennas that are more efficient, lower in weight and smaller in size than traditional solid wire antennas. 39 We believe our plasma antenna offers numerous advantages over traditional wire antennas including stealth for military applications and higher digital performance in commercial applications. We cannot predict when these products will be ready for commercial or military use. Our gas plasma research team has been awarded US patent # 6,710,746 for a gas plasma antenna element demonstrating reconfigurable length. The development of this technology has been funded to date through grants from the US Navy and Army. US patent #6,710,746, which has SBIR origins, relates to plasma antennas having re-configurable length, beam width, and bandwidth. Traditionally, antennas have been defined as metallic devices for radiating or receiving radio waves, or as a conducting wire which is sized to emit radiation at one or more selected frequencies. As a result, the paradigm for antenna design has heretofore been focused on antenna geometry and physical dimensions. We believe that our gas plasma antenna design will result in antennas with greater flexibility and security than conventional antennas. During fiscal year 2004, funded gas plasma SBIR contracts provided approximately $261,479 in contract revenues. Presently we do not have any purchase commitments for this technology. VEHICLE STOPPING SYSTEM: Under a funded government contract, we developed a vehicle stopping system to address the increasing risks of unauthorized and illegal entry into the U.S. Our vehicle stopping system is designed to safely capture vehicles that are trying to gain entry without authorization. Our vehicle stopping system consists of a net, buried beneath the road, which will spring up when a car or truck attempts to speed across the border illegally. The net is attached to two spindles that unwind with increasing tension as the illegal car is trapped. Our Vehicle Stopping System is capable of stopping a vehicle attempting to gain illegal entry at speeds in excess of 65 miles per hour and without personal injury to occupants or U.S. government border personnel. The vehicle stopping system was successfully tested in June 2003 at the San Ysidro, California port of entry. Presently we do not have any purchase commitments for this system. ACOUSTIC CORE(TM): We acquired rights to the Acoustic Core(TM) technology, as it related to illicit material detection, from Eurotech, Ltd. in December 2002. The Acoustic Core(TM) technology utilizes acoustics sensing and signature analysis technologies to detect a variety of materials. Acoustic Core(TM) is a non-intrusive acoustic remote sensing technology, which exhibits the potential for the automated detection of a large variety of potentially harmful materials such as C4, plastic flare guns, and ceramics. This technology is capable of computerized automatic screening of containers, vehicles and humans. It can detect a broad range of illegal materials even if the materials are moving at a high rate of speed, with low false alarm rates, and it utilizes low frequency acoustic energy, which is safe for humans. This speed and accuracy makes the technology suitable for primary screening applications where large volumes of containers or humans need to be screened quickly and accurately, such as in an airport or at a border crossing. The product of almost a decade of intensive laboratory and field research, we believe the Acoustic Core(TM) technology has the potential to enter the security marketplace to fill high-priority homeland security needs. Because Acoustic Core(TM) technology can utilize the independent acoustic signatures of various materials, products can be developed and programmed to detect a large array of harmful substances, including explosives, and bio-hazardous and radioactive compounds. We believe that the Acoustic Core(TM) technology can screen large containers while they are in motion, such as during transport via truck or railcar. Primary screening of containers in this manner allows for segregation of suspicious containers for secondary screening by a handheld version of the remote sensing products. We completed a project with the U.S. Air Force through a Co-Operative Research and Development Agreement which used our proprietary Acoustic Core(TM) technology to inspect cargo. While this contract did not generate revenue for us, we expect to develop the technology for use in commercially viable products. However, we cannot predict when these products will be ready for commercial or military use. Presently we do not have any purchase commitments for this technology. 40 APTIS(TM): We are involved in the design and testing of APTIS(TM), an acoustic screening portal intended to facilitate screening of humans for concealed metallic and non-metallic weapons such as ceramic knives and plastic guns and explosives. The technology is very flexible and can be incorporated into existing entry portal systems such as metal detectors, eliminating the need to replace these systems used to safely screen humans for explosives. Although we continue to develop this prototype, we cannot predict when it will be ready for commercial use. Presently we do not have any purchase commitments for this system. COMPETITION The markets for our products and solutions are extremely competitive and are characterized by rapid technological change as a result of technical developments exploited by competitors, the changing technical needs of the customers, and frequent introductions of new features. We expect competition to increase as other companies introduce products that are competitively priced, that may have increased performance or functionality, or that incorporate technological advances not yet developed or implemented by us. Some of our present and potential competitors may have financial, marketing, and research resources substantially greater than ours. In order to compete effectively in this environment, we must continually develop and market new and enhanced products at competitive prices, and have the resources to invest in significant research and development activities. There is a risk that we may not be able to make the technological advances necessary to compete successfully. Existing and new competitors may enter or expand their efforts in our markets, or develop new products to compete against ours. Our competitors may develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features. New products or technologies may render our products obsolete. Many of our primary competitors are well established companies that have substantially greater financial, managerial, technical, marketing, personnel and other resources than we do. We have certain proprietary technologies, some of which have been developed, and others that are in development. We will focus on our proprietary technologies, or leverage our management experience, in order to differentiate ourselves from these organizations. There are many other technologies being presented to the Department of Homeland Security that directly compete with our technologies. The Department of Homeland Security may pursue solutions different from ours. INTELLECTUAL PROPERTY Our ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We rely primarily on patents and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We own multiple U.S. and foreign patents. We enter into confidentiality agreements with our consultants and key employees, and maintain controls over access to and distribution of our technology, software and other proprietary information. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. We may face claims by third parties that our products or technology infringe their patents or other intellectual property rights in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations. 41 EOIR provides engineers and scientists to perform research at Government research Laboratories. However, research performed in these Government laboratories is paid for with Government funds and is typically the property of the US Government. This intellectual property may be utilized via licensing agreements executed with the US Government, but there are no guarantees that the US Government will provide such licenses. RESEARCH AND DEVELOPMENT During the fiscal years ended June 30, 2003 and June 30, 2004, we spent $522,657 and $49,289 on research and development respectively. During the fiscal year ended June 30, 2004, we reduced our research and development efforts to concentrate our financial resources on product marketing activities and as a result of completion of funded SBIR contracts. Our research and development activities consist of projects funded entirely by us or with the assistance of SBIR grants, and SBIR projects are generally directed towards the discovery of specific information requested by the government research sponsor. In addition, our subsidiary EOIR is permitted to charge and recover a certain percentage of its administrative budget on Internal Research and Development programs. These programs are generally short in duration and may yield new processes or techniques that will advance our technical knowledge on our Government programs. We believe that focused investments in research and development are critical to our future growth and competitive position in the marketplace. Our research and development efforts are directed to timely development of new and enhanced products that are central to our business strategy. The industries in which we compete are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product introductions and enhancements. As a result, our success depends in part upon our ability to enhance our existing products, develop and introduce new products that improve performance on a cost effective and timely basis. We may be unable to successfully develop products to address new customer requirements or technological changes, and any products we develop may not achieve market acceptance. DEPENDENCE ON U.S. GOVERNMENT CONTRACTS We offer substantially all of our entire range of our services and products to agencies of the U.S. Government. In both fiscal years 2004 and 2003, 100% of our revenue came from U.S. Government prime or subcontracts. Although we are continuously working to diversify our client base, we will continue to aggressively seek additional work from the US Government. As with other government contractors, our business is subject to government client funding decisions and actions that are beyond our control. Much of our business is won through submission of formal competitive bids. Commercial bids are frequently negotiated as to terms and conditions for schedule, specifications, delivery and payment. With respect to bids for government work, however, in most cases the client specifies the terms and conditions and form of contract. Essentially all contracts with the United States Government, and many contracts with other government entities, permit the government client to terminate the contract at any time for the convenience of the government or for default by the contractor. We operate under the risk that such terminations may occur and have a material impact on operations. GOVERNMENT REGULATION Most of our U.S. Government business is subject to unique procurement and administrative rules based on both laws and regulations, including the U.S. Federal Acquisition Regulation that provide various profit and cost controls, rules for allocations of costs, both direct and indirect, to contracts and non-reimbursement of unallowable costs such as interest expenses and certain costs related to business acquisitions, including for example the incremental depreciation and amortization expenses arising from fair value increases to the historical carrying values of acquired assets. 42 Companies supplying defense-related equipment to the U.S. Government are subject to certain additional business risks specific to the U.S. defense industry. Among these risks are the ability of the U.S. Government to unilaterally suspend a company from new contracts pending resolution of alleged violations of procurement laws or regulations. In addition, U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. U.S. Government contracts are, by their terms, subject to unilateral termination by the U.S. Government either for its convenience or default by the contractor if the contractor fails to perform the contracts' scope of work. Upon termination other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and an allowance for profit. Foreign defense contracts generally contain comparable provisions permitting termination at the convenience of the government. To date, none of our significant contracts have been terminated. As is common in the U.S. defense industry, we are subject to business risks, including changes in the U.S. Government's procurement policies (such as greater emphasis on competitive procurement), governmental appropriations, national defense policies or regulations, service modernization plans, and availability of funds. A reduction in expenditures by the U.S. Government for products and services of the type we manufacture and provide, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affect our business. Certain of our sales are direct commercial sales to foreign governments. These sales are subject to U.S. Government approval and licensing under the Arms Export Control Act. Legal restrictions on sales of sensitive U.S. technology also limit the extent to which we can sell our products to foreign governments or private parties. Currently we do not have any sales from overseas customers. SALES AND MARKETING We currently divide the marketing efforts of our products and services into three areas: (1) directly to federal or local government agencies, (2) to large partners who may represent an opportunity for us as subcontractors, and (3) to commercial entities. These marketing duties are divided among upper management. MANUFACTURING Our primary manufacturing facilities are located in Fredericksburg, VA and Providence, RI .We also utilize our offices in Providence, RI as manufacturing prototype development facilities. EMPLOYEES As of September 2004, we employed approximately 191 full-time employees. We believe our future success will depend upon the continued service of our key technical and senior management personnel and upon our continued ability to attract and retain highly qualified technical and managerial personnel. None of our employees is represented by a labor union. We have never experienced a work stoppage and consider our relationship with our employees to be good. PROPERTY We have a three year lease for our executive offices of approximately 1,000 square feet located in Ridgefield, Connecticut and a month-to-month lease for a manufacturing facility of approximately 5,000 square feet located in Fredericksburg, Virginia. We also have an administrative office in Providence, RI which is utilized under a monthly sublease comprising approximately 4,000 square feet. 43 EOIR, our wholly owned subsidiary, holds a four-year lease its executive and administrative offices of approximately 5,420 square feet in Woodbridge, Virginia. The lease, which has an option to renew for an additional three-year term, expires on September 30, 2005. EOIR also leases approximately 5,000 square feet in Spotsylvania, Virginia, where it houses its software development unit. This lease is currently on a month-to-month basis. We also have several offices located in Fredericksburg, Va. One office with approximately 4,722 sq ft., with a 1 year lease, one with 1,200 sq ft., with a 5 year lease, one with 10,000 sq ft., with a 5 year lease, and one with 4,200 sq ft., with a five year lease. We believe that our present facilities are adequate to meet our current needs. If new or additional space is required, we believe that adequate facilities are available at competitive prices. However, we may not be able to relocate to a new facility without severely disrupting the production of our goods. LEGAL PROCEEDINGS On June 28, 2004, Charles Wainer filed a civil suit against the Company in Florida state court alleging breach of a stock purchase agreement and breach of an employment agreement stemming from Wainer's sale of his business to a predecessor of the Company and his subsequent employment thereat. In the complaint, Wainer alleges Markland owes him $300,000 cash, some unspecified portion of $700,000 in stock, some unspecified portion of $86,000 cash for lease payments, and approximately $20,000 in back-pay. The Company believes that these claims are without merit and plans to vigorously defend the action. On August 11, 2004, the Company answered the complaint and denied any liability. On or about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in the Circuit Court of Spotsylvania County, Virginia, against the Company, EOIR, our wholly owned subsidiary, and our Chief Executive Officer and Director, Robert Tarini. Mr. Moulton was the largest single shareholder of EOIR prior to its acquisition by the Company, owning approximately 67% of the EOIR capital stock. Mr. Moulton received approximately $5,863,000 in cash and a promissory note of EOIR in the approximate principal amount of $6,967,000 for his shares of EOIR at the closing of the acquisition of EOIR by the Company. In his complaint Mr. Moulton asserts, among other things, that the Company breached its obligations under the Stock Purchase Agreement, dated June 29, 2004, pursuant to which the Company acquired EOIR, by terminating Mr. Moulton's employment with EOIR and removing him from the EOIR board of directors. Mr. Moulton is seeking damages allegedly suffered by his loss of employment, extreme emotional distress, and costs incurred to enforce his contractual rights. In addition, he is seeking certain other equitable relief including, the appointment of a receiver to oversee the management of EOIR until these promissory notes issued to former EOIR shareholders at the closing of the acquisition are paid in full and a declaratory judgment that the Company's actions constitute an event of default under these promissory notes allowing for the acceleration of all amounts (approximately $11,000,000) due thereunder. The Company is a guarantor of these notes. The Company believes that the allegations in this lawsuit are entirely without merit. The Company has filed an answer denying Mr. Moulton's allegations and opposing vigorously all equitable relief sought. The Company has also filed a demurrer seeking to dismiss certain claims. The Company is considering bringing various claims against Mr. Moulton either by counterclaim or in a separate action. In addition, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. 44 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Each director serves as director until his successor is duly elected and qualified. Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships between our executive officers and directors. Our executive officers and directors are as follows: NAME AGE POSITION YEAR BEGAN - --------------------- --- --------------------------------- ---------- Robert Tarini 45 Chief Executive Officer, Chairman 2002 of the Board of Directors Kenneth Ducey, Jr. 39 President, Chief Financial Officer 2002 and Director Joseph P. Mackin 54 Director 2004 Each director serves for a term beginning on the date they are first elected or appointed and continuing until the next succeeding annual meeting of stockholders. ROBERT TARINI has served as our chief executive officer since November 14, 2003 and as our chairman of the board of directors since December 9, 2002. In April 2003, Mr. Tarini founded Syqwest Inc., a firm which specializes in the design and manufacture of acoustic remote sensing devices utilized in marine and land based applications. In April 2001, Mr. Tarini founded Trylon Metrics Corp., a developer of acoustic remote sensing technology, and acted as President of Trylon from April 2001 to present. In May 2001, Mr. Tarini founded ipPartners Inc. and has served as its President to present. ipPartners Inc. specializes in the development of acoustic remote sensing devices. Since 1999, Mr. Tarini has served as the chief executive officer of Ocean Data Equipment Corporation, where he oversaw the design and development of a complete line of scientific instruments targeted for geophysical and hydrographic research, and developed a remote sensing technique, which is currently being applied to detecting illicit materials. From June 1982 to July 1990, Mr. Tarini worked at Raytheon, where he designed active sonar and sonar trainers for US and foreign customers which were installed onto every 688 class attack submarine and every SQQ-89 surface ship combat system, in total, over 100 seafaring vessels. KENNETH P. DUCEY, JR. has served as our president, chief financial officer and member of our board of directors since December 2002. From 1998 to 2002, Mr. Ducey led three small technology companies while working at the venture capital firm, Spencer Trask. Mr. Ducey was responsible for developing new business, typically in segments in which the company was not yet practicing. In 1988, Mr. Ducey launched Palmtop Utilities, a consulting company that developed the first link between the Sharp Wizard and ACT! contact management software. Mr. Ducey led Palmtop Utilities to become the largest dealer of Sharp Wizards, and secured licensing arrangements with Sharp, Contact Software International, and Microsoft. After successfully selling the assets of Palmtop Utilities in 1992, Mr. Ducey helped to develop The Outsourcing Institute, where he developed and sold multi-million dollar contracts to MCI and PricewaterhouseCoopers. From 1985 to 1986, Mr. Ducey was a trader at Salomon Brothers where he was responsible for actively traded technology companies listed on the NASDAQ National Market. Mr. Ducey was nationally recognized in September 2000 by Business Week as a leading expert in outsourcing. DR. JOSEPH P. MACKIN has been a member of our board of directors since July 13, 2004. Dr. Mackin has been with EOIR for 4 years and is currently an Executive Vice President and Chief Scientist for EOIR. Dr. Mackin is responsible for strategic technology development and Homeland Security initiatives as well as a key participant in corporate day-to-day operations at EOIR. He has served on numerous government panels and committees, and was most recently appointed as the Lead Sensor Scientist on the prestigious National Academy of Science study called "ARMY S&T FOR HOMELAND DEFENSE" published in June 2003. Prior to joining EOIR, Dr. Mackin was an Assistant Sensor Systems Group Leader at MIT Lincoln Laboratories where, among other things, he served as the system integration lead for the Smart Sensor Web program. Dr. Mackin holds a PhD in Physics from the Massachusetts Institute of Technology and a BS in Engineering from the United States Military Academy at West Point. He is retired as an officer in the United States Army. 45 COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS DIRECTOR COMPENSATION We do not, as a standard practice, compensate our directors for their service. However, all of our current directors also serve us as either officers or consultants, and we compensate them for their service in such capacities. EMPLOYMENT AGREEMENTS ROBERT TARINI AND KENNETH DUCEY, JR. On May 12, 2004, the Company entered into five-year compensation agreements with Robert Tarini, our Chairman and Chief Executive Officer, Kenneth Ducey, Jr., our President and Chief Financial Officer, and Asset Growth Company. Asset Growth Company is wholly owned by Kenneth Ducey, Jr., and the following compensation terms of our agreements with Asset Growth Company and Kenneth Ducey, Jr., are provided on an aggregated basis. These agreements, as amended on June 14, 2004, provide for the following remuneration to each of Robert Tarini and Kenneth Ducey, Jr. (including Asset Growth Company): o Base annual remuneration of $300,000 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; o Conditional stock grants over the period commencing April 1, 2004 through January 2, 2008, based on performance criteria. The stock grants, if all earned, entitle each of Messrs. Tarini and Ducey (including Asset Growth Company) 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: STOCK PERCENTAGE GRANT DATE ---------------- --------------- Grant 1 2.5% May 12, 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, 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; and o Expense allowance for all reasonable and necessary expenses of $5,000 per month. The new agreements supersede our prior employment or consulting arrangements with Messrs. Tarini and Ducey, the terms of which are summarized below: Pursuant to our consulting agreement with Mr. Tarini, he served as our chairman and chief executive officer for an initial term of three years at a base consulting fee of $10,000 per month. We also agreed to reimburse Mr. Tarini for all reasonable and necessary out-of-pocket expenses related to the performance of his duties under this agreement. We issued 430,474 shares of our common stock in connection with the execution of the agreement and satisfaction of stated performance criteria. Mr. Tarini was eligible to receive a performance-based bonus of up to four times his annual base salary upon the conclusion of the term of the agreement. He was also eligible to participate in any bonus or incentive compensation program established by our board of directors. 46 In the event that we terminated Mr. Tarini's engagement without cause, or he terminated his engagement for "good reason" (defined in the agreement as, among other things, the assignment of duties inconsistent with Mr. Tarini's position or any material breach by us of the consulting agreement), we would have been obligated to continue payments until the earlier of (a) three months from the date of termination or (b) the date on which Mr. Tarini obtained a full-time engagement elsewhere. This agreement also subjected Mr. Tarini's to certain restrictive covenants, including an obligation to maintain confidential information. Under our employment agreement with Mr. Ducey, he served as our president and chief financial officer for an initial term of three years at an annual base salary of $185,000. The agreement also provided for up to $1,200 a month for his expenses, including his automobile, health insurance and reasonable expenses associated with setting up and maintaining a home office. The remaining terms of his agreement, including provisions for grants of common stock, bonuses and severance pay, were substantially the same as those of Mr. Tarini's agreement. DELMAR R. KINTNER. We entered into an employment agreement with Mr. Kintner in January 2003 whereby he would serve as our chief executive officer for an initial term of one year at an annual base salary of $150,000. The agreement provided for a grant of up to 2.27% of our common stock on a fully-diluted basis provided certain performance criteria were met. It also provided for up to $1,200 a month for his expenses, including his automobile, health insurance and reasonable expenses associated with setting up and maintaining a home office. This agreement was terminated in November 2003. Prior to termination, Mr. Kintner was granted 119,303 shares of our common stock, with a fair market value of $343,097 as of the date of grant. We are not required under the agreement with Mr. Kintner to provide for any further compensation, including any additional grants of our common stock. SUMMARY COMPENSATION TABLE EXECUTIVE OFFICER COMPENSATION SUMMARY COMPENSATION TABLE The following table provides summary information concerning the compensation earned by our chief executive officer and our other executive officers for services rendered for the fiscal years ended June 30, 2002, June 30, 2003 and June 30, 2004. Delmar Kintner served as our Chief Executive Officer until November 2003. LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------- ------------ SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) - ---------------------------------------- ---- ----------- --------------- ----------- Robert Tarini............................. 2004 $ 210,000 $ 3,183,130 (2) Chief Executive Officer and Chairman 2003 $ 120,000 $ 76,667 of the Board of Directors (1) 2002 Kenneth P. Ducey, Jr. .................... 2004 $ 240,000 $ 3,163,130 (2) President and Chief Financial Officer 2003 $ 180,000 $ 76,667 2002 Joseph P. Mackin (3) ..................... 2004 $ 190,000 1,250,286 Executive Vice President, EOIR 2003 2002 Gregory A. Williams (3) .................. 2004 $ 135,000 1,250,286 Vice President, EOIR 2003 2002 Delmar R. Kintner......................... 2004 $ 120,000 $ 254,849 Chief Executive Officer 2003 $ 120,000 $ 128,051 2002
- ------------------ (1) Mr. Tarini assumed the rule of Chief Executive Officer upon Mr. Kintner's resignation in November 2003. 47 (2) Includes 1,930,161 unregistered shares of common stock valued at $3,033,130 based on the closing market price as of the date of grant. (3) Mr. Mackin serves as Executive Vice President of EOIR, our wholly owned subsidiary. In his capacity as a member of our Board of Directors, he has the ability to influence our policy. (4) Mr. Williams resigned from our Board of Directors and his position as Vice President of EOIR effective November 1, 2004. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS/SARS GRANTED OPTIONS/SARS GRANTED TO EMPLOYEES IN EXERCISE OR BASE NAME (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE - --------------------- -------------------- -------------------- ---------------- --------------- Robert Tarini 0 0.0% N/A N/A Kenneth P. Ducey, Jr. 0 0.0% N/A N/A Gregory A. Williams 1,250,286 11.8% (1) $ 0.3775 June 29, 2014 Joseph P. Mackin 1,250,286 11.8% (1) $ 0.3775 June 29, 2014 Delmar R. Kintner 0 0.0% N/A N/A
(1) Under our 2004 Stock Incentive Plan, we granted an employee options to purchase a number of shares to be determined by dividing a stated value by the fair market value per share at the time of vesting. Solely for the purposes of determining these percentages, we have assumed that the number of shares for which such options are exercisable is equal to the number of shares which would be issuable upon exercise were the options vested in full on June 30, 2004. EQUITY COMPENSATION PLAN DISCLOSURE SECURITIES AUTHORIZED FOR ISSUANCE UNDER MARKLAND'S EQUITY COMPENSATION PLANS The following table sets forth certain information as of June 30, 2004, regarding securities authorized for issuance under our equity compensation plans, including individual compensation arrangements. - --------------------------------------- ------------------------- ------------------------ -------------------------- NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS - --------------------------------------- ------------------------- ------------------------ -------------------------- Equity compensation plans approved by security holders 0 N/A 0 - --------------------------------------- ------------------------- ------------------------ -------------------------- Equity compensation plans not approved by security holders 12,294,159 (1) $0.53 31,356,295 (2)(3) - --------------------------------------- ------------------------- ------------------------ -------------------------- TOTAL 12,294,159 $0.53 31,356,295 - --------------------------------------- ------------------------- ------------------------ --------------------------
- ---------------------- (1) Includes warrants to purchase 1,698,133 shares of our common stock issued as finder's fees in connection with the Securities Purchase Agreements entered into between certain investors and our company dated April 2, 2004, April 16, 2004 and May 3, 2004, and 10,596,026 shares of our common stock underlying options issued to certain of our employees. Included in the number of shares issuable upon the exercise of options are five future price options issued to one of our employees. Solely for the purpose of determining the number of shares issuable upon the exercise of these options, we have assumed full vesting as of June 30, 2004, at which time the options would have been exercisable for up to 1,205,286 shares of our common stock. 48 (2) On June 29, 2004, our board of directors adopted the Markland Technologies, Inc. 2004 Stock Incentive Plan the We have reserved a total of 25,000,000 shares of Common Stock for issuance under the 2004 Stock Incentive Plan, of which 14,403,974 remained available for future issuance as of June 30, 2004. The 2004 Stock Incentive Plan authorizes the grant of incentive options, non-statutory options, and restricted and unrestricted stock. For a complete description of the 2004 Stock Incentive Plan, please refer to footnote 9 to the Financial Statements. (3) Included in this figure are 17,436,271 shares of our common stock are potentially issuable under our four-year employment agreements with each of Robert Tarini, Kenneth P. Ducey, Jr., and Verdi Consulting, effective January 1, 2004. Under each of these agreements, we are required to issue shares upon the achievement of performance objectives. The number of shares to be granted is determined as a percentage of our outstanding common stock, calculated on a fully diluted basis (i.e., the number of shares of common stock which would be outstanding were all outstanding instruments convertible or exercisable for shares of common stock converted or exercised in full). The 17,436,271 shares consist of 6,637,143 shares of our common stock which we issued subsequent to the completion of our 2004 fiscal year and an additional 10,315,179 shares of common stock, representing an estimate of the maximum number of shares which may become issuable in the event all performance criteria are met. Solely for the purposes of this estimate, we have assumed that the outstanding fully diluted common stock at the time of the first such future grant will be equal to the number outstanding as of June 30, 2004. We can provide no assurance that the actual number of shares ultimately granted under these agreements will not exceed this estimate. For a complete description of each of these agreements, please refer to footnote 12 to the Financial Statements. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At the close of business on November 5, 2004, there were issued and outstanding 51,564,458 shares of our common stock. The following table provides information regarding beneficial ownership of our common stock as of November 5, 2004 by: o each person known by us to be the beneficial owner of more than five percent of our common stock; o each of our directors; o each executive officer named in the summary compensation table (including three former executive officers); and o all of our current directors and executive officers as a group. The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of shares listed as beneficially owned does not constitute an admission of beneficial ownership. Shares included in the "Right to Acquire" column consist of shares that may be purchased through the exercise of options that vest within 60 days of November 5, 2004. SHARES BENEFICIALLY OWNED ------------------------------------------------------------ RIGHT TO NAME AND ADDRESS OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL PERCENT - -------------------------------------------------- ----------- ------------ ------------ --------- James LLC ........................................ 1,671,950 3,871,046 5,542,996 9.999% Harbour House, 2nd Floor Waterfront Drive PO Box 972 Road Town Tortola, British Virgin Islands Robert Tarini(1).................................. 4,803,952 0 4,803,952 9.316% 54 Danbury Road #207 Ridgefield, Connecticut 06877 Kenneth P. Ducey, Jr.(2).......................... 4,118,105 0 4,118,105 7.986% 54 Danbury Road #207 Ridgefield, Connecticut 06877 49 Gregory A. Williams(3)............................ 0 0 0 * 5 English Hills Drive Fredricksburg, Virginia 22406 Joseph P. Mackin.................................. 0 0 0 * 15 Maypole Road Quincy, Massachusetts 02169 Delmar Kintner (4) ............................... 122,116 0 122,116 * 3153 Skyline Drive Oceanside, California 92056 All directors and executive officers as a group (3 persons)..................................... 8,922,057 0 8,922,057 17.303% - ----------------------
