AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 2004
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MARKLAND TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
FLORIDA 84-1334434
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9995
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
54 DANBURY ROAD, #207
RIDGEFIELD, CT 06877
(203) 894-9700
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
KENNETH DUCEY, JR.
PRESIDENT AND CHIEF FINANCIAL OFFICER
54 DANBURY ROAD, #207
RIDGEFIELD, CT 06877
(203) 894-9700
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
DAVID A. BROADWIN, ESQ.
FOLEY HOAG LLP
155 SEAPORT BOULEVARD
BOSTON, MASSACHUSETTS 02210
(617) 832-1000
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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. [ ]
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CALCULATION OF REGISTRATION FEE
======================================== ===================== ================= ===================== ===============
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE (2)
======================================== ===================== ================= ===================== ===============
Common Stock, par value $.0001 per 18,127,467(3) $1.315 $23,837,619.10 $3,020.23
share
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Common Stock, par value $.0001 per 14,486,882(4)(5)(6) (7) $19,847,824.12 $2,514.72
share
======================================== ===================== ================= ===================== ===============
(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to prevent
dilution resulting from stock splits, stock dividends or similar
transactions pursuant to the terms of our common stock purchase warrants.
(2) Estimated solely for the purpose of determining our registration fee
pursuant to Rule 457(c), based on the average of the high and low sales
prices of our common stock on May 10, 2004, as reported over-the-counter
on the OTC Electronic Bulletin Board by the National Association of
Securities Dealers, Inc., of $1.41 and $1.22, respectively.
(3) Includes 150% of the 5,833,333 shares of our common stock that were sold
to certain selling stockholders pursuant to the Securities Purchase
Agreements entered into between the selling stockholders and our company
dated April 2, 2004 and April 16, 2004, to cover shares of our common
stock, if any, issuable to these selling stockholders as liquidated
damages for breach of certain covenants contained in or as a result of
adjustments contemplated by certain provisions of the respective
Securities Purchase Agreements or the related Registration Rights
Agreement.
(4) Represents shares of common stock issuable upon exercise of warrants
evidencing the right to purchase shares of common stock.
(5) Includes 110% of the 6,166,666 shares of our common stock that are
issuable to certain selling stockholders upon exercise of warrants issued
in connection with the Securities Purchase Agreements entered into
between the selling stockholders and our company dated April 2, 2004 and
April 16, 2004, to cover shares of our common stock, if any, issuable to
these selling stockholders as a result of adjustments to the warrants to
be made as liquidated damages for breach of certain covenants contained
in or as a result of adjustments contemplated by certain provisions of
the respective Securities Purchase Agreements or the related Registration
Rights Agreement.
(6) Includes 921,466 shares of our common stock that are issuable to selling
stockholders upon exercise of the warrants issued as finder's fee in
connection with the Securities Purchase Agreements entered into between
certain selling stockholders and our company dated April 2, 2004, April
16, 2004 and May 3, 2004.
(7) Estimated solely for the purpose of determining our registration fee
pursuant to Rule 457(g), based on 3,716,666 warrants with an exercise
price of $1.00 per share, 366,666 warrants with an exercise price of
$1.40 per share, 10,378,550 warrants with an exercise price $1.50 per
share, and 25,000 warrants with an exercise price of $2.00 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED
WITHOUT NOTICE. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE
SELLING STOCKHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY
STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED MAY 11, 2004
PROSPECTUS
32,614,349 SHARES OF COMMON STOCK
MARKLAND TECHNOLOGIES, INC.
----------------
This prospectus relates to the resale, from time to time, of up to
32,614,349 shares of our common stock by the stockholders referred to throughout
this prospectus as "selling stockholders." 15,210,800 shares of our common stock
offered in this prospectus are currently outstanding, 13,870,216 shares of our
common stock are issuable upon the exercise of warrants and 3,533,333 may be
issued as liquidated damages or as a result of adjustments contemplated by our
agreements with certain selling stockholders.
The selling stockholders may sell the common stock being offered by
this prospectus, from time to time (directly or through agents or dealers) on
terms to be determined at the time of sale. The prices at which the selling
stockholders may sell their shares may be determined by the prevailing market
price for the shares or in negotiated transactions.
The selling stockholders will receive all of the proceeds from the
sales made under this prospectus. Accordingly, we will receive no part of the
proceeds from sales made under this prospectus. We are paying the expenses
incurred in registering the shares, but all selling and other expenses incurred
by the selling stockholders will be borne by the selling stockholders.
----------------
Our common stock is quoted on the OTC Electronic Bulletin Board by the
National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." On
May 10, 2004, the last reported sale price of our common stock on the OTC
Electronic Bulletin Board was $1.24 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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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.
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The date of this prospectus is May 11, 2004
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................12
USE OF PROCEEDS..............................................................12
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY.............................12
SELLING STOCKHOLDERS.........................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................21
CHANGES IN ACCOUNTANTS.......................................................32
BUSINESS.....................................................................32
PROPERTY.....................................................................41
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................41
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.............................42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............45
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES................................................46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47
DESCRIPTION OF SECURITIES....................................................48
PLAN OF DISTRIBUTION.........................................................52
AVAILABLE INFORMATION........................................................54
LEGAL MATTERS................................................................54
EXPERTS......................................................................54
SIGNATURES.................................................................II-13
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this prospectus in connection with the offer
contained in this prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by us.
Neither the delivery of this prospectus nor any sale made hereunder
shall under any circumstances create an implication that there has been no
change in our affairs since the date hereof. This prospectus does not constitute
an offer to sell or a solicitation of an offer to buy securities other than
those specifically offered hereby or of any securities offered hereby in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. The information contained in this prospectus speaks only as of
the date of this prospectus unless the information specifically indicates that
another date applies.
This prospectus has been prepared based on information provided by us
and by other sources that we believe are reliable. This prospectus summarizes
certain documents and other information in a manner we believe to be accurate,
but we refer you to the actual documents, if any, for a more complete
understanding of what we discuss in this prospectus. In making a decision to
invest in the common stock, you must rely on your own examination of our company
and the terms of the offering and the common stock, including the merits and
risks involved.
We are not making any representation to you regarding the legality of
an investment in the common stock by you under any legal investment or similar
laws or regulations. You should not consider any information in this prospectus
to be legal, business, tax or other advice. You should consult your own
attorney, business advisor and tax advisor for legal, business and tax advice
regarding an investment in the common stock.
----------------
In this prospectus, "Markland," the "Company," "we," "us" and "our"
refer to Markland Technologies, Inc. and its subsidiaries, taken as a whole,
unless the context otherwise requires.
----------------
The information in this prospectus reflects our 1-for 60 reverse stock
split effective October 27, 2003.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS CERTAIN MATERIAL ASPECTS OF THE
OFFERING FOR RESALE OF COMMON STOCK BY THE SELLING STOCKHOLDERS COVERED BY THIS
PROSPECTUS BUT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION
REGARDING OUR COMPANY, OUR COMMON STOCK AND OUR FINANCIAL STATEMENTS AND NOTES
TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE "RISK
FACTORS" BEGINNING ON PAGE 5.
BUSINESS
Markland Technologies, Inc. is incorporated in Florida and is the
successor to a variety of businesses dating back to 1995. Our business, as it
exists today, consists of three business areas: chemical detectors, border
security and advanced technologies. Our primary sources of operating revenue are
sales of our automatic chemical agent detection and alarm system, border
security logistics products and services, and Small Business Investment
Research ("SBIR") funded research grants for the development of gas plasma
antenna technology.
o We have a contract with the U.S. Navy to be the sole producer
of the Navy's shipboard automatic chemical agent detection and
alarm system used to detect all classic nerve and blister
agents as well as other chemical warfare agent vapors.
o We have a contract with the Department of Homeland Security to
maintain, integrate, and implement design enhancements to
border security systems installed at five U.S. land ports of
entry.
o We have three ongoing funded SBIR government research grants
and nine issued and pending U.S. patents related to gas plasma
antenna technology.
RECENT PRIVATE PLACEMENTS
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004
The selling stockholders are offering up to 6,999,999 shares of our
common stock of which 3,333,333 are issuable upon exercise of our outstanding
three year common stock purchase warrants having an exercise price of $1.00 per
share that were sold in a private placement completed on April 2, 2004, and
333,333 shares of common stock are issuable upon exercise of similar outstanding
common stock purchase warrants having an exercise price of $1.40 issued as a
finder's fee in this private placement transaction. We agreed to register for
resale 150% of the 3,333,333 shares of our common stock in this offering and
110% of the 3,333,333 shares of our common stock that are issuable upon exercise
of the warrants sold in this private placement, to cover the shares of our
common stock, if any, issuable as liquidated damages for breach of certain
covenants contained in or as a result of adjustments contemplated by certain
provisions of the Securities Purchase Agreement dated as of April 2, 2004 or the
Registration Rights Agreement dated as of April 2, 2004. We agreed to register
110% of the 333,333 shares of our common stock that are issuable upon exercise
of the warrants issued as finder's fee in this private placement.
We received gross proceeds of $2,000,000 and net proceeds of $1,750,000
(after deducting finders' fees and transactions costs) from this private
placement.
-1-
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004
The selling stockholders are offering up to 5,025,000 shares of our
common stock of which 2,500,000 are issuable upon exercise of our outstanding
three year common stock purchase warrants having an exercise price of $1.50 per
share that were sold in a private placement transaction completed on April 16,
2004 and 25,000 shares of common stock issuable upon exercise of similar
outstanding common stock purchase warrants having an exercise price of $2.00 per
share issued as a finder's fee in this private placement transaction. We agreed
to register for resale 150% of the 2,500,000 shares of our common stock and 110%
of the 2,500,000 shares of our common stock that are issuable upon exercise of
the warrants sold in this private placement, to cover the shares of our common
stock, if any, issuable as liquidated damages for breach of certain covenants
contained in or as a result of adjustments contemplated by certain provisions of
the Securities Purchase Agreement dated as of April 16, 2004.
We received gross proceeds of $2,000,000 and net proceeds of $1,890,000
(after deducting finders' fees and transactions costs) from this private
placement.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004
The selling stockholders are offering up to 14,727,300 shares of our
common stock of which 7,098,750 are issuable upon exercise of our outstanding
three year redeemable common stock purchase warrants having an exercise price of
$1.50 per share that were sold in a private placement transaction completed on
May 3, 2004, and 529,800 are issuable upon exercise of redeemable common stock
purchase warrants issued as finders' fees in this private placement transaction.
We received gross proceeds of $5,679,000 and net proceeds of $5,133,860
(after deducting finders' fees and transactions costs) from this private
placement.
ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS
Some of our stockholders have outstanding piggy-back registration
rights. These selling stockholders are offering up to 2,328,717 shares of our
common stock consisting of:
o 637,721 shares of our common stock issued to current and
former consultants, directors and employees pursuant to
consulting and employment agreements for services rendered to
us;
o 266,334 shares of our common stock issued to ASI Technology
Corporation pursuant to a Technology Purchase Agreement dated
March 19, 2003;
o 1,074,662 shares of our common stock issued to the sole
stockholder of Science and Technology Research, Inc. pursuant
to an Agreement and Plan of Merger dated September 30, 2003;
o 300,000 shares of our common stock issued to investors in our
April 2, 2004 private placement in consideration of their
consent to the April 16, 2004 private placement; and
o 50,000 shares issuable upon exercise of a common stock
purchase warrant issued to counsel for the investors in our
April 2, 2004 private placement.
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THE OFFERING
The selling stockholders are offering up to 32,614,349 shares of our
common stock consisting of 15,210,800 shares of our common stock, 13,870,216
shares of common stock issuable upon the exercise of warrants and 3,533,333
shares of our common stock which may be issued as liquidated damages or as a
result of adjustments contemplated by our agreements with certain of the selling
stockholders of which 13,870,216 are issuable upon exercise of our outstanding
common stock purchase warrants.
ISSUER: Markland Technologies, Inc.
SECURITIES OFFERED: 32,614,349 shares of Markland's
common stock.
OTC SYMBOL: MRKL.OB
USE OF PROCEEDS: We will not receive any of the
proceeds from the sale by any
selling stockholder of the
common stock.
OFFERING PRICE: To be determined by the
prevailing market price for the
shares at the time of the sale
or in negotiated transactions.
RISK FACTORS: You should read the "Risk
Factors" section beginning
on page 4 (along with other
matters referred to and
incorporated by reference in
this prospectus) to ensure that
you understand the risks
associated with an investment in
our common stock.
TERMS OF THE SALE: To be determined at the time of
the sale.
TOTAL SHARES OF OUR COMMON STOCK
OUTSTANDING AS OF MAY 10, 2004: 27,074,899
SUMMARY FINANCIAL INFORMATION
The following table provides selected financial and operating data for
the years ended June 30, 2003 and June 30, 2002 and the six months ended
December 31, 2003 and December 31, 2002.
SIX MONTHS ENDED
DECEMBER 31,
YEAR ENDED JUNE 30, (UNAUDITED)
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $658,651 -- $3,563,495 --
Gross Profit (Loss) 213,433 -- 1,233,914 --
Profit (Loss) from Continuing Operations (3,835,594) (247,677) (1,591,417) (171,552)
Net profit (Loss) (2,836,881) (2,460,965) (1,739,145) (315,685)
Current Assets 342,604 26,661 2,034,921 304,361
Current Liabilities 1,577,910 6,932,525 2,824,916 1,473,169
Total Assets 2,040,936 -- 10,883,501 1,604,631
Long Term Debt 416,666 -- 1,197,769 375,000
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Our executive officers are located at 54 Danbury Road, #207,
Ridgefield, CT 06877 and our phone number is (203) 894-9700.
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-3-
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING
AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE ADVERSELY AFFECTED. IN
THOSE CASES, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE IS NO ASSURANCE THAT WE WILL
ACHIEVE PROFITABILITY IN THE FUTURE.
We have a history of operating losses. We cannot predict when, or if,
we will ever achieve profitability. Our current business operations began in
2002 and have resulted in losses in each fiscal year. As of December 31, 2003,
we had an accumulated deficit of approximately $11,511,880. If we continue to
experience operating losses, an investment in our common stock is at risk of
being lost.
WE HAVE A GOING-CONCERN QUALIFICATION IN THE REPORT BY OUR INDEPENDENT AUDITORS
FOR OUR FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2003, WHICH MAY MAKE
CAPITAL RAISING MORE DIFFICULT AND MAY REQUIRE US TO SCALE BACK OR CEASE
OPERATIONS, PUTTING AN INVESTORS FUNDS AT RISK.
The report of our independent auditors dated September 15, 2003
includes a going concern qualification, which indicates an absence of obvious or
reasonably assured sources of future funding that will be required by us to
maintain ongoing operations. If we are unable to obtain additional funding, we
may not be able to continue operations. Since January 1, 2004, we have raised a
total of $12,336,000 in new capital. There is no guarantee that we will be able
to attract additional equity and/or debt investors. To date, we have funded our
operations through equity investments and issuances of debt. Additionally, we
have an accumulated deficit of approximately $11,511,880 as of December 31,
2003. This deficit indicates that we may be unable to meet our future
obligations unless additional funding sources are obtained.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO FUND OUR OPERATIONS
AND FINANCE OUR GROWTH.
The development of our technologies will require additional capital,
and our business plan is to acquire additional revenue producing assets. We may
be unable to obtain additional funds in a timely manner or on acceptable terms,
which would render us unable to fund our operations or expand our business. If
we are unable to obtain capital when needed, we may have to restructure our
business or delay or abandon our development and expansion plans. Although we
have been successful in the past in obtaining financing for working capital and
capital expenditures, we will have ongoing capital needs as we expand our
business. If we raise additional funds through the sale of equity or convertible
securities, your ownership percentage of our common stock will be reduced. In
addition, these transactions may dilute the value of our common stock. We may
have to issue securities that have rights, preferences and privileges senior to
our common stock. The terms of any additional indebtedness may include
restrictive financial and operating covenants that would limit our ability to
compete and expand.
-4-
OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF
CUSTOMERS SUCH THAT THE LOSS OF ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY
REDUCE OUR REVENUES.
During the six months ended December 31, 2003, we derived more than 90%
of our revenues from two customers. We have a contract with the U.S. Navy that
may provide for revenues of up to approximately $37,000,000 depending upon the
U.S. Navy's needs of which STR, our subsidiary, recognized approximately
$12,000,000 in revenues for the three year period ended December 31, 2003 and a
subcontract agreement with Computer Science Corporation may provide for revenues
of up to approximately $2,000,000 of which STR has generated approximately
$1,2000,000 in revenues. The loss of any one of these customers due to cutbacks,
competition, or other reasons would materially reduce our revenue base. Annual
or quarterly losses would occur if there are material gaps or delays in orders
from one of our largest customers and not replaced by other orders or other
sources of income.
MANY OF OUR TECHNOLOGIES ARE UNPROVEN AND THEIR SUCCESS IN THE MARKETPLACE IS
UNKNOWN.
Our Gas plasma antenna, Vehicle stopping system, Acoustic Core(TM)
signature analysis, APTIS(TM) human screening portal, and cryptography software
have not reached commercial viability. There is no guarantee that these products
will be successful in the marketplace. Although we currently sell automatic
chemical detection and alarm systems, we do not know for how long the U.S. Navy
will continue to buy this product, nor do we know if we will be able to sell
this product or others like it to other customers. If we do not successfully
exploit our technology, our financial condition, results of operations and
business prospects would be adversely affected. The development of our
technology is subject to certain factors beyond our control, including the
production of certain components by our suppliers. Commercially viable plasma
antenna technology systems may not be successfully and timely produced by our
OEMs due to the inherent risk of technology development, new product
introduction, limitations on financing, competition, obsolescence, loss of key
technical personnel and other factors. The development and introduction of our
technologies could be subject to additional delays. Our various projects are
high risk in nature, and unanticipated technical obstacles can arise at any time
and result in lengthy and costly delays or result in a determination that
further exploitation is unfeasible.
THE HOMELAND SECURITY INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS, AND UNLESS WE KEEP PACE WITH THE CHANGING
TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND FAIL TO WIN NEW CUSTOMERS.
Our future success will depend, in part, upon our ability to develop
and introduce a variety of new products and services and enhancements to these
new product and services in order to address the changing and sophisticated
needs of the homeland security marketplace. Delays in introducing new products,
services and enhancements, the failure to choose correctly among technical
alternatives or the failure to offer innovative products and services at
competitive prices may cause customers to forego purchases of our products and
services and purchase those of our competitors. Frequently, technical
development programs in the homeland security industry require assessments to be
made of the future directions of technology and technology markets generally,
which are inherently risky and difficult to predict.
WE FACE INTENSE COMPETITION, WHICH COULD RESULT IN LOWER REVENUES AND HIGHER
RESEARCH AND DEVELOPMENT EXPENDITURES AND COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Current political tensions throughout the world have heightened
interest in the homeland security industry, and we expect competition in this
field, which is already substantial, to intensify. If we do not develop new and
enhanced products or if we are not able to invest adequately in our research and
development activities, our business, financial condition and results of
operations could be negatively impacted. Many of our competitors have
-5-
significantly more cash and resources than we have. Our competitors may
introduce products that are competitively priced, have increased performance or
functionality or incorporate technological advances that we have not yet
developed or implemented. To remain competitive, we must continue to develop,
market and sell new and enhanced systems and products at competitive prices,
which will require significant research and development expenditures.
SOME OF OUR COMPETITORS ARE MUCH LARGER THAN WE ARE, HAVE BETTER NAME
RECOGNITION THAN WE DO AND HAVE FAR GREATER FINANCIAL AND OTHER RESOURCES THAN
WE DO.