* Represents beneficial ownership of less than 1.0%. (1) Mr. Tarini is the beneficial owner of 499,849 shares of common stock issued to ipPartners and 136,000 shares of common stock issued to Syqwest, Inc. (2) Mr. Ducey is the beneficial owner of 2,879,485 shares of common stock issued to Asset Growth Company. (3) Mr. Williams resigned from our company on November 1, 2004. (4) Mr. Kintner resigned from our company in November 2003. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Article X of our charter provides that, subject to Section 607.0850 of the Florida Business Corporation Act, we will indemnify our current and former officers and directors against expenses (including attorneys fees), judgments, fines and amounts paid in settlement arising out of his services as our officer or director. Section 607.0850 of the Florida Business Corporation Act states that we have the power to indemnify any person made a party to any lawsuit by reason of being our director or officer against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Our employment agreements with our directors and officers contain provisions requiring us to indemnify them to the fullest extent permitted by Florida law. The indemnification agreements require us to indemnify our directors and officers to the extent permitted by our charter and to advance their expenses incurred in connection with a proceeding with respect to which they are entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On December 9, 2002, our subsidiary, Security Technology, Inc., acquired intellectual property rights and assets relating the Acoustic Core(TM) technology for detecting illicit material from Crypto.com, Inc., a subsidiary of Eurotech, Ltd. pursuant to the Exchange Agreement dated December 9, 2002. In exchange for the purchased technology, we agreed to issue for 4,498,638 shares of our common stock to Eurotech, Ltd. and ipPartners, Inc. Of the shares issued, 3,998,789 were transferred to Eurotech as payment for causing Crypto.com to deliver to us the purchased technology, and 499,849 were transferred to ipPartners in exchange for their forgiveness and discharge of certain obligations owed to them by Crypto in connection to the property transferred. 50 ipPartners, Inc. is controlled by Robert Tarini. Our chief executive officer, however, at the time of this transaction, Mr. Tarini was an unrelated third party. After the transaction, Eurotech, Ltd. owned eighty percent (80%) of our outstanding common stock, making us their majority-owned subsidiary. In order to accomplish this transaction, Market LLC and James LLC, our controlling shareholders at the time, agreed to a recapitalization of the Company whereby Market LLC and James LLC collectively surrendered 4,498,638 shares of our common stock, and $5,225,000 of convertible promissory notes, in exchange for $5,225,000 in stated value Series C Cumulative Convertible Preferred Stock. During January 2003, we completed our acquisition of Ergo Systems, Inc. from Ocean Data Equipment Corporation, now called SyQwest, Inc. Robert Tarini, our chief executive officer, is also the chief executive officer of SyQwest, Inc. Ergo's main asset is an annually renewable U.S. Government General Services Administration contract to provide logistic support and product development for five U.S. ports of entry. In exchange for Ergo we agreed to pay SyQwest $400,000 in cash, due in installments that are triggered with the completion of research milestones. As of April 30, 2004, we have paid SyQwest $176,900 of which $126,900 is an advance representing partial payment for monies that will be due upon the completion of the first milestone. On March 27, 2003, we entered into an exchange agreement with Eurotech whereby Eurotech exchanged 1,666,666 shares of our common stock for 16,000 shares of our Series D Cumulative Convertible Preferred Stock. Our Series D Cumulative Convertible Preferred Stock has a stated value of $1,000 per share and has a beneficial conversion feature where each share is immediately convertible into common stock at a discount to market prices. During the past six months we have also issued shares of our Series D Cumulative Convertible Preferred Stock to James LLC. James LLC has invested a total of $3,832,000 in our Series D Cumulative Convertible Preferred Stock. As of September 24, 2004, the Series D Cumulative Convertible Preferred Stock held by James LLC was convertible into 4,287,964 shares of our common stock. On July 24, 2003, we entered into an agreement with SyQwest, Inc., in which we issued 750,000 shares of our common stock in exchange for the forgiveness of $450,000 for unpaid services performed by SyQwest in connection with research conducted in relation to our vehicle stopping technology. Robert Tarini, our chief executive officer, is also the chief executive officer of SyQwest. We have the right at any time by written notice to repurchase these shares from SyQwest at a price equal to $.60 per share. In September 30, 2003 we acquired one hundred percent (100%) of the outstanding stock of Science and Technology Research, Inc., which produces our U.S. Navy shipboard automatic chemical agent detection and alarm system product. We paid the stockholder of Science and Technology Research a total of $6,475,000 consisting of $900,000 in cash, common stock valued at $5,100,000, a promissory note of $375,000, and acquisition costs of $100,000. To finance this acquisition we executed a two year, twelve percent (12%), secured Promissory Note with Bay View Capital, LLC for $1,400,000. Bay View Capital, LLC is controlled by Robert Tarini, our chief executive officer, and Chad Verdi, whom we have engaged as a consultant. The outstanding balance and accrued interest of this note were repaid in full in April 2004. Also on May 12, 2004, the we entered into five-year employment agreements with our Chief Executive Officer and Chairman of our Board of Directors, Robert Tarini, and our Chief Financial Officer and Director, Kenneth P. Ducey, Jr. The agreements provide for salary and bonus compensation, as well as performance based equity grants. The terms of the agreements are set forth in detail in this report in the section entitled Compensation of Directors and Executive Officers under heading "Employment Agreements." We have also executed amendments to these agreements with each of Mr. Tarini and Mr. Ducey which provided for a higher initial grant of shares in exchange for the omission of antidilution protection in the agreements, a concession granted prior to execution of the agreements. On June 29, 2004, we acquired all of the outstanding stock of EOIR for $8 million in cash and $11 million in principal amount of five year notes issued to the former shareholders of EOIR, including two of our current directors, Gregory A. Williams and Joseph P. Mackin. Neither Mr. Williams nor Mr. Mackin had any affiliation with us prior to the transaction. In connection with their continued employment at EOIR, and as a condition of the acquisition, we granted each of Mr. Williams and Mr. Mackin options to purchase 1,250,286 shares of our common stock at an exercise price of $0.3775 per share. The options vest in five equal annual installments. 51 Also in connection with this acquisition, we issued to James LLC 3,500 shares of Series D Preferred Stock in exchange for $2,000,000 cash. 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% - -------------------- (1) After an adjustment for a 1-for-60 reverse stock split effective October 27, 2003. The Series D preferred stock can be converted only to the extent that the Series D stockholder will not, as a result of the conversion, hold in excess of 9.999% of the total outstanding shares of our common stock. For a complete description of the terms and conditions of the Series D Preferred Stock please refer to our annual report on Form 10-KSB for the fiscal year ended June 30, 2003. On September 21, 2004, we sold secured convertible promissory notes and common stock purchase warrants to two institutional investors. As a condition to this sale, the investors required our Chief Executive Officer, Robert Tarini, and our Chief Financial Officer, Kenneth Ducey, Jr., to enter into a lock-up agreement pursuant to which Mr. Tarini and Mr. Ducey agreed not to sell any shares of our common stock until 60 days after the effective date of a registration statement covering the resale of the underlying shares of common stock of those securities sold in the September 21, 2004 private placement. For more information on the September 21, 2004 private placement, please see footnote 16 to our financial statements. As part of our private placement of secured convertible promissory notes and common stock purchase warrants completed on September 21, 2004, James LLC, the largest holder of our Series D Preferred Stock, agreed not to sell any of its holdings of Series D Preferred Stock until the earlier to occur of: (1) notice from the us and the investors that the transactions contemplated had been completed had been terminated, or (2) March 15, 2005. However, pursuant to the terms of the lock-up agreement, James, LLC may still convert their Series D shares and sell the underlying shares of common stock in accordance with Rule 144 of the Securities Act of 1933, as amended. In exchange, we agreed that under certain conditions, if we did not redeem the Series D stock by January 15, 2005, we would issue to James LLC a warrant to purchase 1,088,160 shares of our common stock at $.80 per share. The Company believes that all transactions described above were made on terms no less favorable to it than those obtainable from unaffiliated third parties. All future transactions, if any, with its executive officers, directors and affiliates will be on terms no less favorable to it than those that will be obtainable from unrelated third parties at the time such transactions are made. OTHER RELATIONSHIP AND TRANSACTIONS: TRANSACTIONS WITH VERDI CONSULTING The transactions described below are not related party transactions within the meaning of Item 404 of Regulation S-B. On May 12, 2004, the Company entered into a five-year consulting agreement with Verdi Consulting. Verdi Consulting has assisted us with a variety of tasks including strategic planning; identifying, structuring and closing on acquisitions; finding financing; investor relations; and general business advice. This agreement provides for the following remuneration: o Base annual remuneration of $300,000 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. 52 The stock grants, if all earned, entitle Verdi Consulting 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: STOCK PERCENTAGE GRANT DATE ---------------- ---------- 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, 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. We have also executed an amendment to this agreement which provided for a higher initial grant of shares in exchange for the omission of antidilution protection in the agreement, a concession granted prior to execution of the agreement. This agreement supersedes the prior agreement we had with Verdi Consulting, which was executed on January 1, 2003. Under this three-year agreement, we paid Verdi Consulting $12,500 per month as base compensation and provided a $1,000 per month expense allowance. In addition, as incentive compensation, we issued 315,375 shares of common stock to Verdi Consulting which vested in four installments during calendar 2003 and 115,097 shares which vested on January 1, 2004. Finally, Verdi Consulting was eligible to receive a bonus of up to $1,200,000 if it was instrumental in assisting us to obtain contracts with a total value in excess of $1,000,000 during the life of the contract. We had agreed to pay Verdi Consulting three month's base compensation if we terminated this contract without cause. DESCRIPTION OF SECURITIES Our authorized capital stock consists of 500,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value per share. As of November 5, 2004, we had 51,564,458 shares of our common stock issued and outstanding. COMMON STOCK VOTING RIGHTS. Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. Our common stock does not have cumulative voting rights. Persons who hold a majority of the outstanding common stock entitled to vote on the election of directors can elect all of the directors who are eligible for election. DIVIDENDS. Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors. Notwithstanding the rights of the holders of our common stock set forth in our charter, we are subject to the following contractual restrictions regarding the payment of dividends: o Pursuant to the Exchange Agreement dated December 9, 2002, with Eurotech, Ltd., and the other parties named therein, any and all cash and other liquid assets held by our Company or its subsidiaries shall be exclusively used for working capital or investment purposes, and we shall not, and shall not permit our subsidiaries to, directly or indirectly divert or upstream cash or other current assets whether in the form of a loan, contract for services, declaration of dividend, or other arrangement in contravention of such restriction until the second anniversary of the closing date of the exchange transaction. 53 o Pursuant to the Securities Purchase Agreement with DKR Soundshore Oasis Holding Fund, Ltd, and DKR Soundshore Strategic Holding Fund, Ltd. dated September 21, 2004, we have covenanted that so long as any of the notes issued pursuant to such agreement are outstanding, we will not declare, pay or make any provision for any cash dividend or cash distribution with respect to our common stock or preferred stock, without first obtaining the approval of the investors party the agreement. LIQUIDATION AND DISSOLUTION. In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders. OTHER RIGHTS AND RESTRICTIONS. Our charter prohibits us from granting preemptive rights to any of our stockholders. All outstanding shares are fully paid and nonassessable. Our common stock is quoted on the OTC Bulletin Board by the National Association of Securities Dealers, Inc. under the symbol "MRKL.OB. PREFERRED STOCK Our articles of incorporation authorize us to issue shares of our preferred stock from time to time in one or more series without stockholder approval. As of November 5, 2004, we had designated 30,000 shares as Series A preferred stock, all of which were outstanding on that date, and 40,000 shares of our preferred stock as Series D Preferred Stock, 17,725 of which were outstanding on that date. The following is a summary description of the principal terms of each series of our preferred stock. For a complete statement of all the terms of each series of preferred stock, please review the applicable certificate of designation that we have previously filed with the SEC on October 13, 2003 as exhibits to our annual report on Form 10-KSB for the year ended June 30, 2003. SERIES A NON-VOTING REDEEMABLE CONVERTIBLE PREFERRED STOCK VOTING RIGHTS: Except as otherwise provided under Florida law, the Series A preferred stock has no voting rights. DIVIDENDS: The Series A preferred stock does not accrue dividends. CONVERSION: Each share of the Series A preferred stock is convertible at our option into one-third of one share of our common stock. ANTIDILUTION: Upon the occurrence of a stock split or stock dividend, the conversion rate shall be adjusted so that the conversion rights of the Series A preferred stock stockholders shall be nearly equivalent as practicable to the conversion rights of the Series A preferred stock stockholders prior to such event. REDEMPTION: We may redeem all or any portion of the outstanding shares of the Series A preferred stock upon cash payment of $10.00 per share. DISSOLUTION: In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the Series A preferred stock will be treated as senior only to our common stock. If, upon any winding up of our affairs, and after the Series D preferred stockholders are paid in full, our assets available to pay the holders of Series A preferred stock are not sufficient to permit the payment in full, then our remaining assets will be distributed to those holders on a pro rata basis. SERIES D CONVERTIBLE PREFERRED STOCK VOTING RIGHTS: Except as otherwise provided under Florida law, the Series D preferred stockholders have no right to vote with the holders of our common stock. However, our charter requires that the Series D preferred stockholders approve any amendment to the rights and preferences of the Series D preferred stock. Where the Series D preferred stockholders do have the right to vote as a series, whether under our charter or pursuant to Florida law, the affirmative vote of the holders of at least 67% of the outstanding shares of Series D preferred stock is necessary to constitute approval. 54 DIVIDENDS: The Series D preferred stock does not accrue dividends. CONVERSION: The Series D preferred stock is convertible at the option of the stockholder at any time. The number of shares of our common stock into which each share of Series D preferred is convertible is determined by dividing $1,000 by the discounted bid price. The "discounted" bid price is the average closing bid price of our common stock during the five business days immediately preceding the conversion date multiplied by the applicable discount factor, as set forth below. AVERAGE CLOSING BID PRICE (1) DISCOUNT FACTOR - --------------------------------------------------- --------------- $15.00 or less 80% more than $15.00, but less than or equal to $30.00 75% more than $30.00, but less than or equal to $45.00 70% more than $45.00 65% - --------------- (1)After an adjustment for a 1-for-60 reverse stock split effective October 27, 2003. The Series D preferred stock can be converted only to the extent that the Series D stockholder will not, as a result of the conversion, hold in excess of 9.999% of the total outstanding shares of our common stock. ANTIDILUTION: Upon the occurrence of a transaction that results in a change of control, or a split off of the company assets, a stock split or a stock dividend, the price at which the Series D preferred stock is convertible shall be adjusted so that the conversion rights of the Series D preferred stock stockholders shall be nearly equivalent as practicable to the conversion rights of the Series D preferred stock stockholders prior to the transaction. REDEMPTION: We have the right to redeem any outstanding shares of our Series D preferred stock at any time. The redemption price per share is equal to $1,000 multiplied by 135%. Our Series D preferred stock is convertible, even after we have provided a notice of redemption, until the Series D stockholder has received full cash payment for the shares we are redeeming. DISSOLUTION: In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the Series D preferred stock will be treated as senior to all preferred stock and our common stock. If, upon any winding up of our affairs, our assets available to pay the holders of Series D preferred stock are not sufficient to permit the payment in full, then all our assets will be distributed to those holders on a pro rata basis. WARRANTS COMMON STOCK PURCHASE WARRANTS ISSUED IN APRIL 2, 2004, PRIVATE PLACEMENT. In our private placement transaction completed on April 2, 2004, we issued common stock purchase warrants to purchase an aggregate of 3,333,333 shares of common stock with an exercise price of $1.00 per share to the investors. In addition, we issued a common stock purchase warrant to purchase 333,333 shares of our common stock with an exercise price of $1.40 per share to West Hastings Ltd. as a finder's fee. These warrants have a so-called "most favored nation" provision pursuant to which the exercise price of the warrants and the terms of the warrants will automatically be changed if we issue warrants with a lower exercise price or with terms more favorable to the holder at any time prior to 180 days after the effective date of a registration statement providing for the resale of shares issuable upon exercise of the warrant. If we issue warrants with a lower exercise price than the warrants we issued on April 2, 2004 during this period, the exercise price of the warrants we issued on April 2, 2004 will be reduced to that new lower price. If we issue warrants with terms more favorable to the warrant holder than the terms set forth in the warrants we issued on April 2, 2004, such new more favorable terms will automatically be incorporated into the April 2 warrants. The shares underlying these warrants have been registered in a separate registration statement filed with the SEC, as amended and supplemented from time to time (File # 333-115395). 55 The holder of a warrant will not possess any rights as a stockholder until the holder exercises the warrant. COMMON STOCK PURCHASE WARRANTS ISSUED IN APRIL 16, 2004, PRIVATE PLACEMENT. In our private placement transaction completed on April 16, 2004, we issued common stock purchase warrants to purchase an aggregate of 2,500,000 shares of common stock with an exercise price of $1.50 per share to the investors. In addition, we issued a common stock purchase warrant to purchase 25,000 shares of our common stock with an exercise price of $2.00 per share to Baker Consulting as a finder's fee. These warrants have a "most favored nation" provision pursuant to which the exercise price of the warrants will automatically be changed (but only to the extent that such change does not itself cause a change to the warrants we issued on April 2, 2004, on account of the most favored nation clause contained in the April 2 warrants), if we issue warrants with a lower exercise price at any time prior to 180 days after the effective date of a registration statement providing for the resale of shares issuable upon exercise of the warrant. If we issue warrants with a lower exercise price than the warrants we issued on April 16, 2004 during this period, the exercise price of the warrants we issued on April 16, 2004, will be reduced to that new lower price. The shares underlying these warrants have been registered in a separate registration statement filed with the SEC, as amended and supplemented from time to time (File # 333-115395). The holder of a warrant will not possess any rights as a stockholder until the holder exercises the warrant. COMMON STOCK PURCHASE WARRANTS ISSUED IN MAY 3, 2004 PRIVATE PLACEMENT. In our private placement transaction completed on May 3, 2004, we issued redeemable common stock purchase warrants to purchase an aggregate of 7,098,750 shares of common stock with an exercise price of $1.50 per share to the investors. These common stock purchase warrants are redeemable by us, at any time, after our common stock has a closing bid price of not less than $2.25 per share for 20 consecutive trading days after such effective date for $0.0001 per share. These warrants do not have a "most favored nation" provision. All the warrants are exercisable for a period of three (3) years. All of the warrants contain provisions that protect holders against dilution by adjusting 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 point in time. The shares underlying these warrants have been registered in a separate registration statement filed with the SEC, as amended and supplemented from time to time (File # 333-115395). The holder of a warrant will not possess any rights as a stockholder until the holder exercises the warrant. WARRANTS ISSUED ON SEPTEMBER 21, 2004 AND NOVEMBER 9, 2004 On September 21, 2004 and November 9, 2004, we issued warrants initially exercisable for shares of our common stock at an initial exercise price of $1.50 per share. These warrants are subject to the following adjustments provisions: o Under the terms of the warrants, if we do not make a prepayment of an aggregate of $4,000,000 in principal, plus any interest having accrued thereon, on the notes issued to the Initial Investors in this private placement by March 15, 2005, the exercise price of the warrant will be reduced from $1.50 to the lesser of (i) $0.792 and (ii) 80% of the average closing price per share of our common stock on the date the adjustment is made. 56 o Adjustments are also required in the event that we issue common stock or common stock equivalents at a price per share below the then effective exercise price of the warrants. o In the event any of the foregoing adjustments are made, the warrants will become exercisable for a number of shares equal to the aggregate exercise price (i.e., the exercise price per share multiplied by the number of underlying shares) prior to the adjustment divided by the adjusted exercise price per share. The warrants are exercisable for a period of five years from the date of issuance. All of the warrants contain provisions that protect holders against dilution by adjusting 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 warrants provide that the number of shares to be acquired by each of the holders of the warrants upon exercise of these warrants cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by each holder and its affiliates, would result in any one of them owning more than 4.999% of our outstanding common stock at any point in time. By written notice to the Company, the holder of the warrant may waive this contractual limitation, effective 61 days after delivery of such notice. The terms of the warrants also provide that the number of shares to be acquired by each of the holders of the warrants upon exercise of these warrants cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by each holder and its affiliates, would result in any one of them owning more than 9.99% of our outstanding common stock at any point in time. We have registered in this registration statement the resale of the shares underlying these warrants by the selling stockholders identified in this prospectus. The holder of a warrant will not possess any rights as a stockholder until the holder exercises the warrant. NOTES CONVERTIBLE NOTES ISSUED ON SEPTEMBER 21, 2004 AND NOVEMBER 9, 2004 On September 21, 2004 and November 9, 2004, we issued convertible promissory notes with a one-year maturity in aggregate principal amounts of $5,200,000 and $1,755,000 respectively. These notes accrue interest at an annual rate of 8%. All accrued interest will become immediately payable on March 15, 2005, after which time interest will be payable on a monthly basis, in arrears. At any time, and at the option of the holder of the note, the outstanding principal and accrued interest of the notes may be converted into shares of our common stock at an initial conversion price per share of $0.80. If we do not make the prepayments discussed below, the conversion price will be adjusted from $0.80 per share to the lower of (i) $0.80 and (ii) a floating rate equal to 80% of average closing price per share of our common stock for the five trading days preceding conversion: o Under the terms of these notes issued on September 21, 2004 we are required to pay to the Initial Investors $4,000,000 of the outstanding principal and interest by March 15, 2005, and the remaining outstanding balance by September 21, 2005. o Under the terms of the notes issued on November 9, 2004, we are required to pay each Additional Investor a principal amount on each note equal to the consideration paid by the Additional Investor holding such note plus any accrued interest by March 15, 2005, and the remaining outstanding balance by November 9, 2005. We have registered in this registration statement the resale of the shares underlying these notes by the selling stockholders identified in this prospectus. 57 The holder of a note will not possess any rights as a stockholder until the holder convert the notes into shares of our common stock. FLORIDA LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Provisions of Florida law, our charter and bylaws could make it more difficult to acquire us by means of a merger, tender offer, proxy contest, open market purchases and otherwise. These provisions, which are summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms. AUTHORIZED BUT UNISSUED STOCK. We have shares of common stock and preferred stock available for future issuance, in some cases, without stockholder approval. We may issue these additional shares for a variety of corporate purposes, including public offerings to raise additional capital, corporate acquisitions, stock dividends on our capital stock or equity compensation plans. The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us, thereby protecting the continuity of our management. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. SPECIAL MEETING OF STOCKHOLDERS. Our bylaws provide that special meetings may be called only by our board of directors or by holders of not less than 10% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. This provision may make it more difficult for stockholders to take action opposed by our board of directors. AMENDMENT TO OUR BYLAWS. Section 607.1004 of the Florida Business Corporation Act provides that preferred stockholders have the right to vote as a class on amendments to our charter that would negatively impact their rights or preferences as preferred stockholders of such class. Our charter, however, provides that our board of directors has the exclusive authority to alter, amend or repeal them. This provision of our charter may also make it more difficult for stockholders to take action opposed by our board of directors. TRANSFER AGENT The transfer agent and registrar for our common stock is Florida Atlantic Stock Transfer, Inc. PLAN OF DISTRIBUTION The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o to cover short sales made after the date that this Registration Statement is declared effective by the Commission; 58 o broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of Common Stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. Upon the Company being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of Common Stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of Common Stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledge intends to sell more than 500 shares of Common Stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law. The Selling Stockholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of Securities will be paid by the Selling Stockholder and/or the purchasers. 59 Each Selling Stockholder who is an affiliate of a broker-dealer has represented and warranted to the Company that he acquired the securities subject to this registration statement in the ordinary course of such Selling Stockholder's business and, at the time of his purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities. As such, they are not underwriters within the meaning of Section 2(11) of the Securities Act. The Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission. The selling stockholders have acknowledged that they understand their obligations to comply with these provisions of the Exchange Act and the rules thereunder and have agreed that they will not engage in any transaction in violation of such provisions. If a selling stockholder uses this prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under this Registration Statement. The selling stockholders have acknowledged that they understand their obligations to comply with the provisions of the Exchange Act and the rules thereunder relating to stock manipulation, particularly Regulation M, and have agreed that they will not engage in any transaction in violation of such provisions. The Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive any proceeds from the sale of the Common Stock. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. AVAILABLE INFORMATION We are a public company and file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. Copies of the reports, proxy statements and other information may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. This prospectus is part of a registration statement on Form SB-2 that we filed with the SEC. Certain information in the registration statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration statement that are excluded from this prospectus. For further information you may: o read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC's Public Reference Room; or o obtain a copy from the SEC upon payment of the fees prescribed by the SEC. LEGAL MATTERS Foley Hoag LLP of 155 Seaport Boulevard, Boston, Massachusetts 02210 has advised us about the legality and validity of the shares. We know of no members of Foley Hoag who are beneficial owners of our common stock or preferred stock. 60 EXPERTS Our consolidated financial statements as of June 30, 2004, included in this prospectus have been audited by Wolf & Company, P.C., registered independent public accounting firm, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Our consolidated financial statements as of June 30, 2003, included in this prospectus have been audited by Marcum & Kliegman, LLP, registered independent public accounting firm, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 61 INDEX TO FINANCIAL STATEMENTS Page ---- REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND CONSOLIDATED FINANCIAL STATEMENTS FOR MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 Report of Independent Registered Public Accounting Firm of Wolf & Company, P.C................ F-2 Report of Independent Registered Public Accounting Firm of Marcum & Kliegman LLP............... F-3 Consolidated Balance Sheet at June 30, 2004.................................................... F-4 Consolidated Statements of Loss for the Years Ended June 30, 2004 and 2003..................... F-5 Consolidated Statements of Stockholders' (Deficiency) Equity for the Years Ended June 30, 2004 and 2003....................................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended June 30, 2004 and 2003............... F-12 Notes to Consolidated Financial Statements..................................................... F-15 F-1
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Markland Technologies, Inc. and Subsidiaries Ridgefield, Connecticut We have audited the consolidated balance sheet of Markland Technologies and subsidiaries as of June 30, 2004, and the related consolidated statements of loss, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provided a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Markland Technologies, Inc. and subsidiaries as of June 30, 2004 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidate financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and its current liabilities exceed its current assets. The Company has limited finances and may require additional funding in order to market and license its products. There are no assurances that the Company can reverse its operating losses or that it can raise additional capital to allow it to continue its planned operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ WOLF & COMPANY, P.C. - ------------------------ Boston, Massachusetts October 13, 2004 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Markland Technologies, Inc. and Subsidiaries We have audited the accompanying consolidated statements of operations, stockholders' (deficiency) equity, and cash flows of Markland Technologies, Inc. and Subsidiaries ("the Company") for the year ended June 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements of Markland Technologies, Inc. and Subsidiaries referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of approximately $2,837,000 during the year ended June 30, 2003. As of June 30, 2003, the Company also had a working capital deficiency of approximately $1,235,000. These conditions raised substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ MARCUM & KLIEGMAN LLP ------------------------- NEW YORK, NEW YORK SEPTEMBER 15, 2003 F-3 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT JUNE 30, 2004 ASSETS CURRENT ASSETS: Cash $ 1,101,088 Accounts receivable 5,354,267 Other current assets 285,070 ------------- TOTAL CURRENT ASSETS 6,740,425 ------------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $11,306 1,076,657 ------------- OTHER ASSETS Amortizable intangible assets, net of accumulated amortization 14,140,548 Technology rights - Acoustic Core 1,300,000 Goodwill 9,706,333 ------------- TOTAL OTHER ASSETS 25,146,881 ------------- TOTAL ASSETS $ 32,963,963 ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,225,701 Accrued expenses and other current liabilities 1,837,836 Unearned contract revenue 324,140 Bank line of credit 600,000 Current portion of long term debt 2,493,470 ------------- TOTAL CURRENT LIABILITIES 9,481,147 NON CURRENT LIABILITIES: Long term debt, less current portion 7,774,980 ------------- TOTAL LIABILITIES 17,256,127 ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A redeemable convertible preferred stock - no par value; 30,000 authorized, issued and outstanding; liquidation preference 300,000 of $300,000 Series C 5% cumulative convertible preferred stock - .0001 par value; 8,000 authorized; none issued and outstanding -- Series D convertible preferred stock - $.0001 par value; 40,000 authorized; 22,786 issued and outstanding; liquidation preference of $22,786,000 2 Common stock - $.0001 par value; 500,000,000 authorized; 31,856,793 shares issued and outstanding 3,180 Additional paid-in capital 50,864,718 Unearned compensation (15,176,116) Accumulated deficit (20,283,948) ------------- TOTAL STOCKHOLDERS' EQUITY 15,707,836 ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,963,963 ============= The accompanying notes are an integral part of these consolidated financial statements. F-4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF LOSS FOR THE YEARS ENDED JUNE 30, ------------------------------- 2004 2003 ------------- ------------- REVENUES $ 6,013,930 $ 658,651 COST OF REVENUES 4,674,593 445,218 ------------- ------------- GROSS PROFIT 1,339,337 213,433 ------------- ------------- OPERATING EXPENSES: Selling, general and administrative 5,313,448 1,186,379 Research & development 49,289 522,657 Amortization of compensatory element of stock issuances for selling, general and administrative expenses 5,211,737 2,051,822 Amortization of intangible assets 915,729 66,668 ------------- ------------- TOTAL OPERATING EXPENSES 11,490,203 3,827,526 ------------- ------------- OPERATING LOSS FROM CONTINUING OPERATIONS (10,150,866) (3,614,093) ------------- ------------- OTHER EXPENSES (INCOME), NET: Interest expense 360,347 226,751 Other income, net -- (5,250) ------------- ------------- TOTAL OTHER EXPENSES (INCOME), NET 360,347 221,501 ------------- ------------- LOSS FROM CONTINUING OPERATIONS (10,511,213) (3,835,594) GAIN FROM DISCONTINUED OPERATIONS: Gain from discontinued operations -- 998,713 ------------- ------------- NET LOSS (10,511,213) (2,836,881) DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 844,270 501,755 DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 3,555,500 4,107,500 PREFERRED STOCK DIVIDEND - Series C 184,478 152,716 ------------- ------------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(15,095,461) $ (7,598,852) ============= ============= BASIC AND DILUTED LOSS PER COMMON SHARE: Loss from continuing operations $ (1.39) $ (1.72) Gain from discontinued operations $ -- $ 0.20 ------------- ------------- Net loss $ (1.39) $ (1.52) ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (AFTER 1 for 60 REVERSE SPLIT) 10,872,049 5,002,724 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 SERIES A SERIES C CONVERTIBLE CONVERTIBLE COMMON STOCK PREFERRED STOCK PREFERRED STOCK ------------------------- ------------------------ ----------------------- SHARES (1) AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ----------- ----------- ---------- ---------- ---------- Balance - June 30, 2002 4,998,486 500 -- -- -- -- Stock canceled in connection with December 9, 2002 exchange agreement (4,998,486) (450) -- -- -- -- Stock issued in connection with December 9, 2002 exchange agreement 4,498,638 450 -- -- -- -- Conversion of promissory notes and interest into Series C convertible preferred stock -- -- -- -- 5,225 1 Stock issued for directors' compensation, net 5,000 1 -- -- -- -- Stock issued in connection with private placement 113,333 11 -- -- -- -- Value assigned to beneficial conversion feature of convertible debt -- -- -- -- -- -- Preferred stock dividend - Series C -- -- -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series C -- -- -- -- -- -- Value allocated to Series C preferred stock - beneficial conversion feature dividend -- -- -- -- -- -- Stock issued in connection with consulting agreement 2,333 -- -- -- -- -- Stock issued in connection with consulting agreements 132,528 13 -- -- -- -- Stock issued in connection with employment agreements 86,559 9 -- -- -- -- Amortization of consulting agreements -- -- -- -- -- -- Amortization of employment agreements -- -- -- -- -- -- Sale of 170 shares of Series C convertible preferred stock -- -- -- -- 170 -- Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- 30,000 300,000 -- -- Conversion of common stock into Series D convertible preferred stock (1,666,666) (167) -- -- -- -- Sale of Series D convertible preferred stock -- -- -- -- -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- -- -- -- Value allocated to Series D preferred stock - beneficial conversion feature dividend -- -- -- -- -- -- Net loss -- -- -- -- -- -- Balance - June 30, 2003 3,671,573 367 30,000 300,000 5,395 1 - ------------------- (1) Share amounts have been restated to reflect the 1-60 reverse stock split effected on October 27, 2003. The accompanying notes are an integral part of these consolidated financial statements. F-6