With the U.S. government's large appropriation of money for homeland
security programs, many companies are competing for the same homeland security
contracts and there can be no assurance that Markland will effectively compete
with large companies who have more resources and funds than we do. Several
companies have been working on issues relevant to the safety of the American
people for the past several years. Lockheed Martin and Northrop Grumman are
providers of hardware engineering and systems engineering solutions. Computer
Science Corp. and EDS provided computer and computer software solutions. Defense
companies, such as General Dynamics, Boeing and Raytheon are solutions providers
that could easily expand their business into the homeland security business and
are currently allocating resources to develop programs in this area. Because of
the services and additional human and financial resources that these larger
companies can provide, they may be more attractive to the U.S. Government.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER.
Recently, we have expanded our operations to pursue existing and
potential new market opportunities. This growth has placed, and is expected to
continue to place, a strain on our personnel, management, financial and other
resources. To manage our growth effectively, we must, among other things:
o upgrade and expand our manufacturing facilities and capacity
in a timely manner;
o successfully attract, train, motivate and manage a larger
number of employees for manufacturing, sales and customer
support activities;
o control higher inventory and working capital requirements; and
o improve the efficiencies within our operating, administrative,
financial and accounting systems, procedures and controls.
If we fail to manage our growth properly, we may incur unnecessary
expenses and the efficiency of our operations may decline.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO EXPAND OUR
OPERATIONS.
To meet our growth objectives, we must attract and retain highly
skilled technical, operational, managerial and sales and marketing personnel. If
we fail to attract, and retain, the necessary personnel, we may be unable to
achieve our business objectives and may lose our competitive position, which
could lead to a significant decline in net sales. We face significant
competition for these skilled professionals from other companies, research and
academic institutions, government entities and other organizations.
-6-
OUR SUCCESS DEPENDS ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES.
Our future success depends to a significant degree on the skills and
efforts of Robert Tarini, our chief executive officer. If we lost the services
of Mr. Tarini, our business and operating results could be adversely affected.
We also depend on the ability of our other executive officers and members of
senior management to work effectively as a team. The loss of one or more of our
executive officers or senior management members could impair our ability to
manage our business effectively.
OUR LARGEST CUSTOMERS ARE THE U.S. NAVY, COMPUTER SCIENCES CORPORATION AND THE
DEPARTMENT OF HOMELAND SECURITY WHOSE OPERATIONS ARE SUBJECT TO UNIQUE POLITICAL
AND BUDGETARY CONSTRAINTS, INVOLVE COMPETITIVE BIDDING, AND OUR CONTACTS WITH
THESE CUSTOMERS MAY BE SUBJECT TO CANCELLATION WITH OR WITHOUT PENALTY WHICH MAY
PRODUCE VOLATILITY IN OUR EARNINGS AND REVENUE.
Our largest customers are the U.S. Navy and Computer Sciences
Corporation with whom we have entered into a subcontracting agreement for the
Department of Homeland Security. Due to political and budgetary processes and
other scheduling delays that may frequently occur relating to the contract or
bidding process, some government agency orders may be canceled or delayed, and
the receipt of revenues or payments may be substantially delayed. This irregular
and unpredictable revenue stream makes it difficult for our business to operate
smoothly. Obtaining contracts from government agencies is challenging, and
government contracts often include provisions that are not standard in private
commercial transactions. For example, government contracts may:
o include provisions that allow the government agency to
terminate the contract without penalty under some
circumstances;
o be subject to purchasing decisions of agencies that are
subject to political influence;
o contain onerous procurement procedures; and
o be subject to cancellation if government funding becomes
unavailable.
In addition, federal government agencies routinely audit government
contracts. These agencies review a contractor's performance on its contract,
pricing practices, cost structure and compliance with applicable laws,
regulations and standards. These audits may occur several years after completion
of the audited work. An audit could result in a substantial adjustment to our
revenues because any costs found to be improperly allocated to a specific
contract will not be reimbursed, with improper costs already reimbursed must be
refunded. If a government audit uncovers improper or illegal activities, we may
be subject to civil and criminal penalties and administrative sanctions,
including termination of contracts forfeiture of profits, suspension of
payments, fines and suspension or debarment from doing business with federal
government agencies. In addition, our reputation could be harmed if allegations
of impropriety were made against us.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR PROPRIETARY TECHNOLOGY.
Our ability to compete depends significantly upon our patents, our
trade secrets, our source code and our other proprietary technology. The steps
we have taken to protect our technology may be inadequate to prevent others from
using what we regard as our technology to compete with us. Our patents could be
challenged, invalidated or circumvented, in which case the rights we have under
our patents could provide no competitive advantages. Existing trade secrets,
copyright and trademark laws offer only limited protection. In addition, the
laws of some foreign countries do not protect our proprietary technology to the
same extent as the laws of the United States, which could increase the
-7-
likelihood of misappropriation. Furthermore, other companies could independently
develop similar or superior technology without violating our intellectual
property rights. Any misappropriation of our technology or the development of
competing technology could seriously harm our competitive position, which could
lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome, disruptive and expensive, distract
the attention of management, and there can be no assurance that we would
prevail.
CLAIMS BY OTHERS THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS COULD HARM
OUR BUSINESS AND FINANCIAL CONDITION.
Our industries are characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. We cannot be certain that our products do not and
will not infringe issued patents, patents that may be issued in the future, or
other intellectual property rights of others.
We do not conduct exhaustive patent searches to determine whether the
technology used in our products infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.
We may face claims by third parties that our products or technology
infringe their patents or other intellectual property rights. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract the attention of our
management. If any of our products are found to violate third-party proprietary
rights, we may be required to pay substantial damages. In addition, we may be
required to re-engineer our products or obtain licenses from third parties to
continue to offer our products. Any efforts to re-engineer our products or
obtain licenses on commercially reasonable terms may not be successful, which
would prevent us from selling our products, and, in any case, could
substantially increase our costs and have a material adverse effect on our
business, financial condition and results of operations.
WE RELY ON THIRD PARTIES TO DEVELOP AND PROVIDE KEY COMPONENTS FOR OUR GAS
PLASMA ANTENNAE, CRYPTOGRAPHY SOFTWARE, ACOUSTIC CORE(TM) AND APTIS(TM) HUMAN
SCREENING PORTAL PRODUCTS.
We rely on third party suppliers to supply key components that we will
use in our gas plasma antennae, Acoustic Core(TM) and APTIS(TM) human screening
portal products. If those suppliers fail to develop and supply these components
in a timely manner or at all, or fail to develop or supply components that meet
our quality, quantity or cost requirements, and we are unable to obtain
substitute sources of these components on a timely basis or on terms acceptable
to us, we may not be able to manufacture our products. In addition, to the
extent that our supply partners use technology or manufacturing processes that
are proprietary, we may be unable to obtain comparable components from
alternative sources.
NEW CORPORATE GOVERNANCE REQUIREMENTS ARE LIKELY TO INCREASE OUR COSTS AND MAKE
IT MORE DIFFICULT TO ATTRACT QUALIFIED DIRECTORS.
We face new corporate governance requirements under the Sarbanes-Oxley
Act of 2002, as well as rules adopted by the SEC. We expect that these laws,
rules and regulations will increase our legal and financial compliance costs and
make some activities more difficult, time consuming and costly. We also expect
that these new requirements will make it more difficult and more expensive for
-8-
us to obtain director and officer liability insurance. We may be required to
accept reduced coverage or incur significantly higher costs to obtain coverage.
These new requirements are also likely to make it more difficult for us to
attract and retain qualified individuals to serve as members of our board of
directors or committees of the board, particularly the audit committee.
FUTURE ACQUISITIONS OF OTHER COMPANIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS
AND ADDITIONAL EXPENSES.
We have completed the acquisitions of several companies and we plan to
review potential acquisition candidates, and our business and our strategy may
include building our business through acquisitions. However, acceptable
acquisition candidates may not be available in the future or may not be
available on terms and conditions acceptable to us.
Acquisitions involve numerous risks, including among others,
difficulties and expenses incurred in the consummation of acquisitions and
assimilations of the operations, personnel and services and products of the
acquired companies. Additional risks associated with acquisitions include the
difficulties of operating new businesses, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired company. If we do not successfully integrate the businesses we
may acquire in the future, our business will suffer.
WE FACE RISKS ASSOCIATED WITH OUR PLANS TO MARKET, DISTRIBUTE AND SERVICE OUR
PRODUCTS INTERNATIONALLY.
We intend to market, distribute and service our products
internationally subject to applicable U.S. Governmental approval and regulation
on sales of sensitive U.S. technology. Our success in international markets will
depend, in part, on our ability to secure relationships with foreign
sub-distributors and] on our ability to meet foreign regulatory and commercial
requirements.
In March 2004 Markland signed an agreement with Tradeways, Ltd.
Tradeways, founded in 1974, is the principal worldwide exporter of U.S. Military
Special Nuclear, Biological and Chemical (NBC) Equipment, and has fulfilled
contracts for NBC products in more than 30 countries. Tradeways provides a
complete range of NBC products, as well as training and service. The process of
selling to foreign militaries is lengthy, and Markland cannot give any
assurances that it will be successful. If Tradeways is unsuccessful in selling
Markland's products, it would greatly decrease Markland's success with foreign
military sales. To date, we have not sold any products through this channel.
RISKS RELATED TO OUR COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
Our stock price has been volatile. From March 31, 2003 to May 10, 2004,
the trading price of our common stock ranged from $0.69 to $18.60. Many factors
may cause the market price of our common stock to fluctuate, including:
o variations in our quarterly results of operations;
o the introduction of new products by us or our competitors;
o acquisitions or strategic alliances involving us or our
competitors;
o future sales of shares of common stock in the public market;
and
-9-
o market conditions in our industries and the economy as a
whole.
In addition, the stock market has recently experienced extreme price
and volume fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. When the market price of
a company's stock drops significantly, stockholders often institute securities
class action litigation against that company. Any litigation against us could
cause us to incur substantial costs, divert the time and attention of our
management and other resources or otherwise harm our business.