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 SERIES D CONVERTIBLE PREFERRED STOCK UNEARNED -------------------------- COMPENSATION SHARES AMOUNT AMOUNT ----------- ----------- ------------ Balance - June 30, 2002 -- -- -- Stock canceled in connection with December 9, 2002 exchange agreement -- -- -- Stock issued in connection with December 9, 2002 exchange agreement -- -- -- Conversion of promissory notes and interest into Series C convertible preferred stock -- -- -- Stock issued for directors' compensation, net -- -- -- Stock issued in connection with private placement -- -- -- Value assigned to beneficial conversion feature of convertible debt -- -- -- Preferred stock dividend - Series C -- -- -- Preferred stock dividend - beneficial conversion feature - Series C -- -- -- Value allocated to Series C preferred stock - beneficial conversion feature dividend -- -- -- Stock issued in connection with consulting agreement -- -- -- Stock issued in connection with consulting agreements -- -- (4,037,237) Stock issued in connection with employment agreements -- -- -- Amortization of consulting agreements -- -- (3,573,966) Amortization of employment agreements -- -- 1,178,002 Sale of 170 shares of Series C convertible preferred stock -- -- 2,051,822 Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- -- Conversion of common stock into Series D convertible preferred stock 16,000 2 -- Sale of Series D convertible preferred stock 430 -- -- Preferred stock dividend - beneficial conversion feature - Series D -- -- -- Value allocated to Series D preferred stock - beneficial conversion feature dividend -- -- -- Net loss -- -- -- Balance - June 30, 2003 16,430 2 (4,381,379) - ---------------------- (1) Share amounts have been restated to reflect the 1-60 reverse stock split effected on October 27, 2003. The accompanying notes are an integral part of these consolidated financial statements. F-7
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 TOTAL ADDITIONAL STOCKHOLDERS' PAID-IN ACCUMULATED (DEFICIENCY) CAPITAL DEFICIT EQUITY ------------- ------------- ------------- AMOUNT AMOUNT AMOUNT ------------- ------------- ------------- Balance - June 30, 2002 29,490 (6,935,854) (6,905,864) Stock canceled in connection with December 9, 2002 exchange agreement 450 -- -- Stock issued in connection with December 9, 2002 exchange agreement 1,299,500 -- 1,300,000 Conversion of promissory notes and interest into Series C convertible preferred stock 5,224,999 -- 5,225,000 Stock issued for directors' compensation, net 2,999 -- 3,000 Stock issued in connection with private placement 339,989 -- 340,000 Value assigned to beneficial conversion feature of convertible debt 125,000 -- 125,000 Preferred stock dividend - Series C (152,716) -- (152,716) Preferred stock dividend - beneficial conversion feature - Series C (501,755) -- (501,755) Value allocated to Series C preferred stock - beneficial conversion feature dividend 501,755 -- 501,755 Stock issued in connection with consulting agreement 30,400 -- 30,400 Stock issued in connection with consulting agreements 5,215,706 -- 1,178,482 Stock issued in connection with employment agreements 4,413,896 -- 839,939 Amortization of consulting agreements (1,178,002) -- -- Amortization of employment agreements (2,051,822) -- -- Sale of 170 shares of Series C convertible preferred stock 170,000 -- 170,000 Conversion of liabilities from discontinued operations into Series A convertible preferred stock -- -- 300,000 Conversion of common stock into Series D convertible preferred stock 165 -- -- Sale of Series D convertible preferred stock 430,000 -- 430,000 Preferred stock dividend - beneficial conversion feature - Series D (4,107,500) -- (4,107,500) Value allocated to Series D preferred stock - beneficial conversion feature dividend 4,107,500 -- 4,107,500 Net loss -- (2,836,881) (2,836,881) Balance - June 30, 2003 13,900,104 (9,772,735) 46,360 The accompanying notes are an integral part of these consolidated financial statements. F-8
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 SERIES A CONVERTIBLE SERIES C CONVERTIBLE COMMON STOCK PREFERRED STOCK PREFERRED STOCK ------------------------ ------------------------ ------------------------ SHARES (1) AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ----------- ----------- ----------- ----------- ----------- Balance - July 1, 2003 3,671,573 367 30,000 300,000 5,395 1 Issuance of Series D convertible preferred stock -- -- -- -- -- -- Conversion of Series C convertible preferred stock and accrued dividends into common stock 5,156,412 516 -- -- (5,395) (1) Conversion of promissory note into common stock 404,266 40 -- -- -- -- Conversion of Series D convertible preferred stock into common stock 604,839 60 -- -- -- -- Stock issued in connection with settlement of liabilities to a related party 750,000 75 -- -- -- -- Stock issued in connection with consulting and employment agreements 6,122,008 612 -- -- -- -- Common stock issued in conjunction with acquisition of ASI assets 325,833 33 -- -- -- -- Common stock issued in conjunction with acquisition of Science and Technology Research Corporation, Inc. 1,589,779 154 -- -- -- -- Amortization of employment and consulting agreements -- -- -- -- -- -- Common stock and warrant issuances in private placements 13,232,083 1,323 -- -- -- -- Intrinsic value of options issued in connection with EOIR acquisition -- -- -- -- -- -- Net loss -- -- -- -- -- -- Balance - June 30, 2004 31,856,793 3,180 30,000 300,000 -- -- - ----------------------------- (1) Share amounts have been restated to reflect the 1-60 reverse stock split effected on October 27, 1003. The accompanying notes are an integral part of these consolidated financial statements. F-9
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 SERIES D CONVERTIBLE UNEARNED PREFERRED STOCK COMPENSATION -------------------------------- ------------- SHARES AMOUNT AMOUNT ------------- ------------- ------------- Balance - July 1, 2003 16,430 2 (4,381,379) Issuance of Series D convertible preferred stock 7,166 -- -- Conversion of Series C convertible preferred stock and accrued dividends into common stock -- -- -- Conversion of promissory note into common stock -- -- -- Conversion of Series D convertible preferred stock into common stock (810) -- -- Stock issued in connection with settlement of liabilities to a related party -- -- -- Stock issued in connection with consulting and employment agreements -- -- (12,006,474) Common stock issued in conjunction with acquisition of ASI assets -- -- -- Common stock issued in conjunction with acquisition of Science and Technology Research Corporation, Inc. -- -- -- Amortization of employment and consulting agreements -- -- 5,211,737 Common stock and warrant issuances in private placements -- -- -- Intrinsic value of options issued in connection with EOIR acquisition -- -- (4,000,000) Net loss -- -- -- Balance - June 30, 2004 22,786 2 (15,176,116) - ----------------------- (1) Share amounts have been restated to reflect the 1-60 reverse stock split effected on October 27, 1003. The accompanying notes are an integral part of these consolidated financial statements. F-10
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 ADDITIONAL TOTAL PAID-IN ACCUMULATED STOCKHOLDERS' CAPITAL DEFICIT EQUITY ------------ ------------ ------------ AMOUNT AMOUNT AMOUNT ------------ ------------ ------------ Balance - June 30, 2003 13,900,104 (9,772,735) 46,360 Issuance of Series D convertible preferred stock 5,401,970 -- 5,401,970 Conversion of Series C convertible preferred stock and accrued dividends into common stock (515) -- -- Conversion of promissory note into common stock 518,419 -- 518,459 Conversion of Series D convertible preferred stock into common stock (60) -- -- Stock issued in connection with settlement of liabilities to a related party 449,925 -- 450,000 Stock issued in connection with consulting and employment agreements 12,286,331 -- 280,469 Common stock issued in conjunction with acquisition of ASI assets 916,692 -- 916,725 Common stock issued in conjunction with acquisition of Science and Technology Research Corporation, Inc. 5,166,346 -- 5,166,500 Amortization of employment and consulting agreements -- -- 5,211,737 Common stock and warrant issuances in private placements 8,225,506 -- 8,226,829 Intrinsic value of options issued in connection with EOIR acquisition 4,000,000 -- -- Net loss -- (10,511,213) (10,511,213) Balance - June 30, 2004 50,864,718 (20,283,948) 15,707,836 - --------------------- (1) Share amounts have been restated to reflect the 1-60 reverse stock split effected on October 27, 2003. The accompanying notes are an integral part of these consolidated financial statements. F-11
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, ------------------------------- 2004 2003 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10,511,213) $ (2,836,881) Gain from discontinued operations -- (998,713) ------------- ------------- Loss from continuing operations (10,511,213) (3,835,594) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation 11,306 -- Amortization of intangible assets 915,729 66,668 Amortization of debt discount and non-cash interest 239,164 41,666 Amortization of compensatory stock compensation 5,211,737 2,051,822 Changes in operating assets and liabilities: Accounts receivable 350,760 (314,223) Prepaid expenses and other assets 137,362 (1,167) Accounts payable (444,295) 939,774 Accrued expenses and other current liabilities 182,550 328,170 ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (3,906,900) (764,550) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for acquisitions, net of cash acquired (8,536,533) (191,900) Purchase of property and equipment (1,853) -- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (8,538,386) (191,900) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds in connection with premium financing agreement -- 44,000 Principal payments relating to premium financing agreement (12,906) (26,996) Repayments of note payable - STR (75,000) -- Proceeds from note payable - Bay View 1,400,000 -- Repayments of note payable - Bay View (1,400,000) -- Proceeds from sale of common stock in private placement 8,226,845 340,000 Proceeds from sale of Series C 5% cumulative convertible preferred stock -- 170,000 Proceeds from sale of Series D convertible preferred stock 5,401,970 430,000 ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,540,909 957,004 ------------- ------------- NET INCREASE IN CASH 1,095,623 554 CASH - BEGINNING OF YEAR 5,465 4,911 ------------- ------------- CASH - END OF YEAR $ 1,101,088 $ 5,465 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-12
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $ 100,769 $ -- ============= ============= Taxes $ -- $ -- ============= ============= Non-cash investing and financing activities: Conversion of notes payable and accrued interest into preferred stock $ 518,459 $ 5,225,000 ============= ============= Conversion of liabilities from discontinued operations into Series A convertible preferred stock $ -- $ 300,000 ============= ============= Acquisition of technology rights by issuance of common stock $ -- $ 1,300,000 ============= ============= Acquisition of ASI by issuance of common stock $ 916,725 $ -- ============= ============= Acquisition of STR by issuance of common stock $ 5,166,500 $ -- ============= ============= Conversion of accounts payable into Common Stock $ 450,000 $ -- ============= ============= Conversion of common stock into Series D convertible preferred stock $ -- $ 10,000 ============= ============= Deemed dividend preferred stock - beneficial conversion Feature - Series C $ 844,270 $ 501,755 ============= ============= Deemed dividend preferred stock - beneficial conversion Feature - Series D $ 3,555,500 $ 4,107,500 ============= ============= Accrued Dividends on preferred stock $ 184,478 $ 152,716 ============= ============= Payable on purchase of Ergo $ -- $ 273,100 ============= ============= Secured convertible promissory note debt discount $ -- $ 125,000 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-13
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2004 AND 2003 During years ended June 30, 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 $ 5,390,805 $ -- Equipment 1,083,467 -- Other current assets 317,851 -- Intangibles 25,029,277 400,000 Accounts payable (3,678,360) -- Accrued liabilities (1,860,156) -- Notes payable to sellers (10,339,351) (273,100) Line of credit (600,000) -- Transaction costs (792,000) -- Equity (5,950,000) -- ------------- ------------- Net Cash Used for Acquisitions, net of cash acquired of $538,467 $ 8,601,533 $ 126,900 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-14
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 1. NATURE OF OPERATIONS BUSINESS HISTORY AND OPERATIONS Markland Technologies, Inc. ("Markland"), previously known as Quest Net Corporation, 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 Corporation. In March 2000, Markland acquired CWTel, Inc. ("CWTel"), a Florida-based telecommunication corporation. In November 2001, CWTel filed a voluntary bankruptcy petition in the State of Florida. In March 2002, a final decree was issued, the trustee discharged and the case closed. On March 15, 2001, Markland acquired all of the outstanding stock of Vidikron of America, Inc. ("Vidikron"). As a result of this acquisition, the sole stockholder of Vidikron, Market LLC, controlled a majority of the common stock of Markland and, accordingly, the transaction was accounted for as a reverse acquisition and as a recapitalization of Vidikron, pursuant to which Vidikron was treated as the accounting acquirer. Accordingly the historical financial statements are those of Vidikron. Vidikron became a wholly-owned subsidiary of Markland. Subsequently, Quest Net changed its name to Markland Technologies, Inc. and Vidikron adopted the year-end of Quest Net. On May 28, 2002, Markland received a notice of default from Market LLC relating to a loan and security agreement and a related secured convertible revolving credit note due to Markland's failure to make payments of principal and interest due under the note. In addition, as a result of the defaults under the note, Market LLC declared all outstanding principal and interest under the note, totaling $4,213,300, to be immediately due and payable. In June of 2002, all of the shares of the Vidikron subsidiary, including all of its operating assets and liabilities, were transferred to Market LLC in partial satisfaction of the indebtedness due Market LLC of $50,000. As a result, Markland had no active business following such event. The assets and liabilities and operating results of Vidikron have been treated as a discontinued operation in the accompanying consolidated financial statements (see Note 11). On November 21, 2002, Security Technology, Inc. ("STI") was incorporated as a Delaware C corporation and became a wholly-owned subsidiary of Markland. In December 2002, Markland, Eurotech Ltd. ("Eurotech"), ipPartners, Inc. ("ipPartners"), a related party, Market LLC and James LLC, entered into an exchange agreement ("Exchange Agreement"). On December 19, 2002, the transactions contemplated by the Exchange Agreement were consummated. Pursuant to the Exchange Agreement, Eurotech transferred to Markland certain rights to Eurotech's Acoustic Core technology, relating to illicit materials detection, and certain cryptology technology. Market LLC and James LLC, the holders of 100% of the issued and outstanding common stock of Markland, exchanged 4,498,638 shares of Markland's common stock (90% of their total holdings) and certain convertible notes owed by Markland in exchange for $5,225,000 in stated value of Series C 5% Cumulative Convertible Preferred Stock. Markland issued 3,998,789 shares of common stock, representing approximately eighty percent (80%) of its outstanding common stock, to Eurotech, and 499,849 shares of common stock, representing approximately ten percent (10%) of its outstanding common stock, to ipPartners. As a result of this transaction, a change of control occurred and Markland became an 80%-owned subsidiary of Eurotech. F-15 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 In January 2003, Markland purchased the common stock of Ergo Systems, Inc. ("Ergo"). In September 2003, Markland purchased certain technology from ASI Technology Corporation ("ASI"). In October 2003, Markland purchased the common stock of Science and Technology Research Corporation, Inc. ("STR"). We acquired from ASI gas plasma antenna technology assets and a sub-license for plasma sterilization and decontamination. The assets at time of purchase included three ongoing funded SBIR government contracts and nine issued and pending U.S. patents related to gas plasma antenna technology with demonstrated applications in the fields of ballistic missile defense, phased array radar, and forward deployed decontamination. 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. Markland acquired 100% of E-OIR Technologies, Inc.'s ("EOIR") outstanding common stock in conjunction with a Stock Purchase Agreement dated June 29, 2004. EOIR provides research and engineering services to Defense and Intelligence Community customers. EOIR's technical services include design and fabrication of sensor systems for military and intelligence community applications. These efforts involve systems, engineering, system integration, prototyping, field collections as well as data analysis and processing. Substantially all of EOIR's revenues are derived from approximately twenty Government contracts with ten different U.S. Government agencies. These transactions are in support of Markland's objective to provide end-to-end solutions to the Department of Homeland Security ("DHS") and Department of Defense ("DOD"). Markland's principal end customer is the United States Government. Markland operates in one principal business segment of providing primarily Government Agencies with products to protect the United States' borders, military personnel and infrastructure assets. All of the Markland's operating units have similar products and services, production processes, customers and regulatory environment. During 2004, sales of remote sensing products, border security products and services and SBIR funded research grants comprised 80%, 16% and 4% of our revenue, respectively. During 2003, revenue was comprised of sales of border security products and services and SBIR funded research grants of 67% and 33%, respectively. The Company's revenues from the acquisition of EOIR will be derived from the sales of remote sensor system products and services. Markland 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 Markland's current revenue, the loss of this customer would have a material adverse effect on Markland's future operations. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of Markland as a going concern. Markland has incurred net losses of $10,511,213 and $2,836,881 for the years ended June F-16 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 30, 2004 and 2003, respectively. Additionally, Markland had a working capital deficiency of $2,740,722 at June 30, 2004. Markland has limited finances and may require additional funding in order to market and license its products. Subsequent to June 30, 2004, Markland issued secured convertible promissory notes and warrants to purchase shares of common stock and received net proceeds of approximately $4,000,000 (see Note 16). There is no assurance that Markland 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 Markland's ability to continue as a going concern. Markland'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. While Markland has experienced operating losses in the past, due to the acquisition of EOIR, management believes the operating portion of the business will be cash flow positive in fiscal 2005. Management's business plan is to continue to grow the customer base and revenues and to control and monitor operating expenses and capital expenditures. In addition, subsequent to year end, Markland consummated a financing through which we realized net cash of approximately $4,000,000. Management believes that the business as currently constituted will produce positive cash flow which, together with the current cash levels, will enable Markland to meet existing financial obligations as they come due during the current fiscal year. However, management can provide no assurance that the performance of the business will meet these expectations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Markland and its wholly-owned subsidiaries, Security Technology, Inc. ("STI"), Ergo Systems, Inc. ("Ergo"), Science and Technology Research Corporation, Inc. ("STR") and E-OIR Technologies, Inc. ("EOIR"). All significant inter-company balances and transactions have been eliminated in consolidation. Use of Estimates in Preparation of Financial Statements - ------------------------------------------------------- The preparation of the accompanying 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 the determination of the fair value of assets acquired and liabilities assumed in business combinations, impairment of identified intangible assets, goodwill and long lived assets, the fair value of equity instruments issued, valuation reserves on deferred tax assets and revenue and costs recognized on long-term, fixed-price contracts. Concentrations - -------------- Markland has cash balances in banks in excess of the maximum amount insured by the FDIC as of June 30, 2004. F-17 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Substantially all revenue is generated from contracts with Federal government agencies. Consequently, substantially all accounts receivable are due from Federal government agencies either directly or through other government contractors. Cash and Cash Equivalents - ------------------------- Cash equivalents include interest-bearing deposits with original maturities of three months or less. 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. Markland's receivables are from government contracts. Markland has not experienced any losses in accounts receivable and has provided no allowance at June 30, 2004 or 2003. Property and Equipment - ---------------------- Property and equipment are valued at cost and are being depreciated over their useful lives using the straight-line method for financial reporting. Routine maintenance and repairs are charged to expense as incurred. Expenditures which materially increase the value or extend useful lives are capitalized. Property and equipment are depreciated using straight-line methods over the estimated useful lives of assets as follows: Computers and equipment 3 years Furniture and fixtures 5-7 years Vehicles 5 years Software 3 years Property and equipment consisted of the following at June 30, 2004: Software $ 63,830 Computer equipment 512,236 Vehicles 405,258 Furniture and fixtures 106,639 -------------- $ 1,087,963 Less accumulated depreciation (11,306) -------------- $ 1,076,657 ============== Depreciation expense for the years ended June 30, 2004 and 2003 was $11,306 and $0, respectively. Income Taxes - ------------ The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable F-18 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 income in the years in which these temporary differences are expected to be recovered or settled. A deferred tax asset is recorded for net operating loss and tax credit carry forwards to the extent that their realization is more likely than not. The deferred tax benefit or expense for the period represents the change in the deferred tax asset or liability from the beginning to the end of the period. Revenue Recognition - ------------------- We recognize revenue when the following criteria are met: (1) we have persuasive evidence of an arrangement, such as contracts, 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 United States Navy, the Company recognizes as revenues the contract price of each unit and recognizes the applicable cost of each unit shipped. As of June 30, 2004, the Company had completed delivery of all outstanding orders under the contract. Unearned Revenue - ---------------- Unearned revenue represents cash collection in excess of revenue earned from fixed price contracts. Fair Value of Financial Instruments - ----------------------------------- The financial statements include various estimated fair value information at June 30, 2004, as required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." Financial instruments are initially recorded at historical cost. If subsequent circumstances indicate that a decline in the fair value of a financial asset is other than temporary, the financial asset is written down to its fair value. Unless otherwise indicated, the fair values of financial instruments approximate their carrying amounts. By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties. The maximum potential loss may exceed any amounts recognized in the consolidated balance sheets. The fair value of cash, accounts receivable, bank line of credit and long-term debt approximate their recorded amounts because of their relative market and settlement terms. The fair value of the notes payable issued to the former owners of EOIR (see Note 3) have been recorded at their fair value, as determined by an independent valuation, which is less than the face value due to a below market interest rate. Advertising Costs - ----------------- Advertising costs are expensed as incurred. For the years ended June 30, 2004 and 2003, advertising and promotion expenses were approximately $19,504 and $-0-, respectively. Shipping Costs - -------------- Delivery and shipping costs are included in cost of revenue in the accompanying consolidated statements of loss. F-19 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Research and Development - ------------------------ Research and development costs are charged to expense as incurred. Markland capitalizes costs related to acquired technologies that have achieved technological feasibility and have alternative uses. Acquired technologies which do not meet this criteria 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 Series A and D Convertible preferred stock, options and warrants 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 Intangible Assets - ------------------------------- The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Statements of Financial Accounting Standards (SFAS ) No. 142, "Goodwill and Other Intangible Assets", prescribes a two-step process for impairment testing of goodwill, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has elected to perform its annual analysis during the fourth quarter of each fiscal year. No indicators of impairment were identified in the fiscal year ended June 30, 2004. Impairment of Long-Lived Assets - ------------------------------- Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", Markland continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators or impairment are present, Markland evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. Markland's policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the years ended June 30, 2004 and 2003. Stock-Based Compensation - ------------------------ At June 30, 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", Markland 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. Since the only options issued by the Company were issued in conjunction with a business combination on June 29, 2004, had the Company recorded compensation costs related to these options based on fair value at the grant date consistent with SFAS No. 123, there would have been no effect on the Company's net loss in any period presented. Impact of Recently Issued Accounting Standards - ---------------------------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. 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 this statement did not have any impact on our financial position or results of operations. F-20 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 In December 2003, the FASB issues FASB Interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest Entities". FIN 46R expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The adoption of this interpretation did not have any impact on our financial position or results of operations. 3. ACQUISITIONS Acoustic Core(TM) Technology - ---------------------------- On December 9, 2002, in connection with the Exchange Agreement dated as of December 9, 2002, by and among Eurotech, the Company, Crypto.com, Inc., ("Crypto" - a wholly-owned subsidiary of Eurotech), Secured Technology, Inc. ("STI"), ipPartners, Inc., Market LLC and James LLC (the "Exchange"), Eurotech and Crypto agreed to license and transfer certain intellectual property to a newly-formed subsidiary of the Company, STI, in exchange for 3,998,789 shares of the Company's newly issued common stock (the "Exchange Shares"). The Exchange Shares constituted 80% of the Company's outstanding common stock making the Company a majority-owned subsidiary of Eurotech. In addition, as part of the agreement, ipPartners was issued 499,849 shares of common stock in exchange for their forgiveness and discharge of certain obligations owed to ipPartners with respect to the property transferred to STI. Eurotech is a development-stage, Washington, D.C.-based, technology company, whose common stock is registered under the Exchange Act. Prior to the Exchange, Market LLC and James LLC controlled the Company. In connection with the Exchange, on December 9, 2002, the Company, Market LLC and James LLC agreed to a recapitalization of the Company, whereby $5,225,000 in stated value of a new series of preferred stock, designated Series C 5% Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") was issued by the Company, in exchange for $5,225,000 of convertible promissory notes, inclusive of accrued interest, as well as, for the agreement by James LLC F-21 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 and Market LLC to collectively surrender 4,498,638 shares of the Company's common stock prior to the consummation of the above Exchange agreement between the Company and Eurotech, among others. The rights licensed from Eurotech in the Exchange consist of certain proprietary technology known as Acoustic Core used to detect illicit substances, and certain cryptology technology held by Eurotech's subsidiary, Crypto. Since Eurotech owned 80% of the common stock of the Company on December 9, 2002, the technology acquired from Eurotech was recorded by the Company at Eurotech's carrying value of $1,300,000. Eurotech had purchased the rights to such technologies in 2001. The Company's technical employees and advisors concluded that as of December 2002, the Company has established technological feasibility for its ultimate security product to be marketed. Additional development services and testing are necessary to complete the product development. The Company will begin to amortize this asset over the economic useful life of five years when the technology is available for general release to its customers. The Company is engaged in a project with the U.S. Air Force to evaluate the Acoustic Core(TM) technology for use in the inspection of cargo. The technology utilizes acoustic waves to detect illicit materials and density changes. In addition, the Company is in the process of adapting such technology for use in the detection of concealed weapons on persons that cannot be detected by traditional metallic screeners. Purchase of Intangible Assets of ASI Technology Corporation - ----------------------------------------------------------- On March 19, 2003, Markland and ASI Technology Corporation, a Nevada corporation, ("ASI") closed its Technology Purchase Agreement (the "Agreement"). Under the Agreement, ASI agreed to sell and Markland 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. Under an interim arrangement, Markland 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 amounted to $1,000,000. This 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. These assets are being amortized over 3 years. In connection with the Agreement, ASI and Markland entered into a registration rights agreement entitling ASI to include its shares of Markland's common stock in future registration statements filed by Markland under the Securities Act of 1933 in connection with public offerings of Markland's common stock. In the event that Markland fails to register such stock on behalf of ASI, or if a registration statement for the shares is delayed, Markland will have to issue an additional $150,000 worth of common stock to ASI. Also in connection with the Agreement, ASI and Markland entered into a sublicense agreement pursuant to which ASI has sublicensed to Markland the right to develop and sell products to certain government, military and homeland security customers in the United States and Canada using Markland'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 $5,000 has been paid to ASI under this agreement and $35,000 is included in selling, general and administrative expenses for the year ended June 30, 2004. F-22 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 During March of 2004, Markland issued 42,500 shares of common stock valued at $66,725 to ASI as a penalty for not having an effective registration statement for the shares issued to ASI. This amount was charged to selling, general and administrative expense in the statement of loss for the year ended June 30, 2004. Purchase of Science and Technology Research, Inc. - ------------------------------------------------- In October 2003, Markland completed the acquisition of 100% of the common stock of Science and Technology Research, 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 aggregated $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 and, under amended terms, is due in full on October 15, 2004. 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 Markland. In June 2004, the Company made the first principal payment in the amount of $75,000. The remaining promissory note, as amended, is payable as follows: July 15, 2004 $ 75,000 August 15, 2004 75,000 September 15, 2004 75,000 October 15, 2004 75,000 --------- $300,000 ========= On March 15, 2004, Markland agreed to pay $40,000 of cash and issue an additional 50,000 shares of common stock valued at $66,500 in exchange for his agreement to extend the due date of the promissory note to October 15, 2004. These amounts were charged to interest expense in the statement of loss for the year ended June 30, 2004. A summary of the allocation, as determined by an independent valuation, of the aggregate consideration for the acquisition to the fair value of the assets acquired and liabilities assumed is as follows: Fair value of net assets acquired: Fair value of assets acquired - Current assets, including cash of $115,830 $ 783,657 Property and equipment 53,467 Fair value of liabilities assumed - Accounts payable and accrued expenses (368,932) ------------ Fair value of identifiable net tangible assets acquired 468,192 Existing contracts 416,000 Customer relationships 1,551,944 Goodwill 4,038,864 ------------ Total Purchase Price $ 6,475,000 ============ F-23 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Markland also entered into a consulting agreement with the principal shareholder and employee of STR (see Note 12). Markland 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 (see Note 6). The results of operations of STR have been included in Markland's consolidated statements of operations commencing October 1, 2003. Purchase of E-OIR Technologies, Inc. - ------------------------------------ On June 29, 2004, Markland acquired all of the outstanding stock of E-OIR Technologies, Inc. ("EOIR") for $8,000,000 in cash and $11,000,000 in principal amount of five year notes secured by the assets and stock of EOIR. EOIR is a provider of technology and services to the US Army Night Vision Laboratories and has expertise in wide area remote sensing using both electro-optic and infrared technologies. The acquisition was consummated in furtherance of Markland's stated strategy of making synergistic acquisitions in order to provide products and services to Homeland Defense, the Department of Defense and U.S. Intelligence Agencies. In connection with this acquisition, Markland has also adopted a Stock Incentive Plan (see Note 9). A summary of the allocation, as determined by an independent valuation, of the aggregate consideration for the merger to the fair value of the assets acquired and liabilities assumed is as follows: Cash $ 8,000,000 Promissory note (net of $1,467,956 below market interest rate discount) 9,532,044 Transaction costs 792,000 ------------ Total Purchase Price $18,324,044 ============ Fair value of net assets acquired: Fair value of assets acquired - Current assets, including cash of $332,637 $ 6,073,467 Property and equipment 1,030,000 Fair value of liabilities assumed: Accounts payable & accrued expenses (5,169,584) Bank loans and overdrafts (1,032,308) ------------ Fair value of identifiable net tangible assets acquired 901,575 Customer relationships 11,755,000 Goodwill 5,667,469 ------------ Total Purchase Price $18,324,044 ============ The goodwill in this transaction, as determined by the independent valuation, arose as a result of anticipated synergies, cost savings and other items not related to tangible net assets or identifiable intangible assets. As a result of the transaction being structured as a stock acquisition, Markland does not expect the goodwill to be deductible for tax purposes. In connection with the EOIR acquisition, Markland also raised gross proceeds of $2,000,000 through a private placement of an additional 3,500 shares of its Series D Preferred Stock to a single institutional investor (see Note 8). Between March 31, 2004 and June 30, 2004 Markland completed three private placements, issuing a total of 13,232,083 shares of common stock plus additional warrants for total proceeds of $9,679,000 ($8,226,845 net of issuance costs). Cash raised in these financings were used, in part, to fund the acquisition of EOIR. F-24 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Unaudited pro forma financial information for the years ended June 30, 2004, had the acquisitions of STR and EOIR been completed as of July 1, 2002, is as follows: Unaudited Pro Forma Information - ------------------------------- Unaudited pro forma information for Markland's acquisition of STR is as follows: - -------------------------------------------------------------------------------- MARKLAND-STR 2004 2003 - -------------------------------------------------------------------------------- Revenues $ 6,518,000 $ 6,713,000 ============== ============== Loss from operations $ (10,245,000) $ (3,349,000) ============== ============== Net loss applicable to common stockholders $ (15,227,000) $ (8,488,000) ============== ============== Net loss applicable to common stockholders per common share $ (1.35) $ (1.30) ============== ============== Unaudited pro forma information for Markland's acquisition of EOIR is as follows: MARKLAND-EOIR 2004 2003 - -------------------------------------------------------------------------------- Revenues $ 59,416,000 $ 34,315,000 ============== ============== Loss from operations $ (7,702,000) $ (2,973,000) ============== ============== Net loss applicable to common stockholders $ (13,333,000) $ (8,743,000) ============== ============== Net loss applicable to common stockholders per common share $ (1.23) $ (1.75) ============== ============== Unaudited pro forma information for Markland's acquisition of both STR and EOIR is as follows: MARKLAND-STR-EOIR 2004 2003 - -------------------------------------------------------------------------------- Revenues $ 59,920,000 $ 40,369,000 ============== ============== Loss from operations $ (7,796,000) $ (2,708,000) ============== ============== Net loss applicable to common stockholders $ (13,465,000) $ (8,633,000) ============== ============== Net loss applicable to common stockholders per common share $ (1.20) $ (1.32) ============== ============== F-25 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 4. AMORTIZATION OF INTANGIBLE ASSETS Amortizable intangible assets consist of the following at June 30, 2004: Amortizable intangibles - EOIR $ 11,755,000 Amortizable intangibles - Ergo 400,000 Amortizable intangibles - ASI 1,000,000 Amortizable intangibles - STR 1,967,944 -------------- Total amortizable intangibles $ 15,122,944 Accumulated amortization (982,396) -------------- Net amortizable intangibles $ 14,140,548 ============== 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 years ended June 30, 2004 and 2003 was $133,332 and $66,668, respectively. 