IF WE ISSUE SUBSTANTIAL SHARES OF OUR COMMON STOCK PURSUANT TO OUR PRIVATE
EQUITY CREDIT AGREEMENT, UPON CONVERSION OF 19,286 SHARES OF THE OUTSTANDING
SERIES D CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUR COMMON STOCK PURCHASE
WARRANTS, YOU COULD SUFFER SUBSTANTIAL DILUTION OF YOUR INVESTMENT AND OUR STOCK
PRICE COULD DECLINE SIGNIFICANTLY.
We have entered into a private equity credit agreement with Brittany
Capital Management Limited, an offshore investment fund, on September 10, 2003
whereby we can force Brittany Capital to purchase up to $10 million of our
common stock; provided that we have an effective registration statement on file
with the SEC covering these shares. While we have not filed a registration
statement with the SEC to cover these shares of common stock, we intend to file
one in the future. In addition, we are obligated to issue a substantial number
of shares of common stock upon the conversion of our Series D convertible
preferred stock and common stock purchase warrants.
Should a significant number of these securities be issued, exercised or
converted, the resulting increase in the amount of the common stock in the
public market could have a substantial dilutive effect on our outstanding common
stock. The conversion and exercise of all of the aforementioned securities or
the issuance of new shares of common stock may also adversely affect the terms
under which we could obtain additional equity capital. The price, which we may
receive for the shares of common stock, that are issuable upon conversion or
exercise of such securities, may be less than the market price of the common
stock at the time of such conversions or exercise.
FLUCTUATIONS IN OUR QUARTERLY NET SALES AND RESULTS OF OPERATIONS COULD DEPRESS
THE MARKET PRICE OF OUR COMMON STOCK.
Our future net sales and results of operations are likely to vary
significantly from quarter to quarter due to a number of factors, many of which
are outside our control. Accordingly, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of future performance.
It is possible that our net sales or results of operations in a quarter will
fall below the expectations of securities analysts or investors. If this occurs,
the market price of our common stock could fall significantly. Our results of
operations in any quarter can fluctuate for many reasons, including:
o Timing of orders from our largest customers, the U.S. Navy and
Computer Sciences Corporation;
o our ability to manufacture, test and deliver products in a
timely and cost-effective manner;
o our success in winning competitions for orders;
o the timing of new product introductions by us or our
competitors;
o the mix of products we sell;
-10-
o competitive pricing pressures; and
o general economic climate.
A large portion of our expenses, including expenses for facilities,
equipment, and personnel, are relatively fixed. Accordingly, if our net sales
decline or do not grow as much as we anticipate, we might be unable to maintain
or improve our operating margins. Any failure to achieve anticipated net sales
could therefore significantly harm our operating results for a particular fiscal
period.
THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS AND PRIVILEGES THAT ARE
SENIOR TO OUR COMMON STOCKHOLDERS AND WE MAY ISSUE ADDITIONAL SHARES OF
PREFERRED STOCK WITHOUT STOCKHOLDER APPROVAL THAT COULD ADVERSELY AFFECT THE
PRICE OF OUR COMMON STOCK.
Our board of directors has the authority to issue a total of up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges, and restrictions, including voting rights, of the preferred stock,
which typically are senior to the rights of the common stockholders, without any
further vote or action by you and the other common stockholders. We have issued
and outstanding approximately 30,000 shares of our Series A Non-Voting
Redeemable Convertible Preferred Stock, approximately 20,000 shares of our
Series D Convertible Preferred Stock, and, may from time to time in the future,
issue additional preferred stock for financing or other purposes with rights,
preferences, or privileges senior to the common stock. Your rights will be
subject to, and may be adversely affected by, the rights of the holders of the
preferred stock that have been issued, or might be issued in the future.
Preferred stock also could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. This could
delay, defer, or prevent a change in control. Furthermore, holders of preferred
stock may have other rights, including economic rights, senior to the holders of
our common stock. As a result, their existence and issuance could have a
material adverse effect on the market value of the common stock.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THE EXERCISE OF OUR
COMMON STOCK PURCHASE WARRANTS.
We intend to use the proceeds, if any, from the exercise of our common
stock purchase warrants, $19,092,824 assuming all warrants are exercised in
their entirety, for general corporate purposes, including capital expenditures,
working capital and possible acquisitions. Accordingly, we will have broad
discretion in using these proceeds. You will not have the opportunity to
evaluate the economic, financial or other information that we will consider in
determining how to use the proceeds. We may use the proceeds for purposes that
do not result in any increase in our market value or any improvement in our
results of operations.
WE HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK, AND WE DO NOT ANTICIPATE
PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid dividends on any of our classes of capital stock to
date, and we currently intend to retain our future earnings, if any, to fund the
development and growth of our business. As a result, capital appreciation, if
any, of our common stock will be your sole source of gain for the foreseeable
future. In addition, the terms of our Exchange Agreement with Eurotech, Ltd.
prohibit us from declaring dividends.
-11-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical facts, the statements in this prospectus are
forward-looking statements. Forward-looking statements are merely our current
predictions of future events. These statements are inherently uncertain, and
actual events could differ materially from our predictions. Important factors
that could cause actual events to vary from our predictions include those
discussed under the headings "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." We
assume no obligation to update our forward-looking statements to reflect new
information or developments. We urge readers to review carefully the risk
factors described in this prospectus and the other documents that we file with
the Securities and Exchange Commission. You can read these documents at
WWW.SEC.GOV.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR
ANY OTHER REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS
PROSPECTUS OR THE DATE OF ANY APPLICABLE PROSPECTUS SUPPLEMENT OR THE DATE OF
DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS THAT INCLUDE
FORWARD-LOOKING STATEMENTS.
USE OF PROCEEDS
The shares of common stock offered by this prospectus are being offered
by the selling stockholders. We will not receive any proceeds from the sale of
shares by the selling stockholders. For information about the selling
stockholders, see "Selling Stockholders."
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY
MARKET INFORMATION
Our common stock is quoted on the OTC Electronic Bulletin Board by The
National Association of Securities Dealers, Inc. under the symbol "MRKL.OB." The
following table provides, for the periods indicated, the high and low bid prices
for our common stock as reported by Bloomberg Financial Services. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions. The
prices reflect a 1-for-60 reverse stock split effective October 27, 2003. Prior
to December 2003, the common stock of the Company was thinly traded. We believe
that the variability of the share price may, in part, be due to thin trading.
- ------------------------------------ --------------------- ---------------------
YEAR ENDED JUNE 30, 2002 HIGH LOW
- ------------------------------------ --------------------- ---------------------
First quarter $24.00 $3.60
- ------------------------------------ --------------------- ---------------------
Second quarter 28.80 3.00
- ------------------------------------ --------------------- ---------------------
Third quarter 4.80 1.80
- ------------------------------------ --------------------- ---------------------
Fourth quarter 4.80 1.20
- ------------------------------------ --------------------- ---------------------
YEAR ENDED JUNE 30, 2003
- ------------------------------------ --------------------- ---------------------
First quarter 1.20 1.20
- ------------------------------------ --------------------- ---------------------
Second quarter 24.00 0.60
- ------------------------------------ --------------------- ---------------------
Third quarter 18.60 9.60
- ------------------------------------ --------------------- ---------------------
Fourth quarter 13.80 3.60
- ------------------------------------ --------------------- ---------------------
YEAR ENDED JUNE 30, 2004
- ------------------------------------ --------------------- ---------------------
First quarter 9.00 2.40
- ------------------------------------ --------------------- ---------------------
Second quarter 5.40 1.90
- ------------------------------------ --------------------- ---------------------
Third quarter 2.70 0.69
- --------------------------------------------------------------------------------
-12-
On May 10, 2004, the last sale price of our common stock as reported on
the OTC Electronic Bulletin Board was $1.24 per share. On that date, we had
approximately, 27,074,899 holders of record of our common stock. This number
does not include stockholders for whom shares were held in a "nominee" or
"street" name.
We have never declared or paid cash dividends on our capital stock, and
we do not plan to pay any cash dividends in the foreseeable future. We currently
intend to retain any future earnings to finance our operations and future
growth. In addition, the terms of our Exchange Agreement with Eurotech, Ltd.
prohibit us from declaring dividends.
SELLING STOCKHOLDERS
Up to 32,614,349 shares are being offered by this prospectus, all of
which are being registered for sale for the account of the selling stockholders.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004
The investors in a private placement transaction completed on April
2, 2004, each a selling stockholder, are offering up to 6,999,999 shares of our
common stock acquired in this private placement, consisting of:
o 3,333,333 shares of our common stock
o 3,333,333 shares of our common stock to be obtained by
exercising common stock purchase warrants with an exercise
price of $1.00 per share; and
o 333,333 shares of our common stock to be obtained by
exercising common stock purchase warrants with an exercise
price of $1.40 per share that were issued as finder's
compensation.
We agreed to register for resale 150% of the 3,333,333 shares of our
common stock and 110% of the 3,333,333 shares of our common stock that are
issuable upon exercise of the warrants sold in the April 2, 2004 private
placement, to cover the shares of our common stock, if any, issuable as
liquidated damages for breach of certain covenants contained in or as a result
of adjustments contemplated by certain provisions of the Securities Purchase
Agreement dated as of April 2, 2004 or the Registration Rights Agreement dated
as of April 2, 2004. We also agreed to register 110% of the 333,333 shares of
our common stock that are issuable upon exercise of the warrants issued as
finder's fee in this private placement.
We received gross proceeds of $2,000,000 and net proceeds of $1,750,000
(after deducting finders' fees and transaction costs) from this private
placement.
-13-
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004
The investors in a private placement transaction completed on April
16, 2004, each a selling stockholder, are offering up to 5,025,000 shares of our
common stock acquired in this private placement, consisting of:
o 2,500,000 shares of our common stock;
o 2,500,000 shares of our common stock to be obtained by
exercising common stock purchase warrants with an exercise
price of $1.50 per share; and
o 25,000 shares of our common stock to be obtained by exercising
common stock purchase warrants with an exercise price of $2.00
per share that were issued as finder's compensation.
We agreed to register for resale 150% of the 2,500,000 shares of our
common stock and 110% of the 2,500,000 shares of our common stock that are
issuable to certain stockholders upon exercise of the warrants, to cover the
shares of our common stock, if any, issuable as liquidated damages for breach of
certain covenants contained in or as a result of adjustments contemplated by
certain provisions of the Securities Purchase Agreement dated as of April 16,
2004.
We received gross proceeds of $2,000,000 and net proceeds of $1,890,000
(after deducting finders' fees and transaction costs) from this private
placement.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004
The investors in the private placement transaction completed on May 3,
2004, each a selling stockholder, are offering up to 14,727,300 shares of our
common stock acquired in this private placement, consisting of:
o 7,098,750 shares of our common stock;
o 7,098,750 shares of our common stock to be obtained by
exercising redeemable common stock purchase warrants with an
exercise price of $1.50 per share; and
o 529,800 shares of our common stock to be obtained by
exercising redeemable common stock purchase warrants with an
exercise price of $1.50 per share that were issued as finder's
compensation.
We received gross proceeds of $5,679,000 and net proceeds of $5,133,860
(after deducting finders' fees and transaction costs) from this private
placement.
-14-
REGISTRATION RIGHTS
We entered into agreements with investors in private placements
completed on April 2, 2004, April 16, 2004 and May 3, 2004. Pursuant to these
agreements, we agreed to file with the SEC a registration statement covering the
resale of all our common stock covered by this prospectus pursuant to Rule 415
of the Securities Act.
We are required to register for resale 150% of the common stock that we
issued in the private placement transactions completed on April 2, 2004 and
April 16, 2004, and 110% of the common stock issuable upon exercise of the
common stock purchase warrants issued in connection with these two private
placement transactions, to cover the shares of our common stock, if any,
issuable to certain selling stockholders as liquidated damages for breach of
certain covenants contained in or as a result of adjustments contemplated by
certain provisions of the Securities Purchase Agreement dated as of April 2,
2004 and April 16, 2004 or the related Registration Rights Agreement. We will be
required to amend this registration statement or file an additional registration
statement, of which this prospectus is a part, at any time if the remaining
number of shares of common stock or the common stock issuable upon exercise of
the common stock purchase warrants exceeds 90% of the number of shares of common
stock registered by this registration statement, of which this prospectus is a
part.
Accordingly, we filed a Registration Statement on Form SB-2, of which
this prospectus forms a part, on May 11, 2004, with respect to the resale of
these shares from time to time. In addition, we agreed to use our commercially
reasonable efforts to cause the registration statement to be declared effective
under the Securities Act as promptly as possible thereafter, and to keep the
registration statement effective for two years following its effective date,
unless the shares of our Common Stock covered by this prospectus have been sold
or may be sold pursuant to Rule 144(k) of the Securities Act, subject to certain
restrictions.
Under the Registration Rights Agreements entered into on April 2, 2004
and April 16, 2004, we will be obligated to pay liquidated damages to the
holders of our common stock who are parties to those agreements, if this
registration statement is not filed by forty five (45) days after the close of
the private placement, and if it is not declared effective by the earlier of
five (5) trading days after oral or written notice by the SEC that it may be
declared effective or ninety days after the close of the private placement. The
amount that we must pay will be calculated as follow:(A) 2% of the purchase
price paid by each holder in the January 2004 private placement during the first
three 30-day periods (or part), and (B) 3% of the principal amount of all that
purchase price for each subsequent 30-day period (or part).
ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS
The selling stockholders with piggy-back registration rights are
offering up to 2,328,717 shares of our common stock being registered for resale
by this registration statement, of which this prospectus is part, consisting of:
o 637,721 shares of our common stock obtained by current and
former consultants, directors and employees pursuant to
consulting and employment agreements for services rendered to
us;
o 266,334 shares of our common stock obtained by ASI Technology
Corporation pursuant to a Technology Purchase Agreement dated
March 19, 2003;
o 1,074,662 shares of our common stock obtained by the sole
stockholder of Science and Technology Research, Inc. pursuant
to an Agreement and Plan of Merger dated September 30, 2003;
o 300,000 shares of our common stock issued to investors in our
April 2, 2004 private placement in consideration of their
consent to the April 16, 2004 private placement; and
o 50,000 shares of our common stock issuable upon exercise of a
common stock purchase warrant issued to counsel for the
investors in our April 2, 2004 private placement.
-15-
SELLING STOCKHOLDERS TABLE
Based on the information supplied to us by each selling stockholder,
the following table sets forth the approximate number of shares beneficially
owned as of May 10, 2004, by each of the selling stockholders and their
pledgees, assignees and successors in interest. The "Right to Acquire" column
reflects beneficial ownership of shares subject to warrants and convertible
preferred stock that may be exercised and converted within 60 days after May 11,
2004. The "Shares Offered" column reflects all of the shares that each selling
stockholder may offer under this prospectus. Percentage ownership is based on
27,074,899 shares issued and outstanding as of May 10, 2004. The table assumes
that the selling stockholders sell all of the shares.
We prepared this based on information supplied to us by the selling
stockholders. Although we have assumed for purposes of the table below that the
selling stockholders will sell all of the shares offered by this prospectus,
because the selling stockholders may offer from time to time all or some of
their shares covered under this prospectus, or in another permitted manner, no
assurances can be given as to the actual number of shares that will be resold by
the selling stockholders or that will be held by the selling stockholders after
completion of the resales.
The terms of the common stock purchase warrants provide that the number
of shares to be obtained by each of the holders of the warrants, upon exercise
of our common stock purchase warrants cannot exceed the number of shares that,
when combined with all other shares of common stock and securities then owned by
each of them, would result in any one of them owning more than 4.99% (or, in
some cases, 9.99%) of our outstanding common stock at any given point in time.
In addition, the selling stockholders may have sold, transferred or
otherwise disposed of the warrants issued in the private placements completed on
April 2, 2004, April 6, 2004 and May 3, 2004 in transactions exempt from the
registration requirements of the Securities Act since the date the selling
stockholders provided the information regarding their securities holdings.
Information concerning the selling stockholders may change from time to
time and changed information will be presented in a supplement to this
prospectus if and when necessary and required. Except as described above, there
are currently no agreements, arrangements or understandings with respect to the
resale of any of the shares covered by this prospectus.
The applicable percentages of ownership are based on an aggregate of
27,074,899 shares of our common stock issued and outstanding on May 10, 2004.
The number of shares beneficially owned by the selling stockholders is
determined under rules promulgated by the SEC.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------------- --------------------------------
RIGHT TO RIGHT TO
NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT
- ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- -------
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004
Elite Properties Ltd. ................... 1,183,333 1,083,333 2,266,666 2,266,666(1)(9) 0 0 *
Montana View Corporation ................ 1,350,000 1,250,000 2,600,000 2,600,000(1)(9) 0 0 *
Sparrow Ventures, Inc. .................. 1,100,000 1,000,000 2,100,000 2,100,000(1)(9) 0 0 *
West Hastings Ltd. ...................... 0 333,333 333,333 333,333(1)(2) 0 0 *
-16-
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------------- --------------------------------
RIGHT TO RIGHT TO
NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT
- ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- -------
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004
Caslterigg Master Investments, Ltd.. .... 1,000,000 1,000,000 2,000,000 2,000,000(1) 0 0 *
Spectra Capital Management, LLC ......... 500,000 500,000 1,000,000 1,000,000(1) 0 0 *
AS Capital Partners, LLC ................ 250,000 250,000 500,000 500,000(1) 0 0 *
Vestcap International Management, Ltd. .. 250,000 250,000 500,000 500,000(1) 0 0 *
OTAPE Investments, LLC .................. 125,000 125,000 250,000 250,000(1) 0 0 *
Basso Holding, Ltd. ..................... 83,334 83,334 166,668 166,668(1) 0 0 *
Basso Eq Op Hld Fund, Ltd. .............. 83,333 83,333 166,666 166,666(1) 0 0 *
Basso Multi Strategy Hldg Fund, Ltd. .... 83,333 83,333 166,666 166,666(1) 0 0 *
Fredrick Berdon & Co. L.P. .............. 62,500 62,500 125,000 125,000(1) 0 0 *
SRG Capital, LLC ........................ 62,500 62,500 125,000 125,000(1) 0 0 *
Baker Consulting......................... 0 25,000 25,000 25,000(1)(2) 0 0 *
PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004
Gamma Opportunity Capital Partners, LP... 625,000 625,000 1,250,000 1,250,000 0 0 *
Alpha Capital AG......................... 625,000 625,000 1,250,000 1,250,000 0 0 *
Stonestreet LP........................... 562,500 562,500 1,125,000 1,125,000 0 0 *
Bristol Investment Fund, Ltd. ........... 500,000 500,000 1,000,000 1,000,000 0 0 *
IAB Island Ventures SA................... 375,000 375,000 750,000 750,000 0 0 *
Ellis International Limited, Inc. ....... 312,500 312,500 625,000 625,000 0 0 *
Winton Capital Holdings, Ltd. ........... 312,500 312,500 625,000 625,000 0 0 *