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 year ended June 30, 2004 was $250,000. The excess of the purchase price of STR over the fair value of assets acquired was $6,006,808. Of this amount, $4,038,864 was allocated to goodwill and $1,967,944 to amortizable intangible assets. $416,000 was allocated to existing contracts with a twenty-six month estimated economic life and the remaining $1,551,944 was allocated to customer relationships with an estimated economic useful life of ten years. Markland has recorded amortization expense of $532,396 for year ended June 30, 2004. The excess of the purchase price of EOIR over the fair value of assets acquired is $18,022,469. Of this amount, $6,267,469 was allocated to goodwill and $11,755,000 to amortizable intangible assets comprising contracts and customer relationships. This asset has an estimated useful life of nine years. Markland has not recorded amortization expense for year ended June 30, 2004 as the acquisition was completed on June 29, 2004. Future amortization expense related to the above-acquired intangible assets over the next five years is as follows: Years Ending June 30, Amount ------------ ----------- 2005 $2,119,972 2006 1,941,305 2007 1,544,639 2008 1,461,306 2009 1,461,306 ----------- $8,528,527 =========== The intangible assets entitled "Acoustic Core" which has a carrying value of $1,300,000 are not available for commercial sale as of June 30, 2004. Accordingly, no amortization expense has been recorded through June 30, 2004. F-26 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 5. LINES OF CREDIT Secured Convertible Revolving Credit Notes - ------------------------------------------ On December 9, 2002, as part of the Company's recapitalization, in accordance with the Exchange Agreement entered between the Company and Market LLC, $3,812,000 representing principal and accrued interest under this line of credit was converted into 3,812 shares of the Company's newly issued Series C 5% Cumulative Convertible Preferred Stock (see Note 8). On December 10, 2002, Markland entered into a Restated and Amended Secured Convertible Revolving Credit Note Agreement for $500,000. Interest under this note accrued at the interest rate of 6% per annum. The note was convertible 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 was being amortized as interest expense over the term of the debt. The principal on the note and accrued interest totaling $518,459 was converted into 404,266 shares of Markland's common stock on April 12, 2004. All unamortized discount related to the beneficial conversion feature was charged to interest expense at that time. Amortization of the beneficial conversion feature for the years ended June 30, 2004 and 2003 was $60,126 and $41,666, respectively. Bank Line of Credit - ------------------- EOIR established a $500,000 line of credit with Virginia Community Bank in October 1999. It is secured by current accounts receivable with variable interest at the prime lending rate (4% at June 30, 2004) plus 1%. The line of credit was extended in 2004, increased to $600,000 and expires in April, 2005. The balance due under this credit line was $600,000 as of June 30, 2004. There is no interest expense associated with this line in the statements of loss because EOIR was acquired on June 29, 2004. 6. LONG-TERM DEBT Note Payable - AI - ----------------- In December 2003, Markland signed a note to finance an insurance premium. The unpaid balance of this note on June 30,2004 was $4,098. Note Payable - Bay View Capital - ------------------------------- On September 4, 2003, Markland 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 Markland immediately repaid $211,000. The proceeds from this loan were used by Markland to fund the acquisition of STR (see Note 3). The loan agreement provides for Markland to make 24 monthly payments of principal and interest. F-27 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Principal is calculated on a monthly basis using a "Cash Flow Recapture Mechanism" as defined in the agreement. Interest is payable monthly in arrears at a rate of 12% per annum payable. 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 remaining principal balance together with any unpaid interest is due on October 27, 2005. The note was secured by a security interest in substantially all assets of Markland. The balance of the note, plus accrued interest, was paid in full in April 2004. Interest expense related to this note was $100,769 for the year ended June 30, 2004. Note Payable - STR Acquisition - ------------------------------ On October 1, 2003, Markland issued a note in the amount of $375,000 in connection with the acquisition of STR (see Note 3). This note is payable in full by October 15, 2004. The outstanding balance at June 30, 2004 was $300,000. On March 15, 2004, Markland agreed to issue to George Yang $40,000 of cash and an additional 50,000 shares of common stock valued at $66,500 in exchange for his agreement to extend the note to October 15, 2004. These amounts were charged to interest expense in the statement of loss for the year ended June 30, 2004. Accrued expenses include $40,000 related to this agreement. Notes Payable - EOIR Acquisition - -------------------------------- On June 29, 2004, EOIR issued notes guaranteed by Markland in the face amount of $11,000,000 in connection with the acquisition of EOIR's common stock. These notes accrue interest at 6% compounded monthly and are payable in quarterly installments over 60 months. The fair market value of these notes is $9,532,044 as determined by an independent valuation. The discount of $1,467,956 will be amortized to interest expense over the life of the note. Other Long-Term Bank Debt - ------------------------- Markland's long-term bank debt consists of the following as of June 30, 2004: Wachovia Bank, secured by a vehicle, dated November, 2001 with monthly payments of $877 including interest of 6.1% $ 23,563 First Market Bank, secured by research equipment, dated October, 2002 with monthly payments of $3,715 including interest of LIBOR plus 2.75% (4.1082% at June 30, 2004) 141,685 First Market Bank, dated July, 2002 with monthly payments of $15,278 plus interest of LIBOR plus 2.75%, (4.1082% at June 30, 2004) 185,363 First Market Bank, secured by leasehold improvements, dated March 19, 2003 with monthly payments of $3,514 including interest of 5.05% 64,294 American Honda Finance, secured by vehicle, dated March 24, 2003 with monthly payments of $406 including interest of 4.70% 17,403 ---------- $ 432,308 ========== F-28 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Future debt maturities for all notes payable and long-term debt are as follows for the years ending: June 30 ------- 2005 $2,787,061 2006 2,280,294 2007 2,249,763 2008 2,219,288 2009 2,200,000 ------------- Total 11,736,406 Less: debt discount (1,467,956) ------------- $ 10,268,450 ============= 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, Markland 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 "Put"). 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, Markland will be required to issue additional shares and/or accrue financial penalties. There can be no assurances that Markland will receive any proceeds from this agreement. As of June 30, 2004, Markland has not drawn down on this equity line. As of June 30, 2004, no shares have been registered by Markland related to this agreement. For all periods presented, Markland has determined that the fair value of this Put was not material. 8. STOCKHOLDERS' EQUITY Preferred Stock: - ---------------- The Company is authorized to issue 5,000,000 shares of preferred stock which may be issued in series with such designations, preferences, stated values, rights, qualifications, or limitations as determined by the Board of Directors. Series A Redeemable Convertible Preferred Stock ----------------------------------------------- On June 30, 2003, Markland issued 30,000 shares of our Series A Non-Voting Redeemable Convertible Preferred Stock in satisfaction of our remaining obligations under a promissory note. The Series A Preferred Stock has no par value, is non-voting and has a stated value of $10 per share. The Preferred Stock is convertible at any time at the option of the Company, and cannot be converted by the holder. This stock is convertible at the rate of three shares of Series A Preferred Stock for each share of common stock. This conversion rate may be adjusted at any time by the Company as a result of either the sale of the F-29 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Company or as a result of a stock split or stock dividend that is issued by the Company while these shares remain outstanding. The Company shall have the right, but not the obligation to, at any time after the issuance of these shares to redeem all or any portion of the outstanding shares of Series A Preferred Stock from the holder in cash at the stated value of $10 per share by sending notice to the holder. The Series A Preferred Stock has a liquidation preference of $10 per share. This stock does not accrue dividends. Series B Convertible Preferred Stock ------------------------------------ On September 4, 2003, Markland's board of directors approved a resolution to cancel its Series B convertible preferred stock. Series C 5% Cumulative Convertible Preferred Stock -------------------------------------------------- On December 9, 2002, the Company entered into an Exchange Agreement, among the Company and Market LLC and James LLC who agreed to exchange their convertible notes payable in the amount of $3,812,000 and $1,413,000, respectively ($5,225,000 in value), inclusive of accrued interest for 5,225 shares ($1,000 stated value per share) of the Company's newly issued Series C Preferred Stock. The Series C Preferred Stock is non-voting and has a liquidation preference of $1,000 per share. The holders of the Series C Preferred Stock are entitled to receive dividends on each share of preferred stock, which shall accrue on a daily basis at the rate of 5% per annum on the sum of the liquidation preference plus all accumulated and unpaid dividends thereon. These dividends shall accrue whether or not they have been declared or there are legally available funds with which to pay them, and at the option of the holders are payable either in cash or in unrestricted common stock. The Series C Preferred Stock is redeemable at any time by Markland, 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 the year ended June 30, 2003, Markland sold 170 shares of Series C Preferred Stock for proceeds of $170,000. On the dates these shares were issued, Markland calculated a beneficial conversion feature related to the conversion discount of $1,386,025. This beneficial conversion feature was accreted to deemed dividends over the conversion period of the Series C Preferred Stock which is 16 months. Deemed dividends related to this beneficial conversion feature were $884,270 and $501,755 for the years ended June 30, 2004 and 2003, respectively. During the years ended June 30, 2004 and 2003, the Company accreted dividends of $184,478 and $152,716, respectively. During the years ended June 30, 2004, all outstanding Series C Preferred Stock and dividends of $337,194 were converted into 6,029,844 shares of common stock. F-30 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 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 Markland anytime and are convertible into shares of Markland'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. 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% -------------------------------------------------------- --------------------- ---------------------- (1) After an adjustment for a 1-for-60 reverse stock split effective October 27, 2003. The Series D preferred stock can be converted only to the extent that the Series D stockholder will not, as a result of the conversion, hold in excess of 9.999% of the total outstanding shares of our common stock. On June 17, 2003, the Company issued to Eurotech 16,000 shares of Series D Redeemable Convertible Preferred Stock in exchange for 1,666,666 shares of the Company's common stock. The Company also sold an additional 430 shares of Series D Preferred Stock to James LLC for net proceeds of $430,000. During the year ended June 30, 2004, Markland sold to a third party 7,166 shares of Series D Preferred Stock for gross proceeds of $5,402,000. Markland has determined that as of the date of issuance there was a beneficial conversion feature in the aggregate amount of $3,555,500 and $4,107,500 for the years ended June 30, 2004 and 2003, respectively. The accretion of these beneficial conversion features on the Series D Preferred Stock has been recorded as a deemed dividend. The deemed dividends increases the loss applicable to common shareholders in the calculation of basic and diluted net loss per common share. Reverse Stock Split - ------------------- On September 4, 2003, Markland's board of directors approved a resolution to effect a one-for-sixty reverse stock split. This action was subsequently approved by shareholder action which was approved by written consent of the Markland shareholders who held at least a majority of the voting power of the common stock, at least 67% of the voting power of the Series C Cumulative Convertible Preferred Stock, and at least 67% of the voting power of the Series D Cumulative Convertible Preferred Stock. 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 F-31 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 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 Markland is authorized to issue. The resolution, which impacts shareholders of record as of September 5, 2003 became effective on October 27, 2003. All share amounts and per share data have been restated to reflect this reverse stock split. Common Stock Issuances - ---------------------- In December 2002, the Company entered into a private equity-financing agreement with two investors in order to raise $340,000 of new capital to finance operations. In exchange for the capital, the investors received an aggregate of 113,333 shares of the Company's common stock. In December 2002, the Company issued an aggregate of 6,667 shares of its common stock to two of its former directors as compensation for services rendered while employed with the Company. In February 2003, the Company agreed to pay one of the aforementioned directors $5,000 in lieu of 1,667 shares of previously issued common stock. For the year ended June 30, 2003, a charge to compensation expense related to the above transactions amounted to $8,000. During the months of February and March 2003, the Company entered into four new one-year consulting agreements, which provide for aggregate monthly remuneration of $3,000. In connection with those agreements, the Company issued 63,333 shares of restricted common stock. The shares were valued at $890,000, of which approximately $605,000 and $285,000 were charged to operations during the years ended June 30, 2004 and 2003, respectively. On July 3, 2003, Markland entered into a consulting agreement with Emerging Concepts Inc. for program management and project engineering services for Ergo Systems related border security activities. In conjunction with this agreement, Markland issued Emerging Concepts 25,000 fully vested shares of common stock valued at $102,000. This amount was charged to operations in the year ended June 30, 2004. On July 24, 2003, Markland 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 Markland'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, Markland 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, Markland has valued these shares at the redemption price of $450,000. During the year ended June 30, 2004, Markland issued to ECON Investor Relations, Inc., a consultant, a 13,790 shares of common stock valued at $44,486. These fully vested shares were issued for enhanced media and corporate communications programs. This amount was charged to operations in the year ended June 30, 2004. In November 2003, Markland entered into a one year agreement with MarketShare Recovery, Stuart Siller, and George Martin to perform certain services with regard to investor relations for Markland. In consideration for these services, Markland agreed to issue a cumulative total of 90,908 shares of its common stock in quarterly installments of 22,727 shares. Since these shares are earned over the term of the agreement and are subject to forfeiture, the Company has accounted for these under variable accounting. Accordingly, the Company records F-32 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 at fair value the unearned shares each period through the term of the agreement. As of June 30, 2004, the Company has recognized unearned compensation, additional paid in capital and stock compensation of $91,005, $273,012 and $182,011, respectively. Subsequent to year end, the Company issued these consultants 160,000 shares of common stock valued at $106,000 in order to settle a dispute. In November 2003, Markland entered into an agreement with Research Works to prepare an equity research report. In consideration for these services, Markland issued Research Works a total of 37,099 shares valued at $105,732. This amount was charged to operations in the year ended June 30, 2004. During the year ended June 30, 2004, Markland awarded three non-officer employees of Markland a total of 19,445 shares valued at $48,036. This amount was charged to operations in the year ended June 30, 2004. During March of 2004, Markland issued 42,500 shares of common stock valued at $66,725 to ASI as a penalty for not having an effective registration statement for the shares issued to ASI. This amount was charged to operations for the year ended June 30, 2004. On March 15, 2004, in conjunction with the acquisition of STR, Markland agreed to issue to George Yang 50,000 shares of common stock valued at $66,500 in exchange for his agreement to amend a note payable. This amount was charged to interest expense in the statement of loss for the year ended June 30, 2004. On February 12, 2004, Markland entered into a one year agreement with Tameraq Partner for investment banking services. This agreement calls for quarterly payments of $25,000 payable in stock. As of June 30, 2004, the Company has recognized unearned compensation, additional paid in capital and stock compensation of $50,000, $100,000 and $50,000, respectively. Pursuant to a private placement transaction completed on April 2, 2004, Markland issued the following: o 3,333,333 shares of Markland common stock at $0.60 per share; o 300,000 shares of Markland common stock in order to get the investors' consent to the private placement on April 16, 2004 (see below) o warrants to purchase 3,333,333 shares of Markland common stock at $1.00 per share with a three year term; o warrants to purchase 333,333 shares of Markland common stock at $1.40 per share with a three year term that were issued as finders' fees; o warrants to purchase 50,000 shares of Markland common stock at $1.00 per share with a three year term that were issued in order to get the investors' consent to the private placement on April 16, 2004 (see below). 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 F-33 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 110% of the 383,333 shares of its common stock that are issuable to certain stockholders upon exercise of the warrants issued as finders' fee and in order to obtain the investors' consent. 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 warrants to purchase 3,333,333 shares of Markland common stock at $1.50 per share with a three year term; o warrants to purchase 25,000 shares of Markland common stock at $2.00 per shares with a three year term that were issued as finders' fees. 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 3,333,333 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 2, 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 warrants to purchase 7,098,750 shares of its common stock at $1.50 per shares with a three year term; o warrants to purchase 529,800 shares of its common stock at $1.50 per share with a three year term that were issued as finders' fees. In conjunction with these three private placements, Markland received gross proceeds of $9,679,000 and net proceeds of $8,226,845 (after deducting finders' fees and transaction costs). Under certain conditions, Markland can redeem the warrants issued in the May 3, 2004 private placement at a price of $.0001 per warrant. Markland has entered into compensation agreements with certain officers and a consultant (see Note 12) which provide for, among other things, certain performance-based stock grants. Due to the indeterminate number of shares to be issued under these agreements, Markland accounts for these stock compensation plans under variable accounting. Accordingly, for the year ended June 30, 2004, Markland recognized unearned compensation, additional paid in capital and stock compensation expense of $11,035,110, $15,414,419 and $4,379,309, respectively. For the year ended June 30, 2003, the Company recognized unearned compensation, additional paid in capital and stock compensation expense of $3,781,000, $5,518,000 and $1,737,000, respectively. In connection with these agreements, Markland issued 5,830,713 and 155,754 shares of common stock during the years ended June 30, 2004 and 2003, respectively. F-34 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 During December 2002 and amended on January 18, 2003, the Company entered into a consulting agreement for six months with an option to renew for an additional six months for services relating to corporate communications. The agreement provides for monthly fees of $7,000, plus expenses, and 333 shares of the Company's common stock. For the year ended June 30, 2003, the Company issued this consultant 2,333 shares of restricted common stock total and has charged approximately $30,000 to operations related to these stock issuances. Markland has established the following reserves for the future issuance of common stock as follows: Reserve for the exercise of warrants 14,703,549 Reserve for stock option plan 25,000,000 Reserve for conversion of Series A Preferred Stock 10,000 Reserve for conversion of Series D Preferred Stock 37,734,756 ------------- Total reserves 77,448,305 ============= The Company is also obligated to issue certain shares under employment and consulting agreements (see Note 12). 9. OPTIONS AND WARRANTS In conjunction with the Company's acquisition of EOIR (see Note 3), the Company adopted the 2004 Stock Incentive Plan ("the Plan"). The Plan authorizes the Company to issue up to 25,000,000 of common shares in the form of options, stock awards, performance share awards or stock appreciation rights. On June 29, 2004, the Company issued options to eleven former minority owners of EOIR who have continued employment with the Company. These options have a ten year term and vest ratably over a five year period. Ten of these employees received options to purchase 9,345,737 shares of common stock at a price of $.3775. On the date of grant, the intrinsic value of these options, $3,528,016, was recorded as unearned stock-based compensation and additional paid in capital. This intrinsic value will be amortized to stock compensation over the five year vesting period. One employee received five options, each of which allows for the purchase of a number of shares equal to .11799575 times a fraction of $1,600,000 divided by the fair value of the stock on the vesting date. One of these options vests each year for the next five years. The exercise price of these options will be one-half the fair value of the stock on the vesting date. The intrinsic value of these options based on the fair value of the stock on June 30, 2004 is $471,983. This intrinsic value has been recorded as unearned stock-based compensation and additional paid in capital. Due to the variable nature of the exercise price and number of shares to be issued under these options, the intrinsic value will be remeasured each period until the terms are fixed. The intrinsic value of each option will be amortized over the vesting periods. As of September 30, 2004, the maximum number of shares issuable under these options is 1,210,213. Markland has also agreed to grant options to purchase an additional 5,000,000 shares of common stock to employees of EOIR in the future. Markland expects that these options will vest over five years after the date of grant and will have an exercise price equal to the fair market value of the common stock on the date of grant. No options were vested at June 30, 2004. F-35 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 SFAS No. 123 requires the measurement of the fair value of stock options, to be included in the statement of loss or disclosed in the notes to financial statements (see Note 2). The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has elected the disclosure-only alternative under SFAS Nos. 123 and 148 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions used and weighted average information for the year ended June 30, 2004 is as follows: Risk-free interest rate 3.05% Expected dividend yield - Expected lives 3 years Expected volatility 149.4% Weighted average fair value per share of options granted $0.71 In connection with private placements of common stock in April and May 2004, the Company issued warrants to purchase a total of 14,703,549 shares of common stock at exercise prices between $1.00 and $1.50. Included in these are warrants to purchase 13,765,416 shares of common stock issued to investors in the private placement. The value of these warrants was recorded as additional paid in capital. The Company has estimated the fair value of these warrants on the grant date as $19,391,359. The remaining warrants to purchase a total of 938,133 shares of common stock were issued as finders' fees. Since these warrants are considered stock issuance costs, there is no net impact on equity. The Company has estimated the fair value of these warrants on the grant date as $1,116,945. At June 30, 2004, the Company had the following outstanding warrants: Number of Shares Exercise Date of Exercisable Price Expiration ---------------- ----------------- ------------------ Issued in conjunction with April 2, 2004 private placement 3,333,333 $1.25 April 2, 2007 333,333 $1.40 April 2, 2007 Issued in conjunction with April 16, 2004 private placement 3,333,333 $1.50 April 16, 2007 25,000 $2.00 April 16, 2007 50,000 $1.00 April 21, 2004 Issued in conjunction with May 3, 2004 private placement 7,098,750 $1.50 May 3, 2007 529,800 $1.50 May 3, 2007 ---------------- Total 14,703,549 ================ Weighted average exercise price $1.44 ================ Weighted average remaining life 2.81 years ================
F-36 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 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 ------------------ Series A Redeemable Convertible Preferred Stock 10,000 Series D Convertible Preferred Stock (convertible at 80% of market value) 34,734,756 Stock options 10,496,915 Warrants 14,703,549 Employment and consulting agreements 17,436,271 ------------- Total as of June 30, 2004 77,381,491 =============
Subsequent to year end, Markland issued more than 20,000,000 shares of common stock in conjunction with conversions of Series D Convertible Preferred Stock, employment and consulting agreements and financings (see Note 16). 11. DISCONTINUED OPERATIONS The Company has treated the disposition of CWTel in March 2002 and Vidikron in May 2002 as discontinued operations. The following information summarizes the operating results of the discontinued operations included in the consolidated financial statements: Year Ended Year Ended June 30, 2004 June 30, 2003 ------------- ------------- Revenues $ -- $ -- ============= ============= Income from operations $ -- $ 998,713 ============= ============= Income from discontinued operations $ -- $ 998,713 ============= =============
The income from discontinued operations for the year ended June 30, 2003 of $998,713 is a result of management of the Company completing an analysis of various obligations related to the discontinued operations. Management determined that $297,404 of liabilities related to the discontinued operations were either three years old (past the statute of limitations) or represented an overestimate of an accrual. In addition, a real estate lease obligation, which had been recorded in previous years at $706,309, was settled for $5,000. During the year ended June 30, 2003, the Company converted a $300,000 promissory note related to the discontinued operations into 30,000 shares of Series A redeemable convertible preferred stock (see Note 8). As of June 30, 2004 and 2003, there were no assets or liabilities remaining from discontinued operations. F-37 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 12. COMMITMENTS AND CONTINGENCIES Compensation Agreements - ----------------------- Effective January 2003, Markland entered into a one-year compensation agreement with the former chief executive officer and three three-year agreements with an officer, the president and chief financial officer, and two consultants to Markland, Robert Tarini and Verdi Consulting, which provided for aggregate remuneration of $47,500 per month. During the year ended June 30, 2004, Markland accrued $600,000 of bonus compensation under these agreements. One of these agreements provided for the issuance of 1.67% of Markland'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. A final issuance occurred as of 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. In addition, these three agreements, provide in total for the issuance of 5.01% of the Company's outstanding common stock in four installments on a fully diluted basis based upon certain performance criteria being met. Upon contract signing, the Company issued a number of shares of Common Stock then equivalent to 0.5% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares; on or about July 1, 2003, Company will issue to these Employee/Consultants a number of shares of Common Stock then equivalent to 0.5% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares if the Second Quarter gross revenue target has been met; and on or about October 1, 2003 Company will issue to these Employee/Consultants a number of shares of Common Stock then equivalent to 0.67% of the total number of shares of Common Stock then outstanding, inclusive of such Employee's/Consultant's Shares, minus the aggregate number of Shares issued to these parties in the first two installments if the Third Quarter gross revenue target has been met. If necessary, an additional issuance will occur in January 2004, so that the total amount of shares issued will equal 5.01% of the outstanding common stock calculated on a fully-diluted basis assuming the conversion of all convertible securities as of December 31, 2003. All of the shares issuable under these four agreements were earned as of January 1, 2004. Accordingly, a total of 1,410,719 shares were issued, of which 119,360 were issued during the year ended June 30, 2003 and 1,291,359 were issued during the year ended June 30, 2004. On May 12, 2004, Markland entered into five-year compensation agreements with two executives, the chairman and chief executive officer and the president and chief financial officer, and a consultant, Verdi Consulting. These agreements, which are effective on January 1, 2004, provide for the following remuneration: Base annual remuneration of $300,000 each (an aggregate of $900,000) payable over the five-year period ending January 2, 2009; Discretionary bonuses over the term of the agreement of up to 300% of the base remuneration; and F-38 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 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 Markland'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. In the event of a change in control of Markland 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 Markland, 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 Markland. In June 2004, these agreements were modified to remove the anti-dilution provision. During the year ended June 30, 2004, a total of 4,575,744 shares of common stock were issued under these new agreements. In connection with the STR acquisition, Markland 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, Markland 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. For the year ended June 30, 2004, Markland charged to operations $225,000 related to this agreement. At June 30, 2004, there is $225,000 included in Accrued Expenses related to this agreement. Facility Rental - --------------- STR leases its location in Fredericksburg, VA, on a month-to-month basis without a formal agreement. Rent expense relating to this location for year ended June 30, 2004 was $70,066. We have a three year lease for our executive offices of approximately 1,000 square feet located in Ridgefield, Connecticut and a month-to-month lease for a manufacturing facility of approximately 5,000 square feet located in Fredericksburg, Virginia. We also have an administrative office in Providence, RI which is utilized under a monthly sublease comprising approximately 4,000 square feet. F-39 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 EOIR, our wholly owned subsidiary, holds a four-year lease for its executive and administrative offices of approximately 5,420 square feet in Woodbridge, Virginia. The lease, which has an option to renew for an additional three-year term, expires on September 30, 2005. EOIR also leases approximately 5,000 square feet in Spotsylvania, Virginia, where it houses its software development unit. This lease is currently on a month-to-month basis. We also have several offices located in Fredericksburg, VA. One office with approximately 4,722 sq ft., with a 1 year lease, one with 1,200 sq ft. with a 5 year lease, one with 10,000 sq ft., with a 5 year lease, and one with 4,200 sq ft., with a five year lease. Monthly lease amounts for these facilities total approximately $31,000. Income Taxes - ------------ The Company is currently delinquent on its corporate federal and state income tax filings. The Company expects that its net operating loss carryforwards will be sufficient to offset any taxable income. As a result, no provision for income taxes or any related penalties or interest has been recorded for the years ended June 30, 2004 and 2003. Government Contracts - -------------------- The Company's billings related to certain U.S. Government contracts are based on provisional general & administrative and overhead rates which are subject to audit by the contracting government agency. The Company has limited experience with these audits. 13. INCOME TAXES There was no provision for federal or state income taxes for the fiscal year's ended June 30, 2004 and 2003, due to the Company's operating losses and a full valuation reserve. The Company's deferred tax asset before valuation allowance is approximately $6,600,000 and consist primarily at June 30, 2004 of the net operating loss carry forwards. The change in the valuation allowance for the year ended June 30, 2004 was approximately $3,200,000. When filed, the Company's net operating loss carry forwards of approximately $19,000,000 will expire in varying amounts through 2024. The use of the federal net operating loss carry forwards may be limited in future years as a result of ownership changes in the Company's common stock, as defined by section 382 of the Internal Revenue Code. The Company has not completed an analysis of these changes. The Company has provided a full valuation reserve against the deferred tax asset because of the Company's loss history and significant uncertainty surrounding the Company's ability to utilize its net operating loss and tax credit carryforward. 