Rock II, LLC............................. 300,000 300,000 600,000 600,000 0 0 *
Professional Traders Fund, LLC........... 250,000 250,000 500,000 500,000 0 0 *
Platinum Long Term Growth................ 250,000 250,000 500,000 500,000 0 0 *
DKR Sound Shore Oasis Holding Fund, Ltd.. 375,000 375,000 750,000 750,000 0 0 *
Congregation Miskan Sholom............... 250,000 250,000 500,000 500,000 0 0 *
Jay Goldman Master Limited Partners...... 200,000 200,000 400,000 400,000 0 0 *
SRG Capital, LLC......................... 187,500 187,500 375,000 375,000 0 0 *
Greenwich Growth Fund Limited............ 187,500 187,500 375,000 375,000 0 0 *
David A. Lyons........................... 156,250 156,250 312,500 312,500 0 0 *
Whalehaven Fund Limited.................. 156,250 156,250 312,500 312,500 0 0 *
South Ferry L.P. #2...................... 125,000 125,000 250,000 250,000 0 0 *
Blair Capital Corporation................ 125,000 125,000 250,000 250,000 0 0 *
-17-
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------------- --------------------------------
RIGHT TO RIGHT TO
NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT
- ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- -------
Michael Hamblet.......................... 100,000 127,411 227,411 227,411 0 0 *
MEA Group, LLC........................... 62,500 62,500 125,000 125,000 0 0 *
Iron Grid, Ltd. ......................... 46,875 46,875 93,750 93,750 0 0 *
Gordon Gregoretti........................ 37,500 37,500 75,000 75,000 0 0 *
Gerard Caviston.......................... 30,000 30,000 60,000 60,000 0 0 *
Quentin Olwell........................... 15,625 15,625 31,250 31,250 0 0 *
Michael Gleason.......................... 15,625 15,625 31,250 31,250 0 0 *
Wolfe, L.P. ............................. 15,625 15,625 31,250 31,250 0 0 *
Global Opportunity Fund Limited.......... 12,500 12,500 25,000 25,000 0 0 *
Apex Opportunity Fund, L.P. ............. 100,000 100,000 200,000 200,000 0 0 *
Richard Molinsky......................... 100,000 100,000 200,000 200,000 0 0 *
Technology Transfer Venture Fund, LP..... 375,000 375,000 750,000 750,000 0 0 *
Lone Star Holding Partnership, LP........ 125,000 125,000 250,000 250,000 0 0 *
Brickman Investments..................... 125,000 125,000 250,000 250,000 0 0 *
Solomon Yakoby........................... 62,500 62,500 125,000 125,000 0 0 *
Alberdale Capital LLC.................... 0 162,500 162,500 162,500(2) 0 0 *
Starboard Capital Markets LLC............ 0 13,707 13,707 13,707(2) 0 0 *
Anthony Spatacco, Jr. ................... 0 13,707 13,707 13,707(2) 0 0 *
Richard F. Sands......................... 0 10,925 10,925 10,925(2) 0 0 *
Richard F. Sands 1999 Family Trust DTD
12/20/1999............................. 0 3,000 3,000 3,000(2) 0 0 *
Wayde Walker............................. 0 3,000 3,000 3,000(2) 0 0 *
Kevin Wilson............................. 0 1,000 1,000 1,000(2) 0 0 *
Richard Brewster......................... 0 1,000 1,000 1,000(2) 0 0 *
Rafael Vasquez........................... 0 1,000 1,000 1,000(2) 0 0 *
Matthew Eitner........................... 0 1,000 1,000 1,000(2) 0 0 *
Matthew Richard McGovern Living Trust 0
Dated 7/28/2000........................ 9,000 9,000 9,000(2) 0 0 *
Nathaniel Clay........................... 0 200 200 200(2) 0 0 *
William Poon............................. 0 1,000 1,000 1,000(2) 0 0 *
Shraga Faskowitz......................... 0 1,000 1,000 1,000(2) 0 0 *
Richard Michalski........................ 0 200 200 200(2) 0 0 *
Brian Smith.............................. 0 200 200 200(2) 0 0 *
James Ahern.............................. 0 200 200 200(2) 0 0 *
Scott Kenneth Steele..................... 0 1,000 1,000 1,000(2) 0 0 *
-18-
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------------- --------------------------------
RIGHT TO RIGHT TO
NAME OF BENEFICIAL OWNER OUTSTANDING ACQUIRE TOTAL SHARES OFFERED OUTSTANDING ACQUIRE PERCENT
- ----------------------------------------- ----------- --------- --------- -------------- ----------- -------- -------
Anthony Miller........................... 0 100 100 100(2) 0 0 *
Alan Feldman............................. 0 1,000 1,000 1,000(2) 0 0 *
Charles Savage........................... 0 1,000 1,000 1,000(2) 0 0 *
David Bloom.............................. 0 100 100 100(2) 0 0 *
Matthew E. Donohue....................... 0 100 100 100(2) 0 0 *
Kent Mitchell............................ 0 100 100 100(2) 0 0 *
Ian O'Brien Rupert....................... 0 100 100 100(2) 0 0 *
Jason Lyons.............................. 0 221,000 221,000 221,000(2) 0 0 *
Mark Groussman........................... 0 55,250 55,250 55,250(2) 0 0 *
ADDITIONAL SELLING STOCKHOLDERS WITH PIGGY-BACK REGISTRATION RIGHTS
ASI Technology Corporation (4) .......... 306,284 266,334 0 0 *
Commonwealth Acquisitions, Ltd. ........ 16,667 16,667 0 0 *
David Danovitch.......................... 3,334 3,334 0 0 *
Dean Denuccio ........................... 280,000 280,000 0 0 *
Rodney Dodd ............................. 7,937 7,937 0 0 *
ECON Investor Relations, Inc. ........... 14,458 12,049 0 0 *
Oscar Hayes ............................. 21,035 21,035 0 0 *
Edward Kessler (7)....................... 7,937 7,937 0 0 *
Delmar Kintner (7)....................... 122,116 119,303 0 0 *
Samuel Krieger........................... 0 25,000 25,000 25,000(3) 0 0 *
MarketShare Recovery, Inc. .............. 27,272 27,272 0 0 *
George Martin............................ 4,546 4,546 0 0 *
Ernie Mercier (7)........................ 8,334 8,334 0 0 *
Jo-Ann Nichols (7)....................... 3,571 3,571 0 0 *
Ronald Nussbaum.......................... 0 25,000 25,000 25,000(3) 0 0 *
Joe O'Neill (4) ......................... 8,334 8,334 0 0 *
John Readey ............................ 65,000 65,000 0 0 *
Larry Shatsoff (7)....................... 1,667 1,667 0 0 *
Stuart Siller .......................... 13,636 13,636 0 0 *
The Research Works, Inc. (4) ............ 37,099 37,099 0 0 *
George Yang (8) ......................... 1,074,662 1,074,662 0 0 *
- ---------------------------
* Less than 1%
(1) We are registering shares equal to 150% of the shares of common stock sold
to the holder plus 110% of the shares issuable to the holder upon exercise
of those warrants to include shares of our common stock which might be
issuable to the selling security holder as adjustment in the event of the
breach of certain covenants contained in that Securities Purchase
-19-
Agreements and the related Registration Rights Agreement. All such shares
are also being offered pursuant to this Offering.
(2) Shares issuable with respect to warrants paid as a finders fee in
connection with the private placements.
(3) Shares issuable with respect to warrants issued in connection with consents
for the third private placement.
(4) Shares acquired pursuant to a Technology Purchase Agreement dated March 19,
2003.
(5) Shares acquired pursuant to a consulting agreement.
(6) Shares acquired pursuant to an Exchange Agreement dated December 9, 2002.
(7) Shares acquired pursuant to an employment agreement or consulting
agreement.
(8) Shares acquired pursuant to an Agreement and Plan of Merger dated September
30, 2003.
VOTING AND INVESTMENT CONTROL
The table below sets forth selling stockholders that are entities and
the names of individuals having voting and investment control over the
securities held by these entities. We determined beneficial ownership based upon
information supplied to us by the selling stockholders and in accordance with
rules promulgated by the Securities and Exchange Commission, and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Except as otherwise indicated, we believe that the persons or entities named in
the following table have voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to community
property laws where applicable, and have not held any office or maintained any
material relationship, except as investor, with us, or any of our predecessors
or affiliates, over the past three years. Certain of the individuals with voting
and investment control have indicated that they exercise such control through a
corporate or other organizational structure, which structural information has
not been included.
The following entities have informed us that the following individuals
have voting and investment control over our securities held by them:
ENTITY VOTING AND INVESTMENT CONTROL
- ------ -----------------------------
Elite Properties Ltd. Shai Granot
Montana View Corporation Touvia Strauss
Sparrow Ventures, Inc. Michal Raviv
West Hastings, Ltd. Bernhard Korolnik
Castlerigg Master Investments, Ltd. Thomas Sandell
Spectra Capital Management, LLC Gregory Porges
AS Capital Partners, LLC Michael Coughlan
Vestcap International Management Ltd. Rima Salam
OTAPE Investments, LLC Ira Leventhal
Basso Holding Ltd. Howard I. Fischer
Basso Equity Opportunity Holding Fund Ltd. Howard I. Fischer
Basso Multi-Strategy Holding Fund Ltd. Howard I. Fisher
Fredrick Berdon & Co. L.P. Fredrick Berdon
SRG Capital, LLC Tai May Lee and Edwin McCabe
Baker Consulting Philip Baker
Gamma Opportunity Capital Partners, LP. Jonathan Knight
Alpha Capital AG Conrad Ackerman
Stonestreet LP Elizabeth Leonard and Michael Finkelstein
Bristol Investment Fund, Ltd. Paul Kestler
IAB Island Ventures SA Margot Hutchinson
Ellis International Limited, Inc. Wilhelm Ungar
Winton Capital Holdings, Ltd. Marc Belzberg
Rock II, LLC Howard Chalfin
-20-
ENTITY VOTING AND INVESTMENT CONTROL
- ------ -----------------------------
Professional Traders Fund, LLC Howard Berger
Platinum Long Term Growth Mark Nordlicht
DKR Sound Shore Oasis Holding Fund, Ltd. Seth Fischer
Congregation Mishkan Sholom *(1)
Jay Goldman Master Limited Partners Jay Goldman
Greenwich Growth Fund Limited Evan Schemenaur
Whalehaven Fund Limited Evan Schemenaur
South Ferry L.P. #2 Abraham Wolfson
Blair Capital *(1)
MEA Group, LLC Albert Shabbat
Iron Grid, Ltd. William King
Wolfe, L.P. Gerald Wolfe
Global Opportunity Fund Limited Thieme Associates
Apex Opportunity Fund, L.P. Eric Vaughan
Technology Transfer Venture Fund, LP William Custer
Lone Star Holding Partnership, LP William Custer
Brickman Investments Vaness Andrade
Alberdale Capital LLC Courtland Miller
Casimir Capital LP *(1)
Starboard Capital Markets LLC James Dotzman and W. Tyson Perry III
*The entity investors have not supplied me with information on who has voting or
investment control.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE OTHER FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE DISCUSSED IN
"RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED
BY REFERENCE. ALL INFORMATION IN THIS PROSPECTUS REFLECTS A 1-FOR-60 REVERSE
STOCK SPLIT EFFECTIVE OCTOBER 27, 2003.
The following management's discussion and analysis of results of
operations and financial condition is organized as follows:
o OVERVIEW. This section provides a general description of
Markland, as well as recent developments and events that have
occurred since 2001 and that we believe are important in
understanding the results of operations and financial
condition or to anticipate future trends. In addition, we have
provided a brief description of significant transactions and
events that impact the comparability of the results being
analyzed.
o RESULTS OF OPERATIONS. This section provides an analysis of
Markland's results of operations for the fiscal years ended
June 30, 2003 and June 30, 2002 and the six months ended
December 31, 2003 and December 31, 2002. This analysis is
presented on a consolidated basis.
-21-
o FINANCIAL CONDITION AND LIQUIDITY. This section provides an
analysis of Markland's cash flows for the fiscal years ended
June 31, 2003 and 2002 and the six months ended December 31,
2003, and December 31, 2002, as well as a discussion of recent
financing arrangements.
o CRITICAL ACCOUNTING POLICIES. This section discusses certain
critical accounting policies that we consider important to
Markland's financial condition and results of operations, and
that required significant judgment and estimates on the part
of management in application. Markland's significant
accounting policies, including the critical accounting
policies discussed in this section, are summarized in the
notes to the accompanying consolidated financial statements.
BACKGROUND
GENERAL. We have undergone material changes to our business and our
financial structure during the period covered by the financial statements
included in this prospectus (our financial statements for the fiscal years ended
June 30, 2002 and June 30, 2003 and for the six month periods ended December 31,
2002 and December 31, 2003).
We have a limited operating history in the businesses we are currently
pursuing. Our business, as it exists today, consists of three business areas:
chemical detectors, border security and advanced technologies. Our primary
sources of operating revenue are sales of our automatic chemical agent detection
and alarm system, border security logistics products and services, and three
SBIR funded research grants for the development of gas plasma antenna
technology. In fiscal year 2003 and in the six months ended December 31, 2003,
we derived revenue of approximately $546,400 and $440,276, respectively, from
our border security products and services, and approximately $112,251 and
$79,465 respectively from SBIR research grants performed for the development of
gas plasma antenna technology. In the six months ended December 31, 2003 we
derived revenue of approximately $2,898,009 from sales of our automatic chemical
agent detection and alarm system. During the fiscal year ended June 30, 2003 we
incurred a net loss of approximately $2,837,000. During the six months ended
December 31, 2003 we incurred a net loss of approximately $1,739,145.
Our strategy is to grow through acquisitions and marketing of our
products.
EVENTS PRIOR TO FISCAL 2002. Markland, previously known as Quest Net,
was incorporated in Colorado in November 1995, under the name "A.P. Sales Inc."
In December 1998, A.P. Sales Inc. dissolved as a Colorado corporation,
redomiciled in Florida and changed its name to Quest Net Corp. In 2001, before
the period covered by the financial statements included in this prospectus, our
only asset was the stock of a subsidiary CWTel, Inc., a company in the
telecommunications business. We acquired this company in March 2000 and secured
our payment obligations with 30,000 shares of our Series A Non-Voting Redeemable
Convertible Preferred Stock. CWTel filed for bankruptcy and was liquidated on
March 11, 2002. After the bankruptcy of our subsidiary, we had no active
business operations. On June 30, 2003, we issued 30,000 shares of our Series A
Non-Voting Redeemable Convertible Preferred Stock in satisfaction of our
remaining obligations to the holder of the security interest.
On March 15, 2001, we acquired all the outstanding capital stock of a
company called Vidikron of America, Inc. Vidikron was a development stage
company in the business of creating digital broadband and wireless networking
solutions for the internet. The sole stockholder of Vidikron was Markland LLC.
To acquire Vidikron we issued 10 shares of our convertible Series B Preferred
-22-
Stock to Markland LLC. Markland LLC converted all of its Series B Preferred
Stock in June 2001, which, resulted in Markland LLC owning approximately 85% of
our then outstanding common stock. There is no Series B Preferred Stock
outstanding. At this time we changed our name to Markland Technologies, Inc.
On October 19, 2000 we executed a promissory note for $3,500,000 in
favor of James LLC. In July 2001, after the Vidikron acquisition, James LLC
elected to convert $2,500,000 of the principal amount of its $3,500,000
promissory note, together with $125,000 accrued interest, into shares of our
common stock. In September 2001, we assumed all of Vidikron's rights and
obligations under a $3,500,000 secured revolving credit facility with Market
LLC. These transaction made Market LLC our senior secured lender.
EVENTS DURING FISCAL 2002. In May of 2002, we received a notice of
default from Market LLC. In June of 2002, we transferred all the stock of
Vidikron to Market in partial satisfaction of our indebtedness to Market. After
this partial payment, we still owed Market $500,000. Our disposition of the
business of Vidikron has been treated as a discontinued operation. As a result,
we recorded a loss of $3,259,421 for the fiscal year ended June 30, 2002
resulting from discontinued operations. At this point in our history we again
had no active business operations. In fiscal 2003, we recorded income of
$998,713 for the fiscal year ended June 30, 2003 resulting from the settlement
of certain liabilities and obligations recorded in previous periods in
connection with the discontinued operations.
EVENTS DURING FISCAL 2003. In December of 2002, we entered into a
transaction with Eurotech, Ltd., ipPartners, Inc., Market LLC, and James LLC.
Pursuant to this transaction to following took place:
o We formed a subsidiary corporation called Security Technology,
Inc.
o Eurotech transferred certain rights to its acoustic core
technology to our subsidiary.
o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners
transferred certain rights to their cryptology technologies to
our subsidiary.
o 90% of the shares of our common stock held by Market and James
were retired.
o We issued shares of common stock representing 80% of our then
issued and outstanding common stock to Eurotech and shares of
common stock representing 10% of our then issued and
outstanding shares of common stock to ipPartners.
o We issued $5,225,000 in stated value of our Series C 5%
Cumulative Convertible Preferred Stock to Market and James in
satisfaction of $5,225,000 of convertible notes held by Market
and James as well as for their agreement to surrender
4,498,638 shares of our common stock.
We are no longer a majority-owned subsidiary of Eurotech due to the
issuances of additional common stock.
In January of 2003, we acquired all of the common stock of Ergo
Systems, Inc., a provider of security logistic support and related product
development services. Ergo has a contract with the United States government to
provide border security logistic support at five ports of entry. In
consideration for this acquisition we agreed to pay $400,000 in cash, payable at
-23-
certain milestones which are related to research efforts. During the six month
period ended December 31, 2003, we realized $440,276 from these services.
EVENTS OCCURRING AFTER FISCAL 2003. In March of 2003, we entered into
an agreement to acquire the intellectual property (including patents), equipment
and government contracts relating to our gas plasma antenna technology from ASI
Technology Corporation, but this transaction did not close until September 30,
2003. In consideration for this acquisition we issued 283,333 shares of
common stock and agreed to pay $1,000,000. During the six months ended December
31, 2003 we realized $225,210 from SBIR research grants related to this
technology.
In October of 2003, we acquired all of the common stock of Science and
Technology Research Corporation, Inc. This company is the producer of the U.S.
navy's shipboard automatic chemical agent detection and alarm system. In
consideration for this acquisition we issued 1,539,779 shares of common stock
and agreed to pay $900,000 in cash, and issued a promissory note for $375,000.
During the six months ended December 31, 2003, we realized $2,898,009 from sales
of our automatic chemical agent detection and alarm system to the U.S. Navy.
FINANCING ACTIVITIES. We have financed our business activities through
borrowings and private placements of our securities to institutional investors.
We have engaged in the following financing activities:
o In October 2003, we borrowed $1,400,000 from Bay View Capital,
LLC. This borrowing was repaid in April 2004.
o At various times between April 2003 and March 2004 we have
raised an aggregate of approximately $3,832,000 through
private placements of our Series D Preferred Stock to an
institutional investor.
o On April 2, 2004, we sold 3,333,333 shares of common stock and
warrants to purchase 3,333,333 shares of our common stock for
$2,000,000 to three investors in a private placement.
o On April 16, 2004, we sold 2,500,000 shares of our common
stock and warrants to purchase 2,500,000 shares of our common
stock for $2,000,000 to ten investors in a private placement.
o On May 3, 2004, we sold 7,098,750 shares of our common stock
and warrants to purchase 7,098,750 shares of our common stock
for 5,679,000 to 34 investors in a private placement.
o As of April 2004, all of our Series C Cumulative Convertible
Preferred Stock has been converted into common stock and none
remains outstanding.
RESULTS OF OPERATIONS
The following selected consolidated financial data reflects the
combined results of operations of Markland Technologies and Science and
Technology Research, which was acquired by us on September 30, 2003, restated
for all periods presented pursuant to the purchase method of accounting.
-24-
The selected consolidated financial data for the years ended June 30,
2003 and 2002 and for each of the six month periods ended December 31, 2003 and
2002 have been derived from the audited consolidated financial statements of
Markland which are included elsewhere in this prospectus.
The historical results presented are not necessarily indicative of
future results. You should read the data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
in this Registration Statement.