14. RELATED PARTY TRANSACTIONS During January 2003, we completed our acquisition of Ergo Systems, Inc. from Ocean Data Equipment Corporation, now called Syqwest, Inc. Robert Tarini, our chief executive officer, is also the chief executive officer of Syqwest, Inc. Ergo's main asset is an annually renewable U.S. Government General Services Administration contract to provide logistic support and product development for five U.S. ports of entry. In exchange for Ergo we agreed to pay Syqwest $400,000 in cash, due in installments that are triggered with the completion of research milestones. Syqwest also performs software and engineering services related to our border security business. During the year ended June 30, 2004, $1,244,327 was paid to Syqwest for these services and there was a payable due to Syqwest of $40,607 at the year end. On July 24, 2003, we entered into an agreement with Syqwest, Inc., in which we issued 750,000 shares of our common stock in exchange for the forgiveness of $450,000 for unpaid services performed by Syqwest in connection with research conducted in relation to our vehicle stopping technology. We have the right at any time by written notice to repurchase these shares from Syqwest at a price equal to $.60 per share. F-40 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 In September 30, 2003 we acquired one hundred percent (100%) of the outstanding stock of Science and Technology Research, Inc., which produces our U.S. Navy shipboard automatic chemical agent detection and alarm system product. We paid the stockholder of Science and Technology Research a total of $6,475,000 consisting of $900,000 in cash, common stock valued at $5,100,000, a promissory note of $375,000, and acquisition costs of $100,000. To finance this acquisition we executed a two year, twelve percent (12%), secured Promissory Note with Bay View Capital, LLC for $1,400,000. Bay View Capital, LLC is controlled by Robert Tarini, our chief executive officer, and Chad Verdi, a consultant to Markland. The outstanding balance and accrued interest of this note were repaid in full on April, 2004. ipPartners and Asset Growth Company are consulting firms owned by Robert Tarini and Ken Ducey Jr., our president, respectively. Payments to these companies during the year ended June 30, 2004 amounted to $17,500 and $170,000 and were in accordance with their respective consulting contracts with the Company. The Company believes that all transactions described above were made on terms no less favorable to it than those obtainable from unaffiliated third parties. All future transactions, if any, with its executive officers, directors and affiliates will be on terms no less favorable to it than those that will be obtainable from unrelated third parties at the time such transactions are made. 15. LITIGATION On June 28, 2004, Charles Wainer filed a civil suit against the Company in Florida state court alleging breach of a stock purchase agreement and breach of an employment agreement stemming from Wainer's sale of his business to a predecessor of the Company and his subsequent employment thereat. In the complaint, Wainer alleges Markland owes him $300,000 cash, some unspecified portion of $700,000 in stock, some unspecified portion of $86,000 cash for lease payments, and approximately $20,000 in back-pay. The Company believes that these claims are without merit and plans to vigorously defend the action. On August 11, 2004, answered the complaint and denied any liability. In addition, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. F-41 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 16. SUBSEQUENT EVENTS Litigation - ---------- On or about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in the Circuit Court of Spotsylvania County, Virginia, against the Company, EOIR, our wholly owned subsidiary, and our Chief Executive Officer and Director, Robert Tarini. Mr. Moulton was the largest single shareholder of EOIR prior to its acquisition by the Company, owning approximately 67% of the EOIR capital stock. Mr. Moulton received approximately $5,863,000 in cash and a promissory note of EOIR in the approximate principal amount of $6,967,000 for his shares of EOIR at the closing of the acquisition of EOIR by the Company. In his complaint Mr. Moulton asserts, among other things, that the Company breached its obligations under the Stock Purchase Agreement, dated June 29, 2004, pursuant to which the Company acquired EOIR, by terminating Mr. Moulton's employment with EOIR and removing him from the EOIR board of directors. Mr. Moulton is seeking damages allegedly suffered by his loss of employment, extreme emotional distress, and costs incurred to enforce his contractual rights. In addition, he is seeking certain other equitable relief including, the appointment of a receiver to oversee the management of EOIR until these promissory notes issued to former EOIR shareholders at the closing of the acquisition are paid in full and a declaratory judgment that the Company's actions constitute an event of default under these promissory notes allowing for the acceleration of all amounts (approximately $11,000,000) due thereunder. The Company is a guarantor of these notes. The Company believes that the allegations in this lawsuit are entirely without merit and expects to file an answer denying Mr. Moulton's allegations and opposing vigorously all equitable relief sought. The Company is considering bringing various claims against Mr. Moulton either by counterclaim or in a separate action. F-42 MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2004 AND 2003 Convertible Note and Warrant Purchase Agreement - ----------------------------------------------- On September 21, 2004, Markland Technologies, Inc. (the "Company" or "we") entered into a Purchase Agreement with DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd. (together the "Investors") pursuant to which we sold warrants to purchase shares of common stock (the "Warrants") and secured convertible promissory notes (the "Convertibles Notes") for the aggregate consideration of $4,000,000. The Convertible Notes are initially convertible into $5,200,000 of common stock at a price of $0.80 per share, subject to certain adjustments as defined in the agreement. The Purchase Agreement contains standard representations, covenants and events of default. Occurrence of an event of default allows the Investors to accelerate the payment of the Convertible Notes and/or exercise other legal remedies, including foreclosing on collateral. The Warrants entitle the Investors to purchase an aggregate of 5,200,000 shares of our common stock, at any time and from time to time, through September 21, 2009. The Convertible Notes are in the aggregate principal amount of five million two hundred thousand dollars ($5,200,000) and accrue interest daily at the rate of eight percent (8%) per year on the then outstanding and unconverted principal balance of the Convertible Notes. Under the terms of the Convertible Notes, we are required to pay $4,000,000 of the outstanding principal and interest by March 15, 2005, and the remaining outstanding balance by September 21, 2005. At anytime, and at the option of the Investors, the outstanding principal and accrued interest of the Convertible Notes may be converted into shares of our common stock. We have granted a security interest in and a lien on substantially all of our assets to the Investors pursuant to the terms of a Security Agreement, dated September 21, 2004. As part of this financing, James LLC, the largest holder of our Series D Preferred Stock, agreed not to sell any of its holdings of Series D Preferred Stock until the earlier to occur of: (1) notice from the us and the investors that the transactions contemplated had been completed had been terminated, or (2) March 15, 2005. However, pursuant to the terms of the lock-up agreement, James, LLC may still convert their Series D shares and sell the underlying shares of common stock in accordance with Rule 144 of the Securities Act of 1933, as amended. In exchange, Markland agreed that under certain conditions, if they did not redeem the Series D stock by January 15, 2005, they would issue to James LLC a warrant to purchase 1,088,160 shares of our common stock at $.80 per share. Subject to conditions set forth in the agreement, the Company may require the Investor to purchase $1,000,000 of Additional Notes on the Additional Closing Date. The Company shall indicate its intent to sell the Additional Notes by delivery to the Investor of a written notice which may be delivered between March 15, 2005 and March 30, 2005, provided, that the Company may only deliver such written notice if, on the date of such delivery and on the closing date of such transaction, it is in compliance in all material respects with the terms and conditions of the Transaction Documents, no Event of Default shall exist under the Initial Notes, there is an effective Registration Statement covering the Underlying Shares and the Warrant Shares and the Company's Common Stock shall have a closing sales price on its Trading Market of at least $0.40 per share for the ten (10) consecutive Trading Days immediately preceding the delivery of the written notice. Notwithstanding the foregoing, with the consent of the Investor, the Company may extend the period by which it may offer the Additional Notes to the Investor. The Company may only exercise the right to elect to require the purchase of Additional Notes on a single occasion, and there may not be more than a single Additional Closing. If the Company shall have timely delivered such notice, then subject to the satisfaction of the conditions set forth in the agreement, on the Additional Closing Date, the Company shall issue to the Investor the Additional Notes and Second Warrants for an aggregate purchase price equal to one million dollars ($1,000,000). At the Additional Closing, the Company will deliver to the Purchaser: (1) the Additional Notes, in exactly the same form as the Initial Notes, except that the maturity date shall be one year from the Additional Closing Date, registered in the name of the Investor, in the aggregate principal amount of $1,300,000 (as indicated in the Company's notice to elect the sale and issuance of the Additional Notes), (2) the Second Warrants (equal to 100% of the number of shares into which the Additional Notes may be converted) and (3) a bring-down of the legal opinion of Company Counsel delivered on the Closing Date, addressed to the Investor. Subsequent stock issuances - -------------------------- During the period ending June 30, 2004, and October 12, 2004, various holders of the Company's Series D Convertible Preferred converted their shares into shares of common stock. The total shares issued under such conversions is approximately 14,568,926. Based on employment agreements, on July 1, and October 1, 2004, executives and consultants of the company were issued 6,637,145 shares of common stock. The company issued 160,000 shares to other consultants under existing contacts which represented the final issuance under their contract. Based on an employment agreement, the company issued 30,000 shares to an employee on August 26th. Based on a consulting agreement, on September 9, 2004, 248,418 shares were issued to a consultant as part of their agreement to help the company with Mergers and Acquisitions. Based on a release of rights with regard to adjustments on future financings, on September 22, 2004, 833,333 shares were issued to investors that participated in the company's earlier financing. F-43 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 607.0850 the Florida Business Corporation Act permits the indemnification of directors and officers of Florida corporations. Our charter provides that we shall indemnify our directors and officers to the fullest extent permitted by Florida law. Under Florida law, we have the power to indemnify our directors and officers against claims arising in connection with their service to us except when an director's or officer's conduct involves: (a) violations of criminal laws, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) deriving an improper personal benefit from a transaction; (c) voting for or assenting to an unlawful distribution; or (d) willful misconduct or conscious disregard for our best interests in a proceeding by or in the right of a shareholder. In addition, we have entered into employment agreements with our directors and officers that contain provisions requiring us to indemnify them to the fullest extent permitted by Florida law. The indemnification agreements require us to indemnify our directors and officers to the extent permitted by our charter and to advance their expenses incurred in connection with a proceeding with respect to which they are entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers or persons in control pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the act and is therefore unenforceable. Article II, Section 4 of our bylaws limits the liability of current and former directors for monetary damages if they have acted in good faith and conformed to a standard of reasonable care. Furthermore, and notwithstanding anything to the contrary in our charter or bylaws, Section 607.0831 of the Florida Business Corporation Act limits the liability of directors for monetary damages for any statement, vote, decision or failure to act relating to management or policy of us unless he or she breached or failed to perform her duties as a director, and the breach or failure constitutes: (a) a violation of criminal law, unless the director had reasonable cause to believe the conduct was lawful or had no reasonable cause to believe it was unlawful; (b) a transaction from which the director derived an improper personal benefit; (c) an unlawful distribution; (d) in a proceeding by or in the right of us or one or more of our shareholders, conscious disregard for our best interests or willful misconduct; or (e) in a proceeding brought by someone other than us or one or more of our shareholders, recklessness or an act or omission committed in bad faith, with malicious purpose, or in a manner exhibiting willful disregard of human rights, safety or property. We have purchased insurance with respect to, among other things, the liabilities that may arise under the statutory provisions referred to above. Our directors and officers are also insured against certain liabilities, including certain liabilities arising under the Securities Act of 1933, which might be incurred by them in such capacities and against which they are not indemnified by us. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS. The following table provides information regarding the various anticipated expenses payable by Markland in connection with the issuance and distribution of the securities being registered. We are paying the expenses incurred in registering the shares, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders. All amounts shown are estimates except the Securities and Exchange Commission registration fee. NATURE OF EXPENSE AMOUNT ---------------------------------------------------------- SEC registration fee...................... $ 4,548 Accounting fees and expenses.............. $ 30,000 Legal fees and expenses................... $ 150,000 Transfer agent fees....................... $ 1,500 Printing and related fees................. $ 10,000 Miscellaneous............................. $ 50,000 -------------- Total..................................... $ 246,048 ============== ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. We have issued the following unregistered securities within the last three years. The following information regarding our securities has been adjusted to reflect a 1-for-40 reverse stock split effected on June 21, 2001 and a 1-for-60 reverse stock split effected on October 27, 2003. 2001 On March 16, 2001, we issued 10 shares of our Series B Convertible Preferred Stock to Vidikron of America, Inc. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 31, 2001, we issued a promissory note to James LLC, a Cayman Island limited liability company, in the amount of $1,314,367. The issuance of this security was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. 2002 On December 9, 2002, we entered into an Exchange Agreement with James LLC, a Cayman Island limited liability company, and Market LLC, a Cayman Island limited liability company, wherein we issued to them an aggregate of 5,225 shares of our Series C Convertible Preferred Stock (with a stated value of $1,000 per share) in exchange for the cancellation of promissory notes in the aggregate amount of $5,250,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 9, 2002, we executed an Exchange Agreement with Eurotech, Ltd., a District of Columbia corporation, and Crypto.com, Inc., a Delaware corporation, wherein we issued 3,998,789 shares of our common stock in exchange for certain assets related to the Acoustic Core(TM) technology for illicit material detection. In addition, we issued 499,848 shares of our common stock to ipPartners, Inc., a Rhode Island corporation, in connection with this acquisition of assets. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On December 10, 2002, we issued a convertible promissory note to Market LLC, a Cayman Island limited liability company, in the amount of $500,000. The issuance of this security was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. II-2 2003 At various times during 2003, we issued to our employees, directors and consultants the following number of shares of our common stock on the following dates as compensation for their services. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. NAME NUMBER OF SHARES - ------------------------------------------------------------------------------- Commonwealth Acquisitions, Inc. (1)......................... 16,667 David Danovitch (1)......................................... 3,334 Dean Denuccio............................................... 280,000 Rodney Dodd................................................. 7,937 Kenneth Ducey, Jr.(2)....................................... 221,568 ECON Investor Relations, Inc. (1)........................... 12,049 Oscar Hayes................................................. 21,035 Edward Kessler.............................................. 7,937 Delmar Kintner (2).......................................... 119,303 MarketShare Recovery, Inc. (1).............................. 27,272 George Martin (1)........................................... 4,546 Ernie Mercier (1)........................................... 8,334 Jo-Ann Nichols (2).......................................... 3,571 Joe O'Neill (1)............................................. 8,334 John Readey................................................. 65,000 Lawrence Shatsoff (1)....................................... 1,667 Stuart Siller (1)........................................... 13,636 The Research Works, Inc. (1)................................ 37,099 Robert Tarini (1)........................................... 221,568 Verdi Consulting (1)........................................ 201,568 (1) Acquired shares in consideration of consulting services. (2) Acquired shares pursuant to an employment agreement. On February 11, 2003, we issued 170 shares of our Series C Preferred stock to James LLC, a Cayman Island limited liability company, for a purchase price of $170,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On March 19, 2003, we executed a Technology Purchase Agreement with ASI Technology Corporation, a Nevada corporation, wherein we acquired certain gas plasma antenna assets for 283,333 shares of our common stock. In connection with this acquisition, we also issued shares of our common stock to Patriot Scientific Corporation. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On March 27, 2003, we executed an Exchange Agreement with Eurotech, Ltd. wherein we issued 16,000 shares of our Series D preferred stock in exchange for 1,666,666 shares of our common stock. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. In July 2003, we entered into a consulting agreement with Emerging Concepts. As consideration for the consulting services, we issued 25,000 shares of our common stock to Emerging Concepts in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, for transactions by an issuer not involving any public offering. On July 24, 2003, we issued 750,000 shares of our common stock to Syqwest, Inc., a Rhode Island corporation formerly known as Ocean Data Equipment Corporation, for unpaid services valued at $450,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On September 30, 2003, we executed an Agreement and Plan of Merger with Science and Technology Research, Inc. In connection with the merger, we issued 1,539,779 shares of our common stock and a promissory note in the amount of $375,000 to George Yang, the sole stockholder of Science and Technology Research, Inc. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. II-3 On each of October 1, 2003, November 3, 2003 and December 1, 2003, we sold to James LLC, a Cayman Island limited liability company, an aggregate of 385 shares of our Series D preferred stock for an aggregate purchase price of $385,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On November 12, 2003, we issued 37,099 shares of our common stock to Research Works, Inc., a New Jersey corporation, for the preparation of an equity research report. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. 2004 During January 2004, we issued 208,906 shares of our common stock to each of Kenneth Ducey, Jr., and Robert Tarini and 209,006 shares of our common stock to Verdi Consulting in connection with employment and consulting agreements. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On February 2, 2004, we sold 277 shares of our Series D preferred stock to James LLC, a Cayman Island limited liability company, for $152,000. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On ten different occasions between August 2003 and March 2004, we issued an aggregate of 4,096 shares of our Series D Preferred Stock to a single institutional investor for an aggregate consideration of $4,096,000. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 2, 2004, we issued 3,333,333 shares of our common stock and warrants to purchase 3,333,333 shares of our common stock at $1.00 per share to three institutional investors for consideration of $200,000. We also issued a warrant to purchase 333,333 share of our common stock and paid $200,000 to a finder in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 16, 2004, we issued 2,500,000 shares of our common stock and warrants to purchase 2,500,000 shares of our commons stock at $1.50 per share to ten institutional investors for consideration of $2,000,000. We also issued warrants to purchase 25,000 shares of our common stock at $2.00 per share and paid $100,000 to a finder in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On April 20, 2004, we issued in the aggregate 300,000 shares to the three investors in our April 2, 2004 private placement in consideration of their consent to permit us to proceed with a private placement that was subsequently consummated on May 3, 2004. We also issued warrants to purchase 50,000 shares of our common stock to counsel for these investors in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On May 3, 2004 and May 7, 2004, we issued and aggregate of 7,098,750 shares of our common stock and redeemable warrants to purchase 7,098,750 shares of our common stock at $1.50 per share to 26 institutional investors 8 individual investors for consideration of $5,679,000. We also issued redeemable warrants to purchase an aggregate of 529,800 shares of our common stock and paid an aggregate of $545,140 to five finders in connection with this transaction. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On June 1, 2004, we issued 1,525,248 shares of our common stock to each of Verdi Consulting and Robert Tarini, 305,050 shares of our common stock to Kenneth Ducey, Jr., and 1,220,198 shares of our common stock to Asset Growth Company (which is wholly owned by Kenneth Ducey, Jr.) in connection with their services as employees and consultants and pursuant to the compensation terms of our agreements with them. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. II-4 On June 29, 2004, in connection with our acquisition of E-OIR Technologies, Inc., we issued 3,500 shares of our Series D Preferred Stock to a single institutional investor for consideration of $2 million. 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. On June 29, 2004, also in connection with the acquisition of E-OIR Technologies, Inc., we adopted a Stock Incentive Plan under which we issued options to purchase 9,345,740 shares of its common stock to key employees of EOIR for an exercise price of $.3775 per share. The options will vest in five equal annual installments. In addition, we granted to another key employees of EOIR options to purchase a number of shares of our common stock equal to $471,983 divided by one-half of the market price for the common stock on the date of vesting. These options also vest in five equal annual installments. We have also agreed to grant options to purchase an additional 5,000,000 shares of common stock to employees of EOIR in the future. On September 15, 2004, we entered into an employment agreement with Darylene Wanek. This agreement provides for the issuance of 30,000 shares of our restricted common stock as part of the remuneration paid. The offer and sale of these securities was made in reliance on Section 4(2) of Securities Act of 1933, as amended. On September 21, 2004, we entered into a Purchase Agreement with DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd. pursuant to which we sold warrants to purchase shares of common stock and secured convertible promissory notes for the aggregate consideration of $4,000,000. At any time, and at the option of the investors, the outstanding principal and accrued interest of the notes may be converted into shares of our common stock. The offer and sale of these securities was made in reliance on Section 4(2) of Securities Act of 1933, as amended. On October 1, 2004, we issued 1,205,479 shares of our common stock to each of Verdi Consulting and Robert Tarini, 301,370 shares of our common stock to Kenneth Ducey, Jr., and 904,110 shares of our common stock to Asset Growth Company (which is wholly owned by Kenneth Ducey, Jr.) in connection with their services as employees and consultants and pursuant to the compensation terms of our agreements with them. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving a public offering. On November 9, 2004, we entered into a Securities Purchase Agreement with Harborview Master Fund L.P. and Southridge Partners LP, pursuant to which we sold warrants to purchase shares of our common stock and secured promissory notes for the aggregate consideration of $1,350,000. At any time, and at the option of the investors, the outstanding principal and accrued interest of the notes may be converted into shares of our common stock. The offer and sale of these securities was made in reliance on Section 4(2) of Securities Act of 1933, as amended. II-5 ITEM 27. EXHIBITS. FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 2.1 Stock Purchase Agreement by and between 8-K June 30, 2004 2.1 Markland and EOIR, dated June 30, 2004 2.2 Forms of Promissory Note 8-K June 30, 2004 2.2 2.3 Security Agreement by and between EOIR and sellers of EOIR stock, dated June 30, 8-K June 30, 2004 2.3 2.4 2004 Stock Option Plan, adopted June 30, 8-K June 30, 2004 2.4 2004 2.5 Preferred Securities Purchase Agreement 8-K June 30, 2004 2.5 2.6 Pledge and Security Agreement 8-K June 30, 2004 2.6 2.7 Forms of Stock Option 8-K June 30, 2004 2.7 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 II-6 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 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 II-7 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT 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 4.15 Registration Rights Agreement by and 8-K September 23, 2004 99.3 between Markland Technologies, Inc. and the investors named therein, dated September 21, 2004 4.16 Form of Common Stock Purchase Warrant 8-K September 23, 2004 99.5 issued by Markland Technologies, Inc. on September 21, 2004 4.17 Lock-up Agreement by and among Markland 8-K September 23, 2004 99.7 Technologies, Inc., Robert Tarini, and Kenneth Ducey, Jr. 4.18 Lock-up Agreement by and between Markland 8-K September 23, 2004 99.6 Technologies, Inc. and James, LLC 4.19 Waiver Agreement by and among Markland 8-K September 23, 2004 99.8 Technologies, Inc. and the parties named therein, dated September 21, 2004 5.1 Opinion of Foley Hoag LLP * 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 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 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 ASI Technology Corporation SBIR Phase II SB-2/1A June 16, 2004 10.14 Proposal, dated October 8, 2001 10.15 ASI Technology Corporation Contract SB-2/1A June 16, 2004 10.15 with Air Force Office of Scientific Research, dated August 1, 2002 10.16 ASI Technology Corporation Contract with SB-2/1A June 16, 2004 10.16 Naval Surface Warfare Center, dated January 31, 2003 10.17 Stock Purchase Agreement by and among Ocean 8-K January 28, 2003 10.1 Data Equipment Corporation, Ergo Systems, Markland Technologies, and Security Technology, Inc., dated December 9, 2002 10.18 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.4 by and among Markland Technologies, Inc., Market LLC, and James LLC 10.19 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.5 by and among Eurotech, Ltd., Crypto.com Inc., Markland Technologies, Inc., Security Technology, Inc. ipPartners, Inc., Market LLC, and James LLC II-9 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 10.20 First Amendment to Exchange Agreement, 10-QSB February 14, 2003 10.6 dated December 9, 2002, by and among Eurotech, Ltd., Crypto.com Inc., Markland Technologies, Inc., Security Technology, Inc. ipPartners, Inc., Market LLC, and James LLC 10.21 Restated and Amended Convertible Revolving 10-QSB February 14, 2003 10.2 Credit Note Agreement, dated December 10, 2002, by and between Markland Technologies, Inc. and Market LLC. 10.22 Letter from Sherb & Co., LLP to the 8-K March 17, 2003 16.1 Commission, dated March 12, 2003, concerning change in certifying accountant 10.23 Technology Purchase Agreement between 8-K April 4, 2003 10.1 Markland Technologies, Inc. and ASI Technology Corporation, dated March 19, 2003 10.24 Exchange Agreement, dated March 27, 2003, 8-K April 4, 2003 10.2 by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.25 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.12 27, 2003, by and between Eurotech, Ltd. and Markland Technologies, Inc. 10.26 Amended and Restated Exchange Agreement, 8-K July 30, 2003 10.1 dated July 24, 2003, by and between Markland Technologies, Inc. and Syqwest, Inc. 10.27 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.14 and between Markland Technologies, Inc. and James LLC, dated February 2, 2003, relating to the issuance of 170 shares of Series C 5% Convertible Preferred Stock 10.28 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.15 and between Markland Technologies, Inc., and James LLC, dated April 1, 2003, relating to the issuance of Series D Convertible Preferred Stock 10.29 Private Equity Credit Agreement by and 10-KSB October 14, 2003 10.16 between Markland Technologies, Inc. and Brittany Capital Management Limited, dated September 10, 2003 10.30 Employment and consulting agreements, dated 10-KSB October 14, 2003 10.18 December 5, 2002, for Delmar Kintner, Kenneth Ducey, Robert Tarini, and Verdi Consulting II-10 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 10.31 Nonexclusive License Agreement by and SB-2 May 11, 2004 10.31 Science & Technology Research, Inc. and the Secretary of the State, dated 11/4/03 10.32 International Distribution Agreement SB-2 May 11, 2004 10.32 between Markland Technologies, Inc. and Tradeways 10.33 Science & Technology Research contract SB-2 May 11, 2004 10.33 Naval Surface Warfare Center, dated January 31, 2003 10.34 Subcontract Agreement by and between ERGO SB-2 May 11, 2004 10.34 Systems, Inc. and Computer Sciences Corporation ,dated December 8, 2003 10.35 Lease for Property in Fredericksburg, SB-2/1A June 16, 2004 10.35 Virginia 10.36 Co-Operative Research and Development SB-2/1A June 16, 2004 10.35 Agreement between Markland Technologies, Inc. and the U.S. Air Force 10.37 Employment Agreement by and between 10-QSB May 24, 2004 10.32 Markland Technologies, Inc. and Robert Tarini, dated May 12, 2004 10.38 Employment Agreement by and between 10-QSB May 24, 2004 10.33 Markland Technologies, Inc. and Kenneth Ducey, Jr., dated January 2, 2004 10.39 Strategic Operations Contractor Agreement 10-QSB May 24, 2004 10.34 by and between Markland Technologies, Inc. and Asset Growth Company, dated May 12, 2004 10.40 Consulting Agreement by and between 10-QSB May 24, 2004 10.35 Markland Technologies, Inc. and Chad A. Verdi, dated May 12, 2004 10.41 Amendment to Employment Agreement between SB-2/1A June 16, 2004 10.41 Markland Technologies Inc. and Robert Tarini dated June 14, 2004 10.42 Amendment to the Employment Agreement SB-2/1A June 16, 2004 10.42 between Markland Technologies Inc. and Kenneth P. Ducey, dated June 14, 2004 10.43 Amendment to the Consulting Agreement SB-2/1A June 16, 2004 10.43 between Markland Technologies Inc. and Verdi Consulting, dated June 14, 2004 10.44 Amendment to the Strategic Operations SB-2/1A June 16, 2004 10.44 Contractor Agreement by and between Markland Technologies, Inc. and Asset Growth Company, dated June 14, 2004 II-11 FILED WITH INCORPORATED BY REFERENCE EXHIBIT THIS FORM ---------------------------------------------- NO. DESCRIPTION SB-2 FORM FILING DATE EXHIBIT NO. ------- ------------------------------------------ ---------- ---------- --------------- ------------ 10.45 Purchase Agreement between Markland 8-K September 23, 2004 99.1 Technologies, Inc. and the investors named therein, dated September 21, 2004 10.46 Security Agreement between Markland 8-K September 23, 2004 99.2 Technologies, Inc. and the investors named therein, dated September 21, 2004 10.47 Form of Secured Convertible Promissory Note 8-K September 23, 2004 99.4 issued by Markland Technologies, Inc., on September 21, 2004 10.48 Night Vision Electronic Sensors Directorate 10-KSB October 13, 2004 10.48 (NVESD) Omnibus Contract between E-OIR Measurement Inc., a subsidiary of EOIR and United States Army Night Vision and Electronic Sensors Directorate 10.49 Letter from Marcum & Kliegman regarding the 8-K/A July 15, 2004 16.1 change in certifying accountants 10.50 Securities Purchase Agreement between Markland Technologies, Inc., Harborview Master Fund L.P. and Southridge Partners LP dated November 9, 2004 X 10.51 Form of Convertible Note issued to Harborview Master Fund L.P. and Southridge Partners LP X 10.52 Form of Warrant issued to Harborview Master Fund L.P. and Southridge Partners LP X 10.53 Subordination Agreement between DKR Soundshore Oasis Holding Fund, LLC DKR Soundshore Strategic Holding Fund, LLC, Harborview Master Fund L.P., Southridge Partners LP, and Markland Technologies, Inc., dated November 9, 2004. X 10.54 Conditional Waiver and Consent between DKR Soundshore Oasis Holding Fund, LLC DKR Soundshore Strategic Holding Fund, LLC, Harborview Master Fund L.P., Southridge Partners LP, and Markland Technologies, Inc., dated November 9, 2004. X 23.1 Consent of Foley Hoag LLP * 23.2 Consent of Wolf & Company, P.C. X 23.3 Consent of Marcum & Kliegman LLP X 24.1 Power of Attorney (contained on the X signature age of this registration statement) * To be filed with Amendment No. 1 to Form SB-2
ITEM 28. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. II-12 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Ridgefield, State of Connecticut, on November 10, 2004. MARKLAND TECHNOLOGIES, INC. By: /s/ Kenneth P. Ducey, Jr. ------------------------------------- Kenneth P. Ducey, Jr. President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Kenneth P. Ducey and Robert Tarini, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits and schedules thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, which they, or either of them, may deem necessary or advisable to be done in connection with this Registration Statement, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes or any of them, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated: SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert Tarini Chief Executive Officer and November 10, 2004 - -------------------------- Chairman of the Board of Directors Robert Tarini /s/ Kenneth P. Ducey, Jr. President, Chief Financial Officer November 10, 2004 - -------------------------- and Director Kenneth P. Ducey, Jr. /s/Joseph P. Mackin Director November 10, 2004 - -------------------------- Joseph P. Mackin
II-13 EX-10.50 2 markland_sb2ex10-50.txt EXHIBIT 10.50 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT made as of the 9th day of November, 2004, by and between Markland Technologies, Inc. (the "COMPANY"), a corporation organized under the laws of the State of Florida, with its principal offices at #207 54 Danbury Road, Ridgefield, CT, 06877, and the purchaser whose name and address is set forth on the signature page hereof (the "Purchaser") (each agreement with a Purchaser shall be deemed a separate and independent agreement between such Purchaser and the Company, except that each Purchaser acknowledges and consents to the rights granted to each other Purchaser under this Agreement); WITNESSETH THAT: WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to sell Secured 8% Convertible Notes in substantially the form of EXHIBIT I hereto (the "NOTES"), and five year warrants to purchase shares the Company's Common Stock, $.0001 par value per share ("COMMON STOCK"), in substantially the form of EXHIBIT II hereto (the "WARRANTS"); and WHEREAS, the Purchaser understands and acknowledges that the Company may enter into one or more substantially identical securities purchase agreements with other persons purchasing Notes and Warrants; IN CONSIDERATION of the mutual covenants contained in this Agreement, and intending to be legally bound hereby, the Company and the Purchaser agree as follows: SECTION 1. AUTHORIZATION OF SALE OF THE SECURITIES. Subject to the terms and conditions of this Agreement, the Company has authorized the sale to the Purchaser of a Note in the aggregate principal amount indicated on the signature page hereof, and a Warrant pursuant to which such Purchaser shall have the right to acquire the number of shares of Common Stock indicated on the signature page hereof. SECTION 2. AGREEMENT TO SELL AND PURCHASE THE NOTE AND WARRANT. At the Closing (as defined in SECTION 3), the Company will sell the Note and the Warrant to the Purchaser, and the Purchaser will buy the Note and Warrant from the Company (the "PURCHASED SECURITIES"), upon the terms and conditions hereinafter set forth, in exchange for a cash payment of [__________] DOLLARS ($_______) (the "PURCHASE PRICE"). The Purchase Price shall be paid by wire transfer of immediately available funds to the account set forth on EXHIBIT III hereof. SECTION 3. DELIVERY OF THE NOTE AND WARRANT AT THE CLOSING. The completion of the purchase and sale of the Note and Warrant (the "CLOSING") shall occur simultaneously with the execution hereof (the "CLOSING DATE"). At the Closing, the Company will issue to the Purchaser a Note and a corresponding Warrant, registered in the name of the Purchaser, or in such nominee name(s) as designated by the Purchaser in writing. The name(s) in which the Note and Warrant are to be registered are set forth in the Questionnaire attached hereto as EXHIBIT IV. The Company's obligation to complete the purchase and sale of the Note and Warrant being purchased hereunder and deliver such Note and Warrant to the Purchaser at the Closing shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) receipt by the Company of same-day funds in the full amount of the Purchase Price; and (b) the accuracy in all material respects of the representations and warranties made by the Purchaser and the fulfillment of those undertakings of the Purchaser to be fulfilled prior to or at the Closing. The Purchaser's obligation to accept delivery of such Note and Warrant and to pay for the Note and Warrant shall be subject to the accuracy in all material respects of the representations and warranties made by the Company herein and the fulfillment of those undertakings of the Company to be fulfilled prior to or at the Closing. SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents and warrants to, and covenants with, the Purchaser as follows: 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; and the Company is duly qualified to do business as a foreign corporation and is in good standing in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a Material Adverse Effect, as defined in SECTION 4.4. 4.2 AUTHORIZED CAPITAL STOCK. The authorized capital stock of the Company consists of 500,000,000 shares of Common Stock, $.0001 par value per share, and 5,000,000 shares of Preferred Stock, $.0001 par value per share. The issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all applicable U.S. federal and state securities laws. 4.3 ISSUANCE, SALE AND DELIVERY OF THE SECURITIES. The Note and Warrant being purchased hereunder have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. The Common Stock underlying the Note (the "NOTE SHARES"), and the Warrant (the "WARRANT SHARES;" the Note, Note Shares, Warrant and Warrant Shares referenced herein are sometimes refered to collectively as the "SECURITIES"), when issued, delivered and paid for in accordance with the terms of the Warrant, will be duly authorized, validly issued, fully paid and nonassessable. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Note and Warrant to be sold by the Company as contemplated herein. The Company's issuance of the Note and Warrant shall be in compliance with all applicable U.S. federal and state securities laws. 4.4 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The Company has full legal right, corporate power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated will not violate any provision of the organizational documents of the Company. Except for the liabilities and obligations created by this Agreement and related transactions, the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated will not result in the creation of any lien, charge, security interest or encumbrance 2 upon any assets of the Company pursuant to the terms or provisions of, or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company is a party or by which the Company or any of its properties may be bound or affected and in each case which would have a material adverse effect on the condition (financial or otherwise), properties, business, prospects, or results of operations of the Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"), or any statute or any authorization, judgement, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its respective properties. Except as disclosed in EXHIBIT V attached hereto, no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with all U.S. federal and state securities laws applicable to the offering and sale of the Note and the Warrant. Upon its execution and delivery, and assuming the valid execution thereof by the Purchaser, this Agreement will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.6 NO DEFAULTS. The Company is not in violation of or default under any provision of its Articles of Incorporation or by-laws, or other organizational documents. The Company, and to the best of the Company's knowledge, each other party thereto, is not in breach of or indefault with respect to any provision of any agreement, judgement, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company is a party or by which the Company or any of its properties are bound which would have a Material Adverse Effect on the condition of the business; and there does not exist any state of facts which, with notice or lapse of time or both, would constitute an event of default as defined in such documents on the part of the Company, and to the best of the Company's knowledge, on the part of each other party thereto, except for such breaches and defaults would not have a Material Adverse Effect. 4.7 NO ACTIONS. Except as disclosed in EXHIBIT VI attached hereto or the Company's Information Documents, as defined in SECTION 4.14, there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of which property owned or leased by the Company or any of its subsidiaries is or may be subject (except for threatened litigation which individually or in the aggregate would not have a Material Adverse Effect); and no labor disturbance by the employees of the Company or any of its subsidiaries exists, or, to the best of the Company's knowledge, is imminent. Neither the Company nor any of its subsidiaries is a party to or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. 3 4.8 PROPERTIES. The Company and each of its subsidiaries has, as of the applicable dates referred to therein, good and marketable title to all the properties and assets reflected as owned by it in the financial statements included in the Company's Information Documents subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those existing liens listed in EXHIBIT VII ("PERMITTED LIENS"), (ii) those, if any, reflected in such financial statements, or (iii) those which are not material in amount and do not adversely affect the use made and currently proposed to be made of such property by the Company or such subsidiary. The Company and its subsidiaries hold their leased properties under valid and binding leases. The Company and its subsidiaries own or lease all such properties as are necessary to their operations as now conducted. 4.9 COMPLIANCE. The Company has not been advised, or has no reason to believe, that the Company or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where failure to be so in compliance would not have a Material Adverse Effect. 4.10 INTEGRATION, ETC. Neither the Company nor any of its Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act of 1933, as amended (the "SECURITIES ACT") has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any "security" (as defined in the Securities Act) which is or could be integrated with the sale of the Notes and Warrants in a manner that would require the registration under the Securities Act of the Notes and Warrants or (ii) engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) in connection with the offering of the Notes and Warrants. 4.11 INSURANCE. The Company and its subsidiaries maintain insurance of the types and in the amounts that the Company and its subsidiaries reasonably believe is adequate for their respective businesses, including, but not limited to, insurance against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect. 4.12 REPORTING COMPANY; LISTED SECURITIES. The Company has filed all reports required to be filed by Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the twelve (12) months preceding the Closing Date and has been subject to such filing requirements for such twelve (12) month period. 4.13 ADDITIONAL INFORMATION. The Company has made available to the Purchaser a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC under the Securities Act and the Exchange Act since December 31, 2003 (as such documents have since the time of their filing been amended, the "INFORMATION DOCUMENTS"), which are all the documents (other than preliminary material) that the Company was required to file with the Commission since such date. As of their respective dates, the Information Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to the Information Documents or such other forms, reports or other documents, and none of the Information Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the 4 circumstances under which they were made, not misleading. The financial statements of the Company included in the Information Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by the rules and regulations of the Commission) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments, which were not individually or in the aggregate material) in all material respects the financial position of the Company as at the dates thereof and the results of its operations and cash flows for the periods then ended. SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER. 5.1 ACCREDITED INVESTOR. The Purchaser represents and warrants to, and covenants with, the Company that: (i) the Purchaser is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the purchase of the Notes and Warrants, including investments in securities issued by the Company, and has requested, received, reviewed and understood all information it deems relevant in making an informed decision to purchase the Notes and Warrants, including, without limitation, the information contained in the Information Documents; (ii) it acknowledges that the offering of the Notes and Warrants pursuant to this Agreement has not been reviewed by the Commission or any state regulatory authority; (iii) the Purchaser is acquiring the Note and Warrant set forth in the signature page hereto, for its own account for investment only and with no present intention of distributing any of such Note and Warrant or any arrangement or understanding with any other persons regarding the distribution of such Note and Warrant; (iv) the Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) the Note or Warrant except in compliance with the Securities Act and the rules and regulations promulgated thereunder and any applicable state securities or blue sky laws; (v) the Purchaser has completed or caused to be completed the Questionnaire attached hereto as EXHIBIT IV, for use in preparation of the Registration Statement, and the answers thereto are true and correct as of the date hereof and will be true and correct as of the effective date of the Registration Statement; (vi) the Purchaser has, in connection with its decision to purchase the Note and Warrant, not relied upon any representations or other information (whether oral or written) other than as set forth in the Information Documents and the representations and warranties of the Company contained herein; (vii) the Purchaser has had an opportunity to discuss this investment with representatives of the Company and ask questions of them and such questions have been answered to the full satisfaction of the Purchaser; and (viii) the Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. 5.2 COMPLIANCE WITH SECURITIES ACT. The Purchaser hereby covenants with the Company not to make any sale of any Securities without satisfying the requirements of the Securities Act. 5.3 AUTHORITY. The Purchaser further represents and warrants to, and covenants with, the Company that (i) the Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the 5 transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, (ii) the Purchaser is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (iii) the execution, delivery and performance of this Agreement by Purchaser and the consummation by the Purchaser of the transactions contemplated by this Agreement will not violate any provision of the organizational documents of Purchaser or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Purchaser is a party or, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Purchaser, (iv) no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required on the part of the Purchaser for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, and (v) upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of the Purchaser enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and (vi) there is not in effect any order enjoining or restraining the Purchaser from entering into or engaging in any of the transactions contemplated by this Agreement. 5.4 RISK. The Purchaser recognizes that an investment in the Securities is speculative and involves a high degree of risk, including a risk of total loss of the Purchaser's investment. 5.5 INFORMATION ABOUT PURCHASER. All of the information provided to the Company or its agents or representatives concerning the Purchaser's suitability to invest in the Company and the representations and warranties contained herein, are complete, true and correct as of the date hereof. The Purchaser understands that the Company is relying on the statements contained herein to establish an exemption from registration under U.S. federal and state securities laws. 5.6 ADDRESS. The address set forth in the signature page hereto is the Purchaser's true and correct domicile. 5.7 PLAN OF DISTRIBUTION. The Purchaser covenants to provide the Company an updated, accurate and complete plan of distribution at all times during which the Company is required to keep the Registration Statement in effect. 5.8 LEGEND. The Purchaser understands and agrees that each certificate or other document evidencing any of the Securities shall be endorsed with the legends in substantially the form set forth in EXHIBIT VIII as well as any other legends required by applicable law, and the Purchaser covenants that the Purchaser shall not transfer any Securities represented by any such security without complying with the restrictions on transfer described in the legends endorsed on such security. 6 SECTION 6. SURVIVAL OF REPRESENTATIVES, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement, all covenants, agreements, representations and warranties made by the Company and the Purchaser herein and in any certificates or documents delivered pursuant hereto or in connection therewith shall survive following the delivery to the Purchaser of the Note and Warrant being purchased and the payment therefor. SECTION 7. REGISTRATION OF THE NOTE SHARES AND WARRANT SHARES IN COMPLIANCE WITH THE SECURITIES ACT. 7.1 REGISTRATION PROCEDURES AND EXPENSES. The Company shall: (a) the Company shall file with the SEC on Form SB-2, or such other form as appropriate ("REGISTRATION STATEMENT"), the resale pursuant to Rule 415 under the Securities Act of the Note Shares and Warrant Shares (the "REGISTRABLE SECURITIES") by the Purchaser from time to time on the facilities of any securities market on which shares of the Common Stock are then traded or in privately-negotiated transactions, and specifically excluding underwritten offerings; (b) if: (i) a Registration Statement is not filed on or prior to the 45th day following the Closing Date, or (ii) a Registration Statement is not declared effective by the SEC on or prior to the 90th day following the Closing Date, or (iii) after the SEC first declares a Registration Statement effective, without regard for the reason thereunder or efforts therefore, such Registration Statement ceases for any reason to be effective and available to the holders of the Registrable Securities as to all Registrable Securities registered under such Registration Statement at any time prior to the earlier date when the Registrable Securities have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by counsel to the Company, for more than an aggregate of 20 Trading Days in any twelve month period (which need not be consecutive) (any such failure or breach being referred to as an "EVENT," and for purposes of clauses (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 20 Trading Day period is exceeded, being referred to as "EVENT DATE"), then on each such Event Date, and on the same day as such Event Date in each subsequent month until the applicable Event is cured (the Event Date and each such subsequent date, a "PAYMENT DATE") the Company shall pay to each holder an amount, as partial liquidated damages and not as a penalty, equal to 2.0% of the Purchase Price paid by such holder for Securities at closing pursuant to this Securities Purchase Agreement, such payment being 1% in cash and 1% in Common Stock, PROVIDED, that in the event the Company fails to deliver such Common Stock by the 10th Trading Day following such Payment Date, such payment shall be, at the discretion of the Holder, in all cash. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 10% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event, except in the case of the first Event Date. Liquidated damages payable in Common Stock pursuant to this section shall be determined by calculating the quotient of the dollar amount of such liquidated damages divided by either (1) the average of the closing bid prices of the Common Stock for the five (5) Trading Days prior 7 to the Payment Date and (2) the closing bid price of the Common Stock on the day preceding the date such Common Stock is delivered pursuant to this SECTION 7(B), whichever of (1) and (2) yields a greater number of shares; (c) The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Purchaser and the officers, directors, agents and employees of each such Purchaser, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Purchaser furnished in writing to the Company by such Purchaser expressly for use therein, or to the extent that such information relates to such Purchaser or such Purchaser's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Purchaser expressly for use in the Registration Statement, such Prospectus or such form of prospectus or in any amendment or supplement thereto or (2) the use by such Purchaser of an outdated or defective prospectus after the Company has notified such Purchaser in writing that the Prospectus is outdated or defective and prior to the receipt by such Purchaser of an advice or an amended or supplemented prospectus. (d) Each Purchaser shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, and each person who controls the Company, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Purchaser's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent that, (1) such untrue statements or omissions are based solely upon information regarding such Purchaser furnished in writing to the Company by such Purchaser expressly for use therein, or to the extent that such information relates to such Purchaser or such Purchaser's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Purchaser expressly for use in the Registration Statement, such prospectus or such form of prospectus or in any amendment or supplement thereto or (2) the use by such Purchaser of an outdated or defective prospectus after the Company has notified such Purchaser in writing that the Prospectus is outdated or defective and prior to the receipt by such Purchaser of an advice or an amended or supplemented prospectus. (e) If any proceeding shall be brought or asserted against any person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory 8 to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such proceeding; or (3) the named parties to any such proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such proceeding. All reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within fifteen (15) Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). The indemnity agreements contained in this SECTION 7 are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. (f) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Purchaser may sell all the Note Shares or Warrant Shares then held by the Purchaser within a three-month period in accordance with Rule 144 under the Securities Act ("RULE 144"), or (iii) such time as all the Note Shares and Warrant Shares which the Purchaser has a right to acquire have been sold pursuant to a registration statement; 9 (g) so long as the Registration Statement is effective covering the resale of the Note Shares and Warrant Shares owned by the Purchaser, furnish to the Purchaser with respect to the Note Shares and Warrant Shares registered under the Registration Statement such reasonable number of copies of prospectuses and such other documents as the Purchaser may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Note Shares and Warrant Shares by the Purchaser; (h) file documents required of the Company for blue sky clearance in states specified in writing by the Purchaser; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not so qualified or has not so consented; (i) with a view to making available to the Purchaser the benefits of Rule 144 (or its successor rule) and any other rule or regulation of the Commission that may at any time permit the Purchaser to sell the Note Shares and Warrant Shares to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Purchaser's Note Shares and Warrant Shares may be resold within a given three-month period pursuant to Rule 144 or any other rule of similar effect or (B) such date as all of the Purchaser's Shares shall have been resold and (ii) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act. 7.3 MARKET STAND-OFF. (a) The Purchaser agrees that until the date that is forty (40) Trading Days following the date upon which the SEC declares the Registration Statement effective (the "EFFECTIVE DATE"), the Purchaser shall not, offer, pledge, sell, grant any right, option or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any Note Shares or Warrant Shares. For purposes of this Agreement "Trading Day" shall mean any day during which the principal trading market for the Common Stock shall be open for business. SECTION 8. SECURITY AGREEMENT. (a) EXHIBIT IX is the Security Agreement, dated September 21, 2004, by and among the Company and the Secured Parties named therein (the "SECURITY AGREEMENT"). The Company hereby grants, effective upon the Closing, to the Purchaser a security interest and lien in (i) all Accounts, (ii) all Chattel Paper, (iii) all Commercial Tort Claims, (iv) all Documents, (v) all Equipment, (vi) all General Intangibles, (vii) all Goods, (viii) all Instruments, (ix) all Insurance, (x) all Inventory; (xi) all Letter of Credit Rights, (xii) all other goods and other personal property of such Grantor, whether tangible or intangible, (xiii) to the extent not otherwise included in clauses (i) through (xiii) of this Section, all Collateral Records, Collateral Support and Supporting Obligations in respect of any of the foregoing, (xiv) to the extent not otherwise included in clauses (i) through (xiv) of this Section, all other property in which a security interest may be granted under the UCC or which may be delivered to and held by the Agent pursuant to the terms hereof, and (xv) to 10 the extent not otherwise included in clauses (i) through (xv) of this Section, all Proceeds, products, substitutions, accessions, rents and profits of or in respect of any of the foregoing (the "COLLATERAL") of the Company on the same terms and conditions as the Security Agreement (the "SECURITY INTEREST") and that the Company and the Purchaser shall have the same rights, duties, and obligations as if Purchaser was a party to the Security Agreement; PROVIDED THAT: (a) the Purchaser shall not be considered a "Secured Party" for purposes of Section 15 of the Security Agreement, until the Secured 8% Convertible Notes dated September 21, 2004, made by the Company pursuant to the Security Agreement, have been converted or paid in full, (b) the Purchasers shall not have a right to prevent the Company from granting further security interests, and (c) the Security Interest shall be subject to the provisions of SECTIONS 8(B) below. (b) The Security Interest, this Agreement and the transactions contemplated hereby are intended to comply with the requirements for subordination under, and to the fullest extent necessary to so comply are expressly subordinated to, the security interest granted to the holders of the Promissory Notes (the "EOIR NOTES"), dated June 29, 2004, made by EOIR pursuant to a Security Agreement, dated June 29, 2004, between EOIR and the holders of the EOIR Notes, (the "EOIR SECURITY AGREEMENT"), without limiting the generality of the foregoing, the Security Interest created by this Agreement is junior to and subordinated to the Liens (as defined in the EOIR Security Agreement) to the extent necessary for it to be a "Permitted Lien" within the terms of the EOIR Security Agreement and the Purchaser agrees that they will execute and deliver any and all documents and take any actions that the holders of the EOIR Notes and the beneficiaries of the EOIR Security Agreement may request to evidence or effect this subordination. SECTION 9. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified airmail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows: if to the Company, to: Markland Technologies, Inc. #207 54 Danbury Road Ridgefield, Connecticut 06877 Facsimile: (203)286-1608 Attention: Kenneth Ducey, Jr., CFO with a copy to: Foley Hoag, LLP 155 Seaport Boulevard Boston, Massachusetts 02210 Facsimile: (617) 832-7000 Attention: David Broadwin, Esq. or to such other person at such other place as the Company shall designate to the Purchaser in writing; and 11 if to the Purchaser, at its address as set forth at the end of this Agreement, or at such other address or addresses as may have been furnished to the Company in writing. SECTION 10. CHANGES. This Agreement may not be modified or amended except pursuant to an instrument in writing, signed by the Company and the Purchaser. SECTION 11. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. SECTION 12. SEVERABILITY. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 13. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice of law provisions thereof. SECTION 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but both of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party. SECTION 15. ENTIRE AGREEMENT. This Agreement (including the attachments and exhibits hereto) contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and is in full substitution for any and all prior oral or written agreements and understandings between them related to such subject matter, and neither party hereto shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any representations, indemnities, covenants or agreements except as specifically set forth herein. SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. [REMAINDER OF PAGE INTENTIONALLY DELETED] 12 EX-10.51 3 markland_sb2ex10-51.txt EXHIBIT 10.51 EXHIBIT A NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES HAVE 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. No. [_] $[_] Original Issue Date: September 21, 2004 MARKLAND TECHNOLOGIES, INC. SECURED 8% CONVERTIBLE NOTE DUE SEPTEMBER 21, 2005 THIS NOTE is one of a series of duly authorized and issued notes of Markland Technologies, Inc., a Florida corporation (the "COMPANY"), designated as its Secured 8% Convertible Notes due September 21, 2005, in the original aggregate principal amount of five million two hundred thousand ($5,200,000) (collectively, the "NOTES" and each Note comprising the Notes, a "NOTE"). FOR VALUE RECEIVED, the Company promises to pay to the order of ___________ or its registered assigns (the "INVESTOR"), the principal _____________, on September 21, 2005, or such earlier date as this Note is required to be repaid as provided hereunder (the "MATURITY DATE"), and to pay interest to the Investor on the principal amount of this Note outstanding from time to time in accordance with the provisions hereof. All holders of Notes are referred to collectively, as the "INVESTORS." This Note is subject to the following additional provisions: 1. DEFINITIONS. In addition to the terms defined elsewhere in this Note: (a) capitalized terms that are used but not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, dated as of the Original Issue Date, among the Company and the Investors identified therein (the "PURCHASE AGREEMENT"), and (b) the following terms have the meanings indicated below: "ADJUSTED CONVERSION PRICE" means the lesser of (a) the Fixed Conversion Price and (b) 80% of the average of the Closing Prices during the five (5) Trading Days prior to the applicable Conversion Date, in each case, subject to adjustment from time to time pursuant to Section 11. "BANKRUPTCY EVENT" means any of the following events: (a) the Company or any Subsidiary commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Subsidiary thereof; (b) there is commenced against the Company or any Subsidiary any such case or proceeding that is not dismissed within 75 days after commencement; (c) the Company or any subsidiary is adjudicated by a court of competent jurisdiction insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Subsidiary suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 75 days; (e) under applicable law the Company or any Subsidiary makes a general assignment for the benefit of creditors; (f) the Company or any Subsidiary fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; or (g) the Company or any Subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing. "CHANGE OF CONTROL" means the occurrence of any of the following in one or a series of related transactions: (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) under the Exchange Act) of more than one-third of the voting rights or equity interests in the Company; (ii) a replacement of more than one-half of the members of the Company's board of directors in a single election of directors that is not approved by those individuals who are members of the board of directors on the date hereof (or other directors previously approved by such individuals); (iii) a Fundamental Transaction (as defined in Section 11(c)), a merger or consolidation of the Company or any Subsidiary or a sale of more than one-half of the assets of the Company in one or a series of related transactions, unless following such transaction or series of transactions, the holders of the Company's securities prior to the first such transaction continue to hold at least two-thirds of the voting rights and equity interests in the surviving entity or acquirer of such assets; (iv) a recapitalization, reorganization or other transaction involving the Company or any Subsidiary that constitutes or results in a transfer of more than one-third of the voting rights or equity interests in the Company, unless following such transaction or series of transactions, the holders of the Company's securities prior to the first such transaction continue to hold at least two-thirds of the voting rights and equity interests in the surviving entity or acquirer of such assets; (v) consummation of a "Rule 13e-3 transaction" as defined in Rule 13e-3 under the Exchange Act with respect to the Company, or (vi) the execution by the Company or its controlling shareholders of an agreement providing for or reasonably likely to result in any of the foregoing events. "CLOSING PRICE" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on an Eligible Market, the closing bid price per share of the Common Stock for such date (or the nearest preceding date) on the primary Eligible Market or exchange on which the Common Stock is then listed or quoted; (b) if prices for the Common Stock are then quoted on the OTC Bulletin Board, the closing bid price per share of the Common Stock for such date (or the nearest preceding date) so quoted; (c) if prices for the Common Stock are then reported 2 in the "Pink Sheets" published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent qualified appraiser selected in good faith and paid for by a majority in interest of the Investors. "COMMON STOCK" means the common stock of the Company, $0.0001 par value per share, and any securities into which such common stock may hereafter be reclassified. "COMMON STOCK EQUIVALENTS" means any securities of the Company or a Subsidiary thereof which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock. "COMPANY PREPAYMENT AMOUNT" means a cash payment equal to 105% of such outstanding principal amount, plus all accrued but unpaid interest on such Notes, through the date of payment, and the amount of any unpaid liquidated damages and other amounts then owing (other than interest and principal) under the Transaction Documents. "CONVERSION DATE" means the date a Conversion Notice together with the Conversion Schedule is delivered to the Company in accordance with Section 5(a). "CONVERSION NOTICE" means a written notice in the form attached hereto as EXHIBIT A. "CONVERSION PRICE" means whichever of the Initial Conversion Price or Adjusted Conversion Price is then in effect. "DEFAULT" means any event or condition which constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "ELIGIBLE MARKET" means any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or the OTC Bulletin Board. "EQUITY CONDITIONS ARE SATISFIED" means, as of any date of determination, that each of the following conditions is (or would be) satisfied on such date, if the Company were to issue on such date all of the Underlying Shares then issuable upon (1) conversion in full of the outstanding principal amount of all Notes, and (2) the payment of accrued and unpaid interest on such Interest Payment Date under all the Notes of the Company: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance, (ii) the Common Stock is listed or quoted (and is not suspended from trading) on an Eligible Market and such shares of Common Stock are approved for listing on such Eligible Market upon issuance, (iii) such Common Stock is registered for resale under the Registration Statement and the prospectus under such Registration Statement is available for the sale of all Registrable Securities held by the Investor, (iv) either (A) the Company has given the holder of the Notes ten (10) Trading Days prior notice that it intends 3 to pay interest by delivery of shares or (B) such issuance would be permitted in full without violating, (x) in the case of Section 13, Section 5(b)(i) and (ii) hereof, or (y) in all other cases, Section 5(b) hereof or the rules or regulations of the Eligible Market on which such shares are listed or quoted, (v) both immediately before and after giving effect thereto, no Default shall or would exist, and (vi) no public announcement of a pending or proposed Change of Control transaction has occurred that has not been consummated. "EVENT EQUITY VALUE" means the average of the Closing Prices for the five consecutive Trading Days preceding either: (a) the date of an Event Notice or the date the Company becomes obligated to pay the Event Price under Section 7(b), as applicable, or (b) the date on which the Event Price with respect thereto (together with any other payments, expenses and liquidated damages then due and payable under the Transaction Documents) is paid in full, whichever is greater. "EVENT OF DEFAULT" means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment (free of any claim of subordination) other than the failure to make the prepayment required under Section 13(a), when the same becomes due and payable (whether on a Prepayment Date, the Maturity Date or by acceleration or prepayment or otherwise), of (a) liquidated damages in respect of this Note which default continues unremedied for a period of three Trading Days after the date on which written notice of such default is first given to the Company by the Investor, or (b) principal or interest in respect of this Note. (ii) the Company or any Subsidiary (1) fails to pay when due any monetary obligation (regardless of amount) under any currently existing or hereafter arising debenture (other than a Note) or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness or under any long term leasing or factoring arrangement, if the aggregate amount of the obligations and liabilities of the Company and the subsidiaries thereunder exceed $100,000 (each of the foregoing a "MATERIAL DEBT AGREEMENT"), or (2) fails to observe or perform any other material obligation under any Material Debt Agreement, and such failure results in the obligations thereunder becoming or being declared due and payable prior to the date on which they would otherwise become due and payable. (iii) the Company shall sell all or substantially all of its assets in one or a series of related transactions. (iv) the Company (a) shall fail to observe or perform any material covenant, condition or agreement contained in any Transaction Document (other than those specified in clause (i) above or clause (vii), (ix), (x), (xi), (xii) or (xiv) below), and (b) such failure shall (X) continue unremedied for a period of twenty Trading Days after the date on which written notice of such default is first given to the Company by the Investor (it being understood 4 that no prior notice need be given in the case of a default that cannot reasonably be cured within seven Trading Days) and (Y) reasonably be expected to adversely affect the ability of the Company to either pay the Notes or deliver shares as required by the Note. (v) any prepayment by the Company of any other Note or any other Indebtedness issued by it or any issuance of securities in exchange for any Notes issued by it (other than Underlying Shares upon conversion of such Notes in accordance with their terms as in effect on the Original Issue Date thereof), except in each case (i) if the Company offers to the Investor in writing the same prepayment of this Note and all other Notes then held by such Investor on the same economic terms on which the Company prepays or offers to prepay (whichever is more favorable to the holder of such Note) such Notes, (ii) in accordance with the prepayment provisions of the Security Agreement, and (iii) in accordance with the prepayment provisions of Section 13 of this Note. (vi) any of the Company's representations and warranties set forth in the Purchase Agreement shall be incorrect in any material respect as of the Original Issue Date. (vii) the occurrence of a Bankruptcy Event. (viii) any Transaction Document shall cease, for any reason, to be in full force and effect in all material respects, (ix) the Company shall assert in writing that any Transaction Document has ceased, for any reason, to be in full force and effect or shall disavow any of its obligations thereunder. (x) the Common Stock shall not be listed or quoted, or is suspended from trading, on an Eligible Market for a period of three Trading Days (which need not be consecutive Trading Days). (xi) the Company fails to deliver a stock certificate evidencing Underlying Shares to an Investor within five Trading Days after a Conversion Date or in the case of exercises under a Warrant, within five Trading days after a Date of Exercise under, and as such term is defined in, such Warrant, or the conversion or exercise rights of the Investors pursuant to the terms hereof or the terms of the Warrants are otherwise suspended for any reason (other than as a result of the limitations set forth in Section 5(b)(ii)). (xii) the Company fails to have available a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock available to issue the Underlying Shares upon any conversion of Notes or upon any exercise of Warrants. (xiii) the Company effects or publicly announces its intention to effect any exchange, recapitalization or other transaction the primary purpose of which is to require or reward physical delivery of certificates evidencing the Common Stock, unless following such transaction, the holders of the Company's securities prior to the first such transaction continue to beneficially own at least two-thirds of the voting rights and equity interests in the surviving entity or acquirer of such assets. 5 (xiv) a Registration Statement under the Registration Rights Agreement is not declared effective by the Commission by the 180th day following the Closing Date, or is not effective as to all Registrable Securities (as defined in the Registration Rights Agreement), and available for use by the holders of Registrable Securities for in excess of an aggregate of 20 Trading Days (which need not be consecutive) in any twelve month period during the Effectiveness Period (as defined in the Registration Rights Agreement). "FIXED CONVERSION PRICE" means $0.80, subject to adjustment from time to time in accordance with Section 11. "INDEBTEDNESS" shall have the same meaning as the term "Debt" in the Purchase Agreement "INITIAL CONVERSION PRICE" means $0.80, subject to adjustment from time to time pursuant to Section 11. "INTEREST PAYMENT DATE" means the Prepayment Date and each monthly anniversary thereafter. "ORIGINAL ISSUE DATE" has the meaning set forth on the face of this Note. "PERMITTED INDEBTEDNESS" has the meaning given such term in the Purchase Agreement. "PERMITTED LIENS" has the meaning given such term in the Purchase Agreement. "PREPAYMENT DATE" means March 15, 2005. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "REGISTRATION STATEMENT" shall have the meaning set forth in the Purchase Agreement. "SECURITY AGREEMENT" shall have the meaning set forth in the Purchase Agreement. "TRADING DAY" means (i) a day on which the Common Stock is traded on an Eligible Market, (ii) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices), or (iii) in the event that the Common Stock is not listed or quoted as set forth in (i) or (ii) hereof, a Business Day. "UNDERLYING SHARES" means the shares of Common Stock issuable upon conversion of the Notes and payment of interest thereunder. 2. INTEREST. (a) The Company shall pay interest to the Investor on the aggregate unconverted and then outstanding principal amount of this Note at the rate of 8% per annum. Such interest shall accrue but not become payable until the Prepayment Date, at which time all interest then having 6 accrued shall become payable. Interest shall be payable in arrears on a monthly basis thereafter. Interest payments hereunder may be made in cash or, subject to the conditions of Section 2(b), in shares of Common Stock. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed and shall accrue daily commencing on the Original Issue Date. (b) Subject to the conditions and limitations set forth below, in lieu of paying interest in cash the Company may, at its option, on each Interest Payment Date, pay accrued interest on this Note by delivering by the applicable Interest Payment Date, a number of registered shares of Common Stock equal to the quotient obtained by dividing the amount of such interest by 90% of the Closing Price for the Trading Day immediately preceding (but not including) such Interest Payment Date. The Company must deliver written notice to the Investor indicating the manner in which it intends to pay interest at least ten (10) Trading Days prior to each Interest Payment Date, but the Company may indicate in any such notice that the election contained therein shall continue for subsequent Interest Payment Dates until rescinded. Failure to timely provide such written notice shall be deemed an irrevocable election by the Company to pay such interest in cash. All interest payable in respect of the Notes on any Interest Payment Date must be paid in the same manner. Notwithstanding the foregoing, the Company may not pay interest in shares of Common Stock on any Interest Payment Date unless, on the date thereof, the Equity Conditions Are Satisfied. Investor shall have the right, but not the obligation, to add to the principal amount of the Notes any interest not fully paid, which may be converted at the Conversion Price. 3. REGISTRATION OF NOTES. The Company shall register the Notes upon records maintained by the Company for that purpose (the "NOTE REGISTER") in the name of each record Investor thereof from time to time. The Company may deem and treat the registered Investor of this Note as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest hereon, and for all other purposes, absent actual notice to the contrary from such record Investor. 4. REGISTRATION OF TRANSFERS AND EXCHANGES. The Company shall register the transfer of any portion of this Note in the Note Register upon surrender of this Note to the Company at its address for notice set forth herein. Upon any such registration or transfer, a new Note, in substantially the form of this Note (any such new debenture, a "NEW NOTE"), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Investor. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Note. The Company agrees that its prior consent is not required for the transfer of any portion of this Note; provided, however, that the Company shall be entitled to reasonable assurance, including an opinion of counsel reasonably acceptable to Company, that such transfer complies with applicable federal and state securities laws. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Investor surrendering the same. No service charge or other fee will be imposed in connection with any such registration of transfer or exchange. 7 5. CONVERSION. (a) AT THE OPTION OF THE INVESTOR. All or any portion of the principal amount of this Note then outstanding together with any accrued and unpaid interest hereunder shall be convertible into shares of Common Stock at the Conversion Price (subject to limitations set forth in Section 5(b)), at the option of the Investor, at any time and from time to time from and after the Original Issue Date. The Investor may effect conversions under this Section 5(a), by delivering to the Company a Conversion Notice together with a schedule in the form of SCHEDULE 1 attached hereto (the "CONVERSION Schedule"). If the Investor is converting less than all of the principal amount represented by this Note, or if a conversion hereunder may not be effected in full due to the application of Section 5(b), the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to the Investor a Conversion Schedule indicating the principal amount which has not been converted. (b) CERTAIN CONVERSION RESTRICTIONS. (i) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Investor upon conversion of the Notes (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such conversion (or other issuance), the total number of shares of Common Stock then beneficially owned by such Investor and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Investor's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which an Investor may receive or beneficially own in order to determine the amount of securities or other consideration that such Investor may receive in the event of a Fundamental Transaction involving the Company as contemplated in Section 11 of this Note. By written notice to the Company, an Investor may waive the provisions of this Section 5(b)(i) as to itself but any such waiver will not be effective until the 61st day after delivery thereof and such waiver shall have no effect on any other Investor. (ii) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by an Investor upon each conversion of Notes (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such conversion (or other issuance), the total number of shares of Common Stock then beneficially owned by such Investor and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with such Investor's for purposes of Section 13(d) of the Exchange Act, does not exceed 9.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which an Investor may receive or beneficially own in order to determine the amount of securities or other consideration that such Investor may receive in the event of a Fundamental Transaction (defined below) involving the Company as contemplated herein. This restriction may not be waived. 8 6. MECHANICS OF CONVERSION. (a) The number of Underlying Shares issuable upon any conversion hereunder shall equal the outstanding principal amount of this Note to be converted, divided by the Conversion Price on the Conversion Date, plus (if indicated in the applicable Conversion Notice) the amount of any accrued but unpaid interest on this Note through the Conversion Date, divided by the Conversion Price on the Conversion Date. (b) The Company shall, by the third Trading Day following each Conversion Date, issue or cause to be issued and cause to be delivered to or upon the written order of the Investor and in such name or names as the Investor may designate a certificate for the Underlying Shares issuable upon such conversion, free of restrictive legends if at such time a Registration Statement is then effective and available for use by the Investor. The Investor, or any Person so designated by the Investor to receive Underlying Shares, shall be deemed to have become holder of record of such Underlying Shares as of such Conversion Date. The Company shall use its best efforts to deliver Underlying Shares hereunder electronically (via a DWAC) through the Depository Trust Corporation or another established clearing corporation performing similar functions. (c) The Investor shall not be required to deliver the original Note in order to effect a conversion hereunder except in connection with a conversion that brings the balance to zero. Execution and delivery of the Conversion Notice shall have the same effect as cancellation of the Note and issuance of a New Note representing the remaining outstanding principal amount. (d) The Company's obligations to issue and deliver Underlying Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Investor to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Investor or any other Person of any obligation to the Company or any violation or alleged violation of law by the Investor or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Investor in connection with the issuance of such Underlying Shares. (e) If by the third Trading Day after a Conversion Date the Company fails to deliver to the Investor such Underlying Shares in such amounts and in the manner required pursuant to Section 5, then the Investor will have the right to rescind the Conversion Notice pertaining thereto by giving written notice to the Company prior to such Investor's receipt of such Underlying Shares. (f) The Company understands that a delay in the delivery of Underlying Shares as required hereunder beyond the third Trading Day after a Conversion Date would result in economic loss to the Investor. As partial compensation to an Investor for such loss, and not as a penalty, the Company agrees that, if it fails to deliver Underlying Shares in accordance with this Section 6 (as adjusted in accordance with this provision) in excess of five Trading Days after the third Trading Day after a Conversion Date, then it will 9 pay late payments to such Investor in accordance with the following schedule (where "No. Trading Days Late" is defined as the number of Trading Days beyond three Trading Days after the Conversion Date): Late Payment For Each $10,000 of Principal No. Trading Days Late Being Converted - ----------------------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000 +$200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Section 6(f) in immediately available funds upon demand. Nothing herein shall limit the Investor's right to pursue any other remedy for the Company's failure to issue and deliver Underlying Shares to the Investor as required hereunder. The liquidated damages herein provided shall survive any rescission of a conversion under Section 6(e). 7. EVENTS OF DEFAULT. (a) At any time or times following the occurrence and during the continuance of an Event of Default, the Investor may elect, by notice to the Company (an "EVENT NOTICE"), to require the Company to purchase all or any portion of the outstanding principal amount of this Note, as indicated in such Event Notice, at a purchase price in Dollars in cash equal to the greater of: (A) 100% of such outstanding principal amount (except that such amount shall equal 120% in the case of an Event of Default under clause (iii) of the definition of "Event of Default"), plus all accrued but unpaid interest thereon and any unpaid liquidated damages and other amounts then owing to the Investor under the Transaction Documents, through the date of purchase, or (B) the Event Equity Value of the Underlying Shares that would be issuable upon conversion of such principal amount and payment in Common Stock of all such accrued but unpaid interest thereon (without regard to any condition precedent or conversion limitation contained herein). The aggregate amount payable pursuant to the preceding sentence is referred to as the "EVENT PRICE." The Company shall pay the aggregate Event Price to the Investor (free of any claim of subordination) no later than the third Trading Day following the date of delivery of the Event Notice, and upon receipt thereof the Investor shall deliver the original Note so repurchased to the Company. (b) Upon the occurrence of any Bankruptcy Event with respect to the Company, all outstanding principal and accrued but unpaid interest on this Note and any unpaid liquidated damages and other amounts then owing under the Transaction Documents shall immediately become due and payable in full in Dollars in cash (free of any claim of subordination), without any action by the 10 Investor, and the Company shall immediately be obligated to repurchase this Note held by such Investor at the Event Price pursuant to the preceding paragraph as if the Investor had delivered an Event Notice immediately prior to the occurrence of such Bankruptcy Event. (c) In connection with any Event of Default, the Investor need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind (other than the Event Notice), and the Investor may immediately enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Any such declaration may be rescinded and annulled by the Investor at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereto. 8. RANKING. This Note ranks pari passu with all other Notes now or hereafter issued pursuant to the Transaction Documents and is senior in all respects to all existing and hereafter created unsecured Indebtedness of the Company. The Company will not, directly or indirectly, enter into, create, incur, assume or suffer to exist any unsecured indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom, that is senior in any respect to the Company's obligations under the Notes; except for Permitted Indebtedness. 9. CHARGES, TAXES AND EXPENSES. Issuance of certificates for Underlying Shares upon conversion of (or otherwise in respect of) this Note shall be made without charge to the Investor for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Underlying Shares or Notes in a name other than that of the Investor. The Investor shall be responsible for all other tax liability that may arise as a result of holding or transferring this Note or receiving Underlying Shares in respect hereof. 10. RESERVATION OF UNDERLYING SHARES. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Underlying Shares as required hereunder, the number of Underlying Shares which are then issuable and deliverable upon the conversion of (and otherwise in respect of) this entire Note (taking into account the adjustments of Section 11), free from preemptive rights or any other contingent purchase rights of persons other than the Investor. The Company covenants that all Underlying Shares so issuable and deliverable shall, upon issuance in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 11. CERTAIN ADJUSTMENTS. The Conversion Price is subject to adjustment from time to time as set forth in this Section 11. (a) STOCK DIVIDENDS AND SPLITS. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into 11 a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Fixed Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination. (b) PRO RATA DISTRIBUTIONS. If the Company, at any time while this Note is outstanding, distributes to all holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, "DISTRIBUTED PROPERTY"), then, at the request of the Investor delivered before the 90th day after the record date fixed for determination of shareholders entitled to receive such distribution, the Company will deliver to the Investor, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that the Investor would have been entitled to receive in respect of the Underlying Shares for which this Note could have been converted immediately prior to such record date. If such Distributed Property is not delivered to the Investor pursuant to the preceding sentence, then upon any conversion of this Note that occurs after such record date, the Investor shall be entitled to receive, in addition to the Underlying Shares otherwise issuable upon such conversion, the Distributed Property that the Investor would have been entitled to receive in respect of such number of Underlying Shares had the Investor been the record holder of such Underlying Shares immediately prior to such record date. Notwithstanding the foregoing, this Section 11(b) shall not apply to any distribution of rights or securities in respect of adoption by the Company of a shareholder rights plan, which events shall be covered by Section 11(a). (c) FUNDAMENTAL TRANSACTIONS. If, at any time while this Note is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person in which the Company is not the surviving entity, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock covered by Section 11(a) above) (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any subsequent conversion of this Note, the Investor shall have the right to: (x) declare an Event of Default pursuant to clause (iii) thereunder, (y) receive, for each Underlying Share that would have been issuable upon such conversion absent such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the "ALTERNATE CONSIDERATION") or (z) require the surviving entity to issue to the Investor an instrument identical to this Note 12 (with appropriate adjustments to the conversion price). For purposes of any such conversion, the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Investor shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction (or, if different, the ultimate parent of such successor or entity or the entity issuing the Alternate Consideration) shall issue to the Investor a new debenture consistent with the foregoing provisions and evidencing the Investor's right to convert such debenture into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (d) SUBSEQUENT EQUITY SALES. If the Company or any subsidiary thereof, as applicable, at any time while this Note is outstanding, shall issue shares of Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at a price per share less than either the Initial Conversion Price or the Fixed Conversion Price (the "ADDITIONAL SHARES PRICE") (if the holder of the Common Stock or Common Stock Equivalent so issued may, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, becomes entitled to receive shares of Common Stock at a price less than the Initial Conversion Price or Fixed Conversion Price, but such price is not fixed at the time of issuance, such issuance shall be deemed to occur (i) in the case of purchase price adjustments and reset provisions, at the time, if any, that such adjustment or reset occurs, or (ii) in the case of conversion, exercise or exchange prices, the date of such conversion, exercise or exchange), then, the Initial Conversion Price and Fixed Conversion Price shall each be reduced to equal the Additional Shares Price. Notwithstanding anything to the contrary set forth herein, the Conversion Price shall never be increased as a result of the Additional Shares Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued; PROVIDED, however, that no adjustment shall be made pursuant to this Section 11(d) as a result of the conversion, exercise or exchange, as the case may be, of Common Stock Equivalents outstanding on the date hereof (but will apply to any amendments, resets, modifications, and reissuances thereof (other than those, if any, resulting from the issuance of the Notes or the transactions contemplated by the issuance of the Notes) and as a result of any changes, resets or adjustments to a conversion, exercise or exchange price thereunder whether or not as a result of any amendment, modification or reissuance (other than those, if any, resulting from the issuance of the Notes or the transactions contemplated by the issuance of the Notes)), upon the issuance of Common Stock or Common Stock Equivalents to employees or consultants of the Company as compensation upon approval of the Board of Directors of the Company, or upon the issuance of Common Stock pursuant to any agreements or other obligations in existence on the date hereof (including those set forth in the Transaction Documents) (but will apply to any amendments, resets, modifications, and reissuances thereof and as a result of any changes, resets or adjustments to a conversion, exercise or exchange price thereunder whether or not as a result of any amendment, modification or reissuance). The Company shall notify the Investor in writing, no later than the Trading Day following the issuance of any Common Stock or 13 Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms. (e) RECLASSIFICATIONS; SHARE EXCHANGES. In case of any reclassification of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property (other than compulsory share exchanges which constitute Change of Control transactions), the Investors of the Notes then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Investors shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of Common Stock of the Company into which such shares of Notes could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges. (f) CALCULATIONS. All calculations under this Section 11 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (g) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment pursuant to this Section 11, the Company at its expense will promptly compute such adjustment in accordance with the terms hereof and prepare a certificate describing in reasonable detail such adjustment and the transactions giving rise thereto, including all facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Investor. (h) NOTICE OF CORPORATE EVENTS. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any subsidiary, (ii) authorizes and publicly approves, or enters into any agreement contemplating or solicits shareholder approval for any Fundamental Transaction or (iii) publicly authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Investor a notice describing the material terms and conditions of such transaction, at least 20 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Investor is given the practical opportunity to convert this Note prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. 12. FRACTIONAL SHARES. The Company shall not be required to issue or cause to be issued fractional Underlying Shares on conversion of this Note. If any fraction of an Underlying Share would, except for the provisions of this Section, be issuable upon conversion of this Note or payment of interest hereon, the number of Underlying Shares to be issued will be rounded up to the nearest whole share. 14 13. PREPAYMENT. (a) PREPAYMENT OBLIGATION OF THE COMPANY. The Company shall prepay $4,000,000 of the Notes plus all accrued and unpaid interest and other amounts, including liquidated damages, by the Prepayment Date, PROVIDED THAT, such prepayment may only be made out of retained earnings. In the event the Investor does not receive such prepayment amount by the Prepayment Date, then the Conversion Price shall automatically become the Adjusted Conversion Price and not the Initial Conversion Price. (b) PREPAYMENT AT OPTION OF COMPANY. Subject to the provisions of this Section and upon at least sixty (60) days' prior notice, the Company may deliver a written notice (such notice, a "PREPAYMENT NOTICE") to the Investor stating its irrevocable undertaking to redeem, at any time on or after the Prepayment Date, at the applicable Company Prepayment Amount all or part of the outstanding principal amount of all Notes held by such Investor, together with accrued and unpaid interest on such outstanding principal amount, liquidated damages and other amounts then owing thereon through the Prepayment Date, PROVIDED however, that: (i) there shall not exist any Event of Default, and (ii) the Equity Conditions Are Satisfied as to all Underlying Shares. If the conditions for delivery of a Prepayment Notice set forth in clauses (i) and (ii) above are satisfied during the period from the date of the Prepayment Notice through and including the Prepayment Date, then the Company shall deliver to the Investor the full applicable Company Prepayment Amount in cash on the 61st day following the date of the Prepayment Notice (the "COMPANY PREPAYMENT DATE"), subject to (i) reduction for principal and interest of the Investor's Notes that shall have been converted between the date of the Prepayment Notice and the Company Prepayment Date, (ii) the right of the Investor to nullify such Prepayment Notice if any of such conditions shall not have been met from the date of the Prepayment Notice through the Company Prepayment Date or if the Company shall during such period fail to honor any Conversion Notice as contemplated in the immediately following sentence, and (iii) the operation of the automatic amendment to such Prepayment Notice in accordance with this Section. The Company covenants and agrees that it will honor all Conversion Notices tendered from the time of delivery of the Prepayment Notice through 6:30 p.m. (New York City time) on the Trading Day prior to the Company Prepayment Date. In addition, if any portion of the Company Prepayment Amount remains unpaid after the Company Prepayment Date, the Investor subject to such prepayment may elect by written notice to the Company to invalidate AB INITIO the Prepayment Notice with respect to the unpaid amount, notwithstanding anything herein contained to the contrary. If the Investor makes such an election, this Note shall be reinstated with respect to such unpaid amount and the Company shall no longer have any prepayment rights under this Section. 14. NOTICES. Any and all notices or other communications or deliveries hereunder (including without limitation any Conversion Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the 15 facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 54 Danbury Road, #207, Ridgefield, CT 06877, facsimile: (203) 286-1608, attention Chief Financial Officer, (ii) if to the Investor, to the address or facsimile number appearing on the Company's shareholder records or such other address or facsimile number as the Investor may provide to the Company in accordance with this Section. 15. MISCELLANEOUS. (a) This Note shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. (b) Subject to Section 15(a), above, nothing in this Note shall be construed to give to any person or corporation other than the Company and the Investor any legal or equitable right, remedy or cause under this Note. This Note shall inure to the sole and exclusive benefit of the Company and the Investor. (c) All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for any Proceeding, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court or that a New York Court is an inconvenient forum for such Proceeding. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal Proceeding. The prevailing party in a Proceeding shall be reimbursed by the other party for its reasonable attorneys' fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (d) The headings herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Note. 16 (f) No provision of this Note may be waived or amended except (i) in accordance with the requirements set forth in the Purchase Agreement, and (ii) in a written instrument signed, in the case of an amendment, by the Company and the Investor or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. (g) To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or Proceeding that may be brought by any Investor in order to enforce any right or remedy under the Notes. Notwithstanding any provision to the contrary contained in the Notes, it is expressly agreed and provided that the total liability of the Company under the Notes for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the "MAXIMUM RATE"), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Notes exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Notes is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate of interest applicable to the Notes from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Investor with respect to indebtedness evidenced by the Notes, such excess shall be applied by such Investor to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Investor's election. (h) The obligations under this Note are secured pursuant to the Security Agreement. 17 IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated. MARKLAND TECHNOLOGIES, INC. By: _________________________________ Name: Title: 18 EXHIBIT A CONVERSION NOTICE (To be Executed by the Registered Investor in order to convert Notes) The undersigned hereby elects to convert the principal amount of Note indicated below, into shares of Common Stock of Markland Technologies, Inc., as of the date written below. If shares are to be issued in the name of a Person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Investor for any conversion, except for such transfer taxes, if any. All terms used in this notice shall have the meanings set forth in the Note. Conversion calculations:_______________________________________________________ Date to Effect Conversion _______________________________________________________ Principal amount of Note owned prior to conversion _______________________________________________________ Principal amount of Note to be Converted _______________________________________________________ Principal amount of Note remaining after Conversion _______________________________________________________ DTC Account _______________________________________________________ Number of shares of Common Stock to be Issued _______________________________________________________ Applicable Conversion Price _______________________________________________________ Name of Investor By: ___________________________________________________ Name: Title: 19 By the delivery of this Conversion Notice the Investor represents and warrants to the Company that its ownership of the Common Stock does not exceed the restrictions set forth in Section 5(b) of the Note. 20 SCHEDULE 1 Markland Technologies, Inc. Secured 8% Convertible Notes due [ ] CONVERSION SCHEDULE This Conversion Schedule reflects conversions made under the above referenced Notes. Dated: - --------------------- -------------------------- --------------------- --------------------------------- Date of Conversion Amount of Conversion Aggregate Principal Applicable Conversion Price Amount Remaining Subsequent to Conversion - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- - --------------------- -------------------------- --------------------- --------------------------------- 21
EX-10.52 4 markland_sb2ex10-52.txt EXHIBIT 10.52 EXHIBIT C NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. MARKLAND TECHNOLOGIES, INC. WARRANT Warrant No. [ ] Original Issue Date: [ ], 2004 MARKLAND TECHNOLOGIES, INC., a Florida corporation (the "COMPANY"), hereby certifies that, for value received, [ ] or its registered assigns (the "HOLDER"), is entitled to purchase from the Company up to a total of [ ]1 shares of Common Stock (each such share, a "WARRANT SHARE" and all such shares, the "WARRANT SHARES"), at any time and from time to time from the Original Issue Date and through and including [ ], 2009 (the "EXPIRATION DATE"), and subject to the following terms and conditions: 1. DEFINITIONS. As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1. Capitalized terms that are used and not defined in this Warrant that are defined in the Purchase Agreement (as defined below) shall have the respective definitions set forth in the Purchase Agreement. "ADJUSTED EXERCISE PRICE" means the lesser of (i) 110% of the closing bid price of the Common Stock on the Trading Day immediately preceding the Closing Date or (ii) 80% of the average of the closing bid price of the Common Stock during the five (5) Trading Days immediately preceding March 15, 2005. "BUSINESS DAY" means any day except Saturday, Sunday and any day that is a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "COMMON STOCK" means the common stock of the Company, par value $.0001 per share, and any securities into which such common stock may hereafter be reclassified. "COMMON STOCK EQUIVALENTS" means any securities of the Company or any Subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock. "EXERCISE PRICE" means whichever of the Initial Exercise Price or Adjusted Exercise Price is then in effect. "FUNDAMENTAL TRANSACTION" means any of the following: (1) the Company effects any merger or consolidation of the Company with or into another Person in which the Company is not a surviving entity, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property. "INITIAL EXERCISE PRICE" means $1.50. "ORIGINAL ISSUE DATE" means the Original Issue Date first set forth on the first page of this Warrant. "NEW YORK COURTS" means the state and federal courts sitting in the City of New York, Borough of Manhattan. "PURCHASE AGREEMENT" means the Purchase Agreement, dated [ ], 2004, to which the Company and the original Holder are parties. "TRADING DAY" means (i) a day on which the Common Stock is traded on a Trading Market, (ii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices), or (iii) in the event that the Common Stock is not listed or quoted as set forth in (i) or (ii) hereof, a Business Day. 2. REGISTRATION OF WARRANT. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "WARRANT REGISTER"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute 2 owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. 3. REGISTRATION OF TRANSFERS. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant (any such new Warrant, a "NEW Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant. 4. EXERCISE AND DURATION OF WARRANTS. This Warrant shall be exercisable by the registered Holder at any time and from time to time from and after the six month anniversary of the Original Issue Date and through and including the Expiration Date. At 6:30 p.m., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not call or redeem any portion of this Warrant without the prior written consent of the affected Holder. 5. DELIVERY OF WARRANT SHARES. (a) To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice (in the form attached hereto) to the Company (with the attached Warrant Shares Exercise Log) by facsimile showing confirmation of receipt and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise, which, unless otherwise required by the Purchase Agreement, shall be free of restrictive legends. The Company shall, upon request of the Holder and subsequent to the date on which a registration statement covering the resale of the Warrant Shares has been declared effective by the Securities and Exchange Commission, use its reasonable best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions, if available, PROVIDED, that, the Company may, but will not be required to change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through the Depository Trust Corporation. A "DATE OF EXERCISE" means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased. (b) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such exercise. 3 (c) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder, it being understood that issuances or reinstatement pursuant to this clause (2) shall be in lieu of, and not in addition to, the Company's obligation to honor the exercise giving rise to such issuance or reinstatement. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (d) The Company's obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares upon exercise of the Warrant as required pursuant to the terms hereof. 6. CHARGES, TAXES AND EXPENSES. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and 4 reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company's obligation to issue the New Warrant. 8. RESERVATION OF WARRANT SHARES. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions of SECTION 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 9. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this SECTION 9. (a) STOCK DIVIDENDS AND SPLITS. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination. (b) FUNDAMENTAL TRANSACTIONS. If, at any time while this Warrant is outstanding there is a Fundamental Transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the "ALTERNATE CONSIDERATION"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as 5 to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder's option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall, either (1) issue to the Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder's right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof, or (2) purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (c) SUBSEQUENT EQUITY SALES. If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall issue shares of Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at a price per share less than the Initial Exercise Price or the Adjusted Exercise Price, as applicable (the "ADDITIONAL WARRANT SHARES PRICE") (if the holder of the Common Stock or Common Stock Equivalent so issued may, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, become entitled to receive shares of Common Stock at a price less than the Initial Exercise Price or the Adjusted Exercise Price, as applicable, but such price is not fixed at the time of issuance, such issuance shall be deemed to occur (i) in the case of purchase price adjustments and reset provisions, at the time, if any, that such adjustment or reset occurs, or (ii) in the case of conversion, exercise or exchange prices, the date of such conversion, exercise or exchange), then, the Initial Exercise Price or the Adjusted Exercise Price, as applicable, shall be reduced to equal the Additional Warrant Shares Price, such adjustment to be made at the time such Common Stock or Common Stock Equivalents are issued; PROVIDED, however, that no adjustment shall be made pursuant to this Section 9(c) as a result of the conversion, exercise or exchange, as the case may be, of Common Stock Equivalents outstanding on the date hereof (but will apply to any amendments, resets, modifications, and reissuances thereof and as a result of any changes, resets or adjustments to a conversion, exercise or exchange price thereunder whether or not as a result of any amendment, modification or reissuance), upon the issuance of Common Stock or Common Stock Equivalents to employees or consultants of the Company as compensation upon approval of the Board of Directors of the Company, or upon the issuance of Common Stock pursuant to any agreements or other obligations in existence on the date hereof (including those set forth in the Transaction Documents) (but will apply to any amendments, resets, modifications, and reissuances thereof and as a result of any changes, resets or adjustments to a conversion, exercise or exchange price thereunder whether or not as a result of any amendment, modification or reissuance). Notwithstanding anything to the contrary set forth herein, the Exercise Price shall never be increased as a result of the Additional Warrant Shares Price. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. 6 (d) NUMBER OF WARRANT SHARES. Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment. (e) CALCULATIONS. All calculations under this SECTION 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment pursuant to this SECTION 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company's Transfer Agent. (g) NOTICE OF CORPORATE EVENTS. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction (but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. (h) PREPAYMENT. The Company shall prepay $5,000,000 of the Notes plus all accrued and unpaid interest and other amounts, including liquidated damages, by March 15, 2005. In the event the Investor does not receive such prepayment amount by March 15, 2005, then the Exercise Price shall automatically be reduced to the Adjusted Exercise Price. 10. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise Price in one of the following manners: (a) CASH EXERCISE. The Holder may deliver immediately available funds; or 7 (b) CASHLESS EXERCISE. If an Exercise Notice is delivered at a time when a registration statement permitting the Holder to resell the Warrant Shares is not then effective or the prospectus forming a part thereof is not then available to the Holder for the resale of the Warrant Shares, then the Holder may notify the Company in an Exercise Notice of its election to utilize cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing prices for the five Trading Days immediately prior to (but not including) the Exercise Date. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued. 11. LIMITATIONS ON EXERCISE. (a) Notwithstanding anything to the contrary contained herein, the number of Warrant Shares that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a Fundamental Transaction as contemplated in Section 9 of this Warrant. By written notice to the Company, an Investor may waive the provisions of this Section 11(a) as to itself but any such waiver will not be effective until the 61st day after delivery thereof and such waiver shall have no effect on any other Investor. (b) Notwithstanding anything to the contrary contained herein, the number of Warrant Shares that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other 8 issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 9.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a Fundamental Transaction as contemplated in Section 9 of this Warrant. This restriction may not be waived. 12. NO FRACTIONAL SHARES. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the date of exercise. 13. NOTICES. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Markland Technologies, Inc., 54 Danbury Road, #207, Ridgefield, CT 06877, Attn: Chief Financial Officer, or to facsimile No.: (203) 286-1608 (or such other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 14. WARRANT AGENT. The Company shall serve as warrant agent under this Warrant. Upon 10 days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 9 15. MISCELLANEOUS. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York (except for matters governed by corporate law in the State of Delaware), without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant and the transactions herein contemplated ("PROCEEDINGS") (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the New York Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. (e) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a stockholder with respect to the Warrant Shares. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. MARKLAND TECHNOLOGIES, INC. By:________________________________________ Name: Title: 11 EXERCISE NOTICE MARKLAND TECHNOLOGIES, INC. WARRANT DATED [ ], 2004 The undersigned Holder hereby irrevocably elects to purchase _____________ shares of Common Stock pursuant to the above referenced Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant. (1) The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant. (2) The Holder intends that payment of the Exercise Price shall be made as (check one): ____"Cash Exercise" under Section 10 ____"Cashless Exercise" under Section 10 (3) If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant. (4) Pursuant to this Exercise Notice, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant. (5) By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Section 11 of this Warrant to which this notice relates. Dated: __________, _____ Name of Holder: (Print) ________________________________ By: ____________________________________ Name:___________________________________ Title: _________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) 12 WARRANT SHARES EXERCISE LOG --------------------------- - ------------------ ----------------------------- ---------------------------- --------------------- Date Number of Warrant Shares Number of Warrant Shares Number of Warrant Available to be Exercised Exercised Shares Remaining to be Exercised - ------------------ ----------------------------- ---------------------------- --------------------- - ------------------ ----------------------------- ---------------------------- --------------------- 13
MARKLAND TECHNOLOGIES, INC. WARRANT ORIGINALLY ISSUED [ ], 2004 WARRANT NO. [ ] FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the above-captioned Warrant to purchase ____________ shares of Common Stock to which such Warrant relates and appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises. Dated: _______________, ____ __________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) __________________________________________ Address of Transferee __________________________________________ __________________________________________ In the presence of: ___________________________________ 14 EX-10.53 5 markland_sb2ex10-53.txt EXHIBIT 10.53 EXECUTION COPY SUBORDINATION AGREEMENT ----------------------- SUBORDINATION AGREEMENT, dated as of November 9, 2004, among Harbor View Master Fund, LP ("HARBORVIEW"), Southridge Partners, LP ("SOUTHRIDGE" and, collectively with Harborview, "JUNIOR CREDITORS"), Markland Technologies, Inc. (the "COMPANY"), DKR Soundshore Oasis Holding Fund, LLC ("SOUNDSHORE") and DKR Soundshore Strategic Holding Fund, LLC ("SOUNDSHORE STRATEGIC" and, collectively with Soundshore, the "SENIOR CREDITORS"). I. Pursuant the Securities Purchase Agreement, dated as of September 21, 2004, among the Company and the Senior Creditors (as amended, supplemented or otherwise modified from time to time, the "PURCHASE AGREEMENT"), the Senior Creditors, severally, purchased from the Company 8% Secured Convertible Notes, due September 21, 2005 in an aggregate principal amount of $5,200,000 (as amended, supplemented or otherwise modified from time to time, the "SENIOR NOTES"). In connection with the Senior Notes, the Senior Creditors were granted a first priority lien on all of the assets of the Company and its Subsidiaries (as defined in the Security Agreement). II. The Junior Creditors purchased from the Company Secured 8% Convertible Notes, dated November 9, 2004 in the aggregate principal amount of $1,350,000.00 (as amended, supplemented or otherwise modified from time to time, the "SUBORDINATED CONVERTIBLE NOTES"). Accordingly, the parties hereto agree as follows: 1. DEFINITIONS. Unless the context otherwise requires, capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Senior Notes. "AGENT" means the Agent appointed under the Security Agreement, dated as of September 21, 2004, among the Company and the Senior Creditors. "JUNIOR OBLIGATIONS" means all of the obligations and liabilities of the Company to the Junior Creditors under the Subordinated Convertible Notes, including with out limitation, all obligations thereunder or in respect thereof now existing or hereafter arising, created, assumed or incurred, including all post-petition interest and make-whole premiums, whether or not allowed as a secured claim or as an unsecured claim in any proceeding, including any proceeding arising under Title 11 of the United States Code. "PAYMENT" means any payment, whether in the form of cash, property or otherwise, whether in respect of principal, interest, fees, expenses or otherwise, whether in respect of a scheduled payment, a prepayment, a repurchase, a redemption, a defeasance, an acceleration, the sale or redemption of any collateral security or otherwise and whether voluntary or involuntary (by way of setoff, offset or otherwise). "PAYOFF TIME" means any time upon which (a) all of the liabilities and obligations of the Senior Creditors under the Senior Notes shall have been satisfied in full or otherwise released, and (b) the earlier of the following two events: (i) each Senior Creditor shall have received the indefeasible payment in full, in cash, of the then outstanding Senior Obligations owing to it, or (ii) the aggregate amount of all cash Payments made in respect of the Junior Obligations and indefeasibly turned over or paid directly to the Senior Creditors under and in accordance with Section 2(d) shall equal or exceed the full amount of the Senior Obligations. "SENIOR DOCUMENTS" means (i) the Senior Notes, (ii) the Security Agreement, dated as of September 21, 2004, among the Company and the Senior Creditors, (iii) the Transaction Documents, (v) each agreement, instrument or other document executed or delivered in connection with any Senior Obligations, and (vi) each agreement, instrument or other document executed or delivered in connection with any of the foregoing, as each may be amended, supplemented or otherwise modified from time to time in accordance with their respective terms. "SENIOR OBLIGATIONS" means all of the obligations and liabilities of the Company under the Senior Notes, whether fixed, contingent, now existing or hereafter arising, created, assumed or incurred, and including all post-petition interest and make-whole premiums, whether or not allowed as a secured claim or as an unsecured claim in any proceeding, including any proceeding arising under Title 11 of the United States Code. 2. SUBORDINATION. (a) The Junior Creditors hereby subordinate, upon the terms and conditions herein contained, the Junior Obligations to the Senior Obligations. (b) Until the Payoff Time, the Junior Creditors shall not be entitled to receive and the Company shall not make any Payment in respect of the Junior Obligations except for periodic interest payments made in the ordinary course and liquidated damages not to exceed $100,000. (c) Unless and until the Payoff Time shall have occurred, the Junior Creditors agrees that they shall not declare any part of the Junior Obligations to be due and payable or exercise any of the rights or remedies that it may have (including, without limitation, bringing, or joining with any other creditor in instituting, any proceeding in contemplation of, or in connection with, any Bankruptcy Event). (d) Until the Payoff Time (i) the Company shall not grant, and the Junior Creditors shall not receive or accept, any Lien of any kind or nature on any property (whether now existing or hereafter acquired) of the Company or any Subsidiary that secures the Junior Obligations, and (ii) the Junior Creditors shall not accept any guaranty of any Junior Obligation, or any "put" or other arrangement similar thereto. (e) Nothing contained in this Subordination Agreement is intended to or shall impair, as among the Company, its creditors (other than the Senior Creditors) and the Junior Creditors, the obligation of the Company to pay 2 the Junior Creditors any amount due in respect of the Junior Obligations as and when the same shall become due and payable in accordance with the terms thereof, or affect the relative rights of the Company and its creditors (other than the Senior Creditors), in each case subject to the rights of each Senior Creditor under this Subordination Agreement. (f) The Junior Creditors agree that this Subordination Agreement shall not be affected by any action or failure to act by a Senior Creditor that results, or may result, in affecting, impairing or extinguishing any right of reimbursement or subrogation or other right or remedy of the Junior Creditors. (g) The Junior Creditors agree that any statement of account with respect to the Senior Obligations from the Senior Creditors to the Company that binds the Company shall also be binding upon the Junior Creditors, and that copies of any such statement of account maintained in the ordinary course of business may be used in evidence against the Junior Creditors. (h) The Junior Creditors agree that no Payment received by the Junior Creditors and paid over to any Senior Creditor pursuant to the provisions hereof shall entitle the Junior Creditors to exercise any rights of subrogation in respect thereof until the Payoff Time, and for the purpose of such subrogation no such Payment that otherwise would have been made to the Junior Creditors shall, as among the Company, its creditors (other than the Senior Creditors) and the Junior Creditors, be deemed to be a payment by the Company to or on account of the Senior Obligations, it being understood that the provisions hereof are intended solely for the purpose of defining the relative rights of the Junior Creditors, on the one hand, and the Senior Creditors, on the other hand. From and after the Payoff Time, the Junior Creditors shall be subrogated to all rights of the Senior Creditors to receive any further payments or distributions until the Junior Obligations shall have been indefeasibly paid in full. The subordination provisions contained herein shall not be affected by any action, or failure to act, by any Senior Creditor that results, or may result, in affecting, impairing or extinguishing any right of reimbursement or subrogation or other right or remedy of the Junior Creditors. (i) Any document or instrument evidencing the Junior Obligations, including, without limitation, the Subordinated Convertible Note, shall bear the following legend: THIS INSTRUMENT AND THE RIGHTS TO PAYMENT HEREUNDER ARE SUBORDINATED PURSUANT THE SUBORDINATION AGREEMENT, DATED AS OF NOVEMBER 9, 2004, AMONG MARKLAND TECHNOLOGIES, INC, THE JUNIOR CREDITORS AND THE SENIOR CREDITORS PARTY THERETO. 3. REPRESENTATIONS AND WARRANTIES. The Junior Creditors represent and warrant to each Senior Creditor as follows: (a) The Junior Creditor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to carry on its business as now conducted. 3 (b) The transactions contemplated hereby are within the corporate or other analogous powers of the Junior Creditor and have been duly authorized by all necessary corporate or other analogous and, if required, equityholder action. This Subordination Agreement has been duly executed and delivered by the Junior Creditor and constitutes a legal, valid and binding obligation thereof, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. (c) The transactions contemplated hereby will not (i) violate the organizational documents of the Junior Creditor and (ii) violate or result in a default under any indenture, agreement or other instrument binding upon the Junior Creditor or its assets, or give rise to a right thereunder to require any payment to be made by the Junior Creditor. (d) All of the Junior Obligations are represented by the Subordinated Convertible Note. 4. SUBORDINATION ABSOLUTE. (a) All rights and interests of each Senior Creditor hereunder, and all agreements and obligations of the Junior Creditors and the Company hereunder, shall remain in full force and effect irrespective of (i) the invalidity or lack of enforceability of any Senior Notes, (ii) any amendment of, supplement to or other modification of (including by any amendment, waiver or consent) the Senior Debentures or all or any of the Senior Obligations, including any renewal, extension, acceleration or replacement thereof, (iii) the existence, enforceability, perfection or validity of any collateral security or any guarantor, (iv) the liability of any other Person in respect of the Senior Obligations, (v) any failure, delay, neglect or omission by the Agent or any other Senior Creditor to obtain, realize upon or perfect any security interest in any collateral, guaranty, indebtedness, liability or obligation, or by any direct or indirect collateral security therefor, (vi) the bankruptcy, reorganization or insolvency of, or by any other proceeding for the relief of debtors commenced by or against, the Junior Creditors, the Company or any other Person, (vii) the subordination of the Senior Obligations to any other liabilities or obligations or (viii) any other reason or circumstance whatsoever, whether similar or dissimilar to the foregoing, that might otherwise constitute a defense available to, or a discharge of, the Junior Creditors in respect of this Subordination Agreement or the Company in respect of the Senior Obligations or this Subordination Agreement. (b) The Junior Creditors hereby waive any right to require that resort be had by the Agent or any other Senior Creditor against the Company or any other Person, or to require that resort be had by the Agent or any other Senior Creditor to any collateral security. Neither the Agent nor any other Senior Creditor shall have any obligation to enforce any Senior Documents by any action, including making or perfecting any claim against the Company prior to being entitled to the benefits of this Subordination Agreement. 5. EXPENSES. The Junior Creditors agree to pay to each Senior Creditor, upon demand, any and all reasonable sums, costs and expenses of each Senior Creditor, as applicable, may pay or incur in enforcing this Subordination 4 Agreement, including court costs, collection charges, and reasonable fees and disbursements of counsel to the Senior Creditors. 6. BINDING EFFECT; SEVERAL AGREEMENT; ASSIGNMENTS; CONTINUING AGREEMENT; TERMINATION. Whenever in this Subordination Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Company or the Junior Creditor that are contained in this Subordination Agreement shall bind and inure to the benefit of each party hereto and its respective successors and assigns. This Subordination Agreement shall become effective when a counterpart hereof executed on behalf of each of the Company and the Junior Creditors shall have been delivered to the Senior Creditors and a counterpart hereof shall have been executed on behalf of the Senior Creditors, and thereafter shall be binding upon the Company or the Junior Creditors, as applicable, and the Secured Creditors and their respective successors and assigns, and shall inure to the benefit of the Company or the Junior Creditors, as applicable, the Agent and the other Senior Creditors, and their respective successors and assigns, except that neither the Company or the Junior Creditors shall have the right to assign its rights or obligations hereunder or any interest herein (and any such attempted assignment shall be void), except as expressly contemplated by this Subordination Agreement or the other Senior Documents. This Subordination Agreement shall be a continuing agreement and shall be irrevocable. 7. WAIVERS; AMENDMENT. (a) No failure or delay of the Secured Creditors in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Senior Creditors hereunder and under the other Senior Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Subordination Agreement or consent to any departure by the Company or the Junior Creditors therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Company or the Junior Creditors in any case shall entitle the Company or the Junior Creditors, as applicable, to any other or further notice or demand in similar or other circumstances. (b) Neither this Subordination Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into by, between or among the Senior Creditors and the Company and/or the Junior Creditors, as applicable. 8. GOVERNING LAW. THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 9. NOTICES. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile to each party hereto 5 at the address set forth with respect to such party on the signature pages hereof. Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Subordination Agreement shall be deemed to have been given on the date of receipt. 10. SURVIVAL OF AGREEMENT; SEVERABILITY. (a) All covenants, agreements, representations and warranties made by each of the Company and the Junior Creditors herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Subordination Agreement shall be considered to have been relied upon by the Senior Creditors and shall survive the execution and delivery of this Agreement, regardless of any investigation made by the Senior Creditors or on their behalf, and shall continue in full force and effect until this Subordination Agreement shall terminate. The agreements made herein shall continue to be effective or be reinstated, as applicable, if at any time payment, or any part thereof, of any Senior Obligation is rescinded or must otherwise be restored by any Senior Creditor or the Junior Creditors upon the bankruptcy or reorganization of the Company, the Junior Creditors or otherwise. (b) In the event any one or more of the provisions contained in this Subordination Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 11. COUNTERPARTS. This Subordination Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one contract. Delivery of an executed counterpart of this Subordination Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Subordination Agreement. 12. HEADINGS. Section headings used herein are for convenience of reference only, are not part of this Subordination Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Subordination Agreement. 13. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each of the Company and the Junior Creditors hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Subordination Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such 6 action or proceeding may be heard and determined in such New York State court or, to the extent permitted by applicable law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Subordination Agreement shall affect any right that the Senior Creditors may otherwise have to bring any action or proceeding relating to this Subordination Agreement against the Company or the Junior Creditors, or any of its property, in the courts of any jurisdiction. (b) Each of the Company and the Junior Creditors hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Subordination Agreement in any court referred to in paragraph (a) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Subordination Agreement irrevocably consents to service of process in the manner provided for notices in Section 10. Nothing in this Subordination Agreement will affect the right of any party to this Subordination Agreement to serve process in any other manner permitted by law. (d) If any party shall commence a proceeding to enforce any provisions of this Subordination Agreement, then the prevailing party in such proceeding shall be reimbursed by the other party for its reasonable attorney's fees and other actual costs and expenses incurred with the investigation, preparation and prosecution of such proceeding. 14. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS SUBORDINATION AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS SUBORDINATION AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 15. MISCELLANEOUS. (a) Except as otherwise specifically provided in this Subordination Agreement, the Junior Creditors hereby waives presentment, demand for payment, notice of default, nonperformance and dishonor, protest and notice of protest under this Subordination Agreement, notice of acceptance of this Subordination Agreement and reliance hereupon by the Senior Creditors, and the 7 incurrence or accrual of any other obligations and notice of any sale of collateral or any default of any sort. (b) Nothing herein shall limit or affect in any manner any right any Senior Creditor may have by virtue of any other instrument or agreement. (c) The Company, for the consideration hereinabove stated, authorizes and approves any act or thing which may be done in accordance herewith and agrees to act in accordance herewith. (d) This Agreement constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Subordination Agreement as of the day and year first above written. HARBORVIEW MASTER FUND, LP By: _________________________ Name: Title: Address for Notice: With a copy to: SOUTHRIDGE PARTNERS, LP By: _________________________ Name: Title: Address for Notice: With a copy to: MARKLAND TECHNOLOGIES, INC. By: _________________________ Name: Title: Address for Notice: Markland Technologies, Inc. 54 Danbury Road, #207 Ridgefield, Connecticut 06877 Facsimile No.: (203) 286-1608 Attn: Chief Financial Officer 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Subordination Agreement as of the day and year first above written. DKR SOUNDSHORE OASIS HOLDING FUND, LTD. By:_______________________________ Name: Title: Address for Notice: DKR Oasis Management Company, LP 1281 Main Street Stanford, CT 06902 Facsimile No.: (203) 324-8489 Attn: Rajni Narasi 10 IN WITNESS WHEREOF, the parties hereto have duly executed this Subordination Agreement as of the day and year first above written. DKR SOUNDSHORE STRATEGIC HOLDING FUND, LTD. By:_______________________________ Name: Title: Address for Notice: DKR Capital Partners L.P. 1281 Main Street Stanford, CT 06902 Facsimile No.: (203) 324-8489 Attn: Rajni Narasi 11 EX-10.54 6 markland_sb2ex10-54.txt EXHIBIT 10.54 EXECUTION COPY CONDITIONAL WAIVER AND CONSENT This Conditional Waiver and Consent, dated as of November 9, 2004, is entered into by and among DKR Soundshore Oasis Holding Fund, LLC ("SOUNDSHORE"), DKR Soundshore Strategic Holding Fund, LLC ("SOUNDSHORE STRATEGIC" and, collectively with Soundshore, the "INVESTORS"), Harborview Master Fund, LP ("HARBORVIEW"), Southrigde Partners, LP ("SOUTHRIDGE" and, collectively with Harborview, the "ADDITIONAL INVESTORS") and Markland Technologies, Inc., a Florida corporation (the "COMPANY"). WHEREAS, the Investors and the Company are parties that certain Purchase Agreement, dated as of September 21, 2004 (the "PURCHASE AGREEMENT") (capitalized terms that are used and not defined herein shall have the respective meanings set forth in the Purchase Agreement); WHEREAS, in connection with the Purchase Agreement, the Investors and the Company entered into a Security Agreement (the "SECURITY AGREEMENT"), and a Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT"), and the Investors purchased certain convertible promissory notes (the "NOTES") and warrants to purchase shares of the common stock, $.0001 par value per share, of the Company (the "WARRANTS" and collectively with the Notes, the Registration Rights Agreement, the Security Agreement, and the Purchase Agreement, the "TRANSACTION DOCUMENTS"); WHEREAS, the Company wishes to raise an additional $1,350,000 (the "SUBSEQUENT FINANCING") by selling to the Additional Investors secured convertible promissory notes (the "ADDITIONAL NOTES") and common stock purchase warrants (the "ADDITIONAL WARRANTS"); Whereas, among other things, the Transaction Documents provide the Investors with rights of first refusal to provide the financing contemplated by the Subsequent Financing, and prohibit the Company from creating or suffering to exist the Debt and Liens that would be created in connection with the Subsequent Financing; and WHEREAS, the Company and the Additional Investors have requested that the Investors waive certain rights under the Transaction Documents in connection with the Subsequent Financing and, subject to the terms and conditions herein contained, the Investors are willing to agree to provide such waiver. NOW, THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CONSENTS AND WAIVERS. Subject to the terms and conditions contained in this Conditional Waiver and Consent, the Investors hereby (i) waive their rights under Section 4.3 of the Purchase Agreement to receive a Subsequent Placement Notice concerning the Subsequent Placement and elect not to provide the financing therein contemplated, (ii) waive the application of Section 6.3 and Section 6.4 of the Purchase Agreement to the Subsequent Placement, and (iii) consent to the inclusion in the Registration Statement of the shares of Common Stock issuable to Additional Investors upon conversion of the Additional Notes and Exercise of the Additional Warrants and waive the application of Section 6(b) of the Registration Rights Agreement to such inclusion. The foregoing are limited waivers and the execution and delivery of this Conditional Consent and Waiver does not constitute (a) a waiver by either of the Investors of any Default or Event of Default now or hereafter existing or any other term or provision of the Notes or any other Transaction Document or (b) a course of conduct or dealing among the parties. 2. CONDITIONS. The waivers and consents herein contained are expressly subject to satisfaction of the following conditions precedent, each of which is a material inducement to the willingness of the Investors to enter into this Conditional Consent and Waiver: 2.1. Except as disclosed in the Disclosure Schedules attached hereto as EXHIBIT A, the representations and warranties contained herein and the Transaction Documents shall be true and correct in all material respects as of the date hereof, except for such representations and warranties limited by their terms to a specific date (which need only be true and correct as of such specified date). 2.2. No Default or Event of Default shall be in existence (as such terms are used in the Notes). 2.3. The Additional Notes, Additional Warrants and agreements and instruments entered into with respect thereto (the "SUBSEQUENT PLACEMENT TRANSACTION DOCUMENTS") will be issued in the forms attached hereto as EXHIBIT B. 2.4. The Debt and Liens represented by the Additional Notes and the Subsequent Financing Transaction Documents will be in all respects subordinate to the Debt and Liens existing under the Notes and the Transaction Documents, in accordance with a subordination agreement between the Additional Investor and the Investors in form and substance acceptable to the Investors. 2.5. The Company shall have paid all fees, costs and expenses incurred by the Investors in connection with the negotiation and preparation of this Conditional Waiver and Consent and the transactions herein contemplated, such amount not to exceed $7,500. 2.6. The Subsequent Financing shall close by November 10, 2004. 3. TRANSACTION DOCUMENTS IN FULL FORCE AND EFFECT. Subject to the conditional waivers herein provided, the Transaction Documents shall remain in full force and effect. Except as expressly set forth herein, this Conditional Waiver and Consent shall not be deemed to be a waiver, amendment or modification of any provisions of any Transaction Document or of any right, power or remedy of any Investor or the Agent thereunder, or constitute a waiver of any provision of any Transaction Document (except to the extent specifically herein set forth in SECTION 1), or any other document, instrument and/or agreement executed or 2 delivered in connection therewith or of any Default or Event of Default under any of the foregoing, in each case whether arising before or after the date hereof or as a result of performance hereunder or thereunder. Except as set forth herein, the Investors reserve all rights, remedies, powers, or privileges available under the Transaction Documents, at law or otherwise. This Conditional Waiver and Consent shall not constitute a novation or satisfaction and accord of any Transaction Document. 4. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and warrants to the Investors as follows: 4.1. The execution, delivery and performance by it of this Conditional Waiver and Consent are within its powers, have been duly authorized, and do not contravene (i) its articles of organization, operating agreement, or other organizational documents, or (ii) any applicable law. 4.2. This Conditional Waiver and Consent has been duly executed and delivered by it, and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 4.3. After giving effect to this Conditional Waiver and Consent and the consummation of the subject Subsequent Financing, it is not in default under the Notes and no Default or Event of Default exists, has occurred and is continuing or would result by the execution, delivery or performance of this Conditional Waiver and Consent or the consummation of the subject Subsequent Financing. 4.4. Except as disclosed in the Disclosure Schedules attached hereto as EXHIBIT A, the representations and warranties contained in the Transaction Documents are true and correct as of the date hereof as if made on the date hereof, except for such representations and warranties limited by their terms to a specific date (which are limited to such specified date). 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ADDITIONAL INVESTOR. The Additional Investor hereby represents, warrants and covenants to the Investors as follows: 5.1. From and after the date of this Agreement through the fortieth (40th) Trading Day following the Effective Date (as such term is defined in the Investors' Registration Rights Agreement), plus one additional day for each day the Investors are not allowed to sell pursuant to the Investors' Registration Rights Agreement after the Effective Date, the Additional Investor hereby agrees it will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly (including by way of swap, pledge or other 3 derivative transactions), or announce the offering of, any of the Additional Notes or the Additional Warrants (including any that it may gain rights or ownership to after the date of this Agreement), or any securities issuable upon any conversion, exchange, reset or otherwise with respect to, such Additional Notes or Warrants. 5.2. The Additional Investor acknowledges and agrees that this Conditional Waiver and Consent is entered into for the benefit of and is enforceable by the Investors and their successors and assigns. Accordingly, the parties understand and agree that any Investor shall have the right to seek any one or more remedies for any act in contravention of this Conditional Waiver and Consent, including obtaining injunctive relief and monetary damages against any one or more of the parties hereto. 6. MISCELLANEOUS. 6.1. This Conditional Waiver and Consent may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement. Each party agrees that it will be bound by its own facsimile signature and that it accepts the facsimile signature of each other party. The descriptive headings of the various sections of this Conditional Waiver and Consent are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof or thereof. 6.2. This Conditional Waiver and Consent may not be changed, amended, restated, waived, supplemented, discharged, canceled, terminated or otherwise modified orally or by any course of dealing or in any manner other than as provided in the Purchase Agreement. 6.3. This Conditional Waiver and Consent (including its exhibits) and the Transaction Documents constitute the final, entire agreement and understanding between the parties with respect to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties, and shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto and thereto. There are no unwritten oral agreements between the parties with respect to the subject matter hereof and thereof. 6.4. THIS CONDITIONAL WAIVER AND CONSENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE CHOICE OF LAW PROVISIONS SET FORTH IN THE PURCHASE AGREEMENT AND SHALL BE SUBJECT TO THE WAIVER OF JURY TRIAL AND NOTICE PROVISIONS OF THE PURCHASE AGREEMENT. 6.5. All representations and warranties made in this Conditional Waiver and Consent shall survive the execution and delivery of this Conditional Waiver and Consent and no investigation by 4 the Investor shall affect such representations or warranties or the right of the Investors to rely upon them. 6.6. THE COMPANY ACKNOWLEDGES AND AGREES THAT TO THE KNOWLEDGE OF THE COMPANY IT HAS NO CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO ANY TRANSACTION DOCUMENT AND THE PERFORMANCE OF ITS OBLIGATIONS THEREUNDER OR, TO THE EXTENT THEY EXIST, THE COMPANY HEREBY WAIVES, RELINQUISHES AND RELEASES ANY SUCH KNOWN CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO ANY TRANSACTION DOCUMENTS AND/OR ANY TRANSACTION RELATED TO ANY TRANSACTION DOCUMENT. [SIGNATURES APPEAR ON FOLLOWING PAGE] 5 IN WITNESS WHEREOF, the undersigned have executed this Conditional Waiver and Consent as an instrument under seal as of the date first written above. MARKLAND TECHNOLOGIES, INC. By:__________________________________________ Name: Title: DKR SOUNDSHORE OASIS HOLDING FUND, LLC By:__________________________________________ Name: Title: DKR SOUNDSHORE STRATEGIC HOLDING FUND, LLC By:__________________________________________ Name: Title: HARBORVIEW MASTER FUND, LP By:__________________________________________ Name: Title: Harborview Master Fund, LP, a BVI corporation c/o Beacon Fund Advisors, Ltd. Harbor House, Waterfront Drive Road Town, Tortola British Virgin Islands SOUTHRIDGE PARTNERS, LP By:__________________________________________ Name: Title: 6 EX-23.2 7 markland_sb2ex23-2.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the inclusion in this Registration Statement on Form SB-2 (the "Registration Statement")of Markland Technologies, Inc. and subsidiaries (the "Company"), of our report dated October 13, 2004, which report includes an explanatory paragraph as to an uncertainty with respect to the Company's ability to continue as a going concern, appearing in the Prospectus, which is a part of such Registration Statement. We also consent to the reference to our firm under the caption "Experts". /s/ Wolf & Company, P.C. - ----------------------------- Wolf & Company, P.C. Boston, Massachusetts November 10, 2004 EX-23.3 8 markland_sb2ex23-3.txt EXHIBIT 23.3 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the inclusion in this Registration Statement on Form SB-2 (the "Registration Statement") of Markland Technologies, Inc. and Subsidiaries, of our report dated September 15, 2003, which report includes an explanatory paragraph as to an uncertainty with respect to the Company's ability to continue as a going concern, appearing in the Prospectus, which is a part of such Registration Statement. We also consent to the reference to our firm under the caption "Experts". /s/ Marcum & Kliegman, LLP - ----------------------------- Marcum & Kliegman, LLP New York, New York November 10, 2004 -----END PRIVACY-ENHANCED MESSAGE-----