UNAUDITED
SIX MONTHS ENDING
DECEMBER 31, YEAR ENDING JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue 3,563,495 658,651
Cost of revenue 2,329,581 -- 445,218 --
Selling, general and administrative 1,126,966 171,552 1,186,379 247,677
Compensatory element of stock issuances 1,539,142 -- 2,051,822 --
Research and development -- -- 522,657 --
Amortization & Depreciation Expense 159,223 -- 66,668 --
Interest and other expenses 147,728 144,133 221,501 --
Loss from Continuing Operations -- -- (3,835,594) (247,677)
Gain on Disposition -- -- -- 1,046,133
Gain (loss) from discontinued Operations -- -- 998,713 (3,259,421)
Net income (loss) (1,739,145) (315,685) (2,836,881) (2,460,965)
RESULTS OF OPERATIONS COMPARISON OF FISCAL 2002 AND FISCAL 2003
REVENUE: During the fiscal year ended June 30, 2002, we had no revenue
from continuing operations. Revenue for the fiscal year ended June 30, 2003 was
$658,651. Of our revenues, approximately $546,400 was from sales of our border
security products and services and approximately $112,251 was from SBIR grants
for the development of our gas plasma antenna technology.
COST OF REVENUES: During the fiscal year ended June 30, 2002, we had no
revenue from continuing operation and therefore there was no cost of revenues
from continuing operations. Cost of revenues for the year ended June 30, 2003
was $445,218. Gross profits for the year ended June 30, 2003 was $213,433. We
had a gross profit margin of approximately 32% for the year ended June 30, 2003.
Our contract with the U.S. government for border security products and services
provided for the majority of our gross profit. The majority of our cost of
revenues was payroll and benefits. In addition, we incurred significant costs
from subcontractors and labor. A portion was also from materials used at the
Dedicated Commuter Lane.
-25-
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expense for the year ended June 30, 2002 was $247,677. This
expense was primarily composed of payments to employees, consultants and
vendors. Selling, general and administrative expense for the year ended June 30,
2003 was $1,186,379. Selling, general and administrative expense was primarily
composed of payments to employees, consultants and vendors. The increase in
selling, general and administrative expense was primarily due to increases in
staff resulting from the acquisition of the Acoustic Core technology from
Eurotech and the acquisition of Ergo systems and related sales growth. We expect
this expense to increase with the size of our business and with any acquisitions
we may make.
RESEARCH AND DEVELOPMENT: We did not spend any money on research and
development during the fiscal year ending June 30, 2002 because we were not an
operating business. During the fiscal year ended 2003, $522,657 was spent on
research and development activities. Included in research and development costs
for the year ended June 30, 2003 is $300,000 payable to Syquest, a related
party, for development costs related to a vehicle stopping technology designed
for use in protecting our borders.
COMPENSATORY ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND
ADMINISTRATIVE FEES: During the fiscal year ended June 30, 2002, we had no
charges for compensatory stock issuances. Compensatory element of stock
issuances for selling, general and administrative fees for the year ended June
30, 2003 was $2,051,822. We use our equity to compensate management and
consultants who provide services to us. We expect to continue to do so in the
future. For this reason we expect to continue to incur such charges.
OPERATING LOSS FROM CONTINUING OPERATIONS. Operating loss from
continuing operations during the year ended June 30, 2002 was $247,677. This
loss resulted from the existence of selling general and administrative expenses
without offsetting revenues. Operating loss from continuing operations for the
year ended June 30, 2003 was $3,614,093. This loss resulted primarily from
non-cash charges for the compensatory element of stock issuances of $2,051,822
and from selling, general and administrative expenses, which were offset to a
small extent by gross profit.
INTEREST EXPENSE: During the fiscal year ended June 30, 2002, we had no
interest expense. Interest expense for the year ended June 30, 2003 was
$226,751. Interest and financing expense was from our notes payable and our
outstanding shares of preferred stock. We expect to satisfy our need for working
capital with additional equity and/or debt financing. To the extent that we
incur additional indebtedness, we expect interest expense to increase.
GAIN (LOSS) FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations during the year ended June 30, 2002 was $2,213,288. This loss
resulted from the disposition of our Vidikron subsidiary. Income from
discontinued operations for the year ended June 30, 2003 was $998,713. This
resulted from the settlement of certain liabilities and obligations previously
recorded in connection with the discontinued operations.
NET LOSS: Net Loss during the year ended June 30, 2002 was $2,460,965
($0.01 per share). This loss resulted primarily from the loss from discontinued
operations. Net loss for the year ended June 30, 2003, was $2,836,881 ($.03 per
share). This loss resulted primarily from operating losses.
PREFERRED STOCK DIVIDENDS: Accrued stated dividends on the Series C
Preferred Stock for the year ended June 30, 2003 totaled $152,716. Deemed
dividends related to the holder of our Series D Preferred Stock of $4,107,500,
represent non-cash charges for beneficial conversion features of such
securities. We expect to continue to finance our operations with
-26-
additional debt and equity financing including, possibly, additional sales of
our Series D Preferred Stock. Such financing could result in additional charges
for preferred stock dividends.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to
common stockholders for the year ended June 30, 2002 was $2,460,965 ($0.01 per
share). Net loss applicable to common stockholders for the year ended June 30
2003 was $7,598,852 ($0.03 per share).
RESULTS OF OPERATIONS COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2002 AND
DECEMBER 31, 2003
REVENUE: During the six month period ended December 31, 2002 we had no
Revenue from continuing operations. Revenue for the six months ended December
31, 2003 was $3,563,495. Of our revenues, approximately $2,898,009 was from
sales of our automatic chemical agent detection and alarm system to the U.S.
Navy. Our contract with the U.S. Navy provides for up to $37,000,000 in sales of
this product for the life of the product. Through December 2003 our subsidiary
STR recognized approximately $12,000,000 in revenues under this contract. We
expect sales will continue, but we cannot give any assurance that they will
continue because orders depend upon the U.S. Navy's needs. Approximately
$440,276 of revenue was derived from border security products and services
provided by our subsidiary, Ergo Systems, Inc. Our contract with the U.S.
government for border security products and services provides for payments of
$2,000,000. Our SBIR grants provide for payments of $1,000,000 over a 12-month
period. Approximately $225,210 of revenue was derived from funded SBIR research
performed for the U.S. military for gas plasma antenna technology.
COST OF REVENUES: During the six month period ended December 31, 2002
we had no revenue and no cost of revenues. Cost of revenues for the six months
ended December 31, 2003 was $2,329,581. Gross profit for the six months ended
December 31,2003 was $1,233,914. We had a gross profit margin of 34.6% for the
six months ended December 31,2003. Our contract with the U.S. Navy contributed a
majority of our gross profit.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expense for the six months ended December 31, 2002 was $171,552.
Selling, general and administrative expense for the six months ended December
31, 2003 was $1,126,966. Selling, general and administrative expense was
primarily composed of payments to employees, consultants and vendors. The
increase in selling, general and administrative expense was primarily due to
increases in staff resulting from the acquisition of Science and Technology
Research Corporation and related sales growth. We expect this expense to
increase with the size of our business and with any acquisitions we may make.
COMPENSATORY ELEMENT OF STOCK ISSUANCES: During the six months ended
December 31, 2002 we had no changes for compensatory element of stock issuances.
Compensatory element of stock issuances for selling, general and administrative
fees for the six months ended December 31, 2003 was $1,539,142. We use our
equity to compensate management and consultants who provide services to us. We
expect to continue to do so in the future. For this reason we expect to continue
to incur such charges.
INTEREST AND FINANCING: Interest expense for the six months ended
December 31, 2002 was $169,786. Interest and financing expense for the six
months ended December 31, 2003 was $147,728. Interest and financing expense was
from our loan by Bay View Capital, LLC, and other notes payable.
NET LOSS: Net loss for the six months ended December 31, 2002 was
$315,685. For the six months ended December 31,2003, we incurred a net loss of
$1,739,145. This net loss was primarily due to the compensatory element of stock
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issuances for selling, general and administrative fees for the six months ended
December 31, 2003 of $1,539,142.
PREFERRED STOCK DIVIDENDS: Accrued stated dividends or the Series C
Preferred Stock for the six months ended December 31, 2003 and 2002 totaled
$130,540 and $15,989, respectively. Deemed dividends related to our Series C and
Series D Preferred Stock totaled $186,250 for the six months ended December 31,
2003, representing non-cash charges for the beneficial conversion features of
such securities.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss applicable to
common stockholders for the six months ended December 31, 2002 was $380,054
($.04 per share). Net loss applicable to common stockholders for the six months
ended December 31, 2003 was $2,055,935 ($.32 per share).
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2003, we experienced $764,550 of negative cash flow from
operating activities. This negative cash flow was the result of a loss from
continuing operatowns of approximately $3,836,000 mitigated by non-cash charges
of approximately $2,159,000 and increases in accounts payable and other
liabilities of approximately $940,000. In addition, we experienced $191,900 of
negative cash flow from investing activities. These investment activities
consisted of payments made in connection with our acquisition of ERGO and ASI.
Cash flows from financing activities for the year ended June 30, 2003
approximated $957,000. We financed our operations and acquisition activities
primarily through sales of common stock and preferred stock as well as through
margins from sales of our products and services. We experienced significant
revenue growth during this period. This revenue growth helped offset our
negative cash flow. We expect our revenues will be variable and unpredictable.
During fiscal 2003, we raised $340,000 from sales of our common stock, $170,000
from sales of our Series C Preferred Stock, and $430,000 from sales of our
Series D Preferred Stock.
During the six months ended December 2003, we experienced $884,314 of
negative cash flow from operating activities. The negative cash flow was a
result of a net loss of $1,739,000 an increase of accounts receivable of
approximately $1,449,000 mitigated by non-cash charges of $1,731,000 and an
increase accounts payable and accrued expenses of $545,000. In addition, we
experienced $869,170 of negative cash flow from investing activities. These
investment activities consisted of payments made in connection with our
acquisition of Science and Technology Research Corporation. We financed our
operations and acquisition activities primarily through borrowings, sales of
preferred stock as well as through margins from sales of our products and
services. During this period we borrowed $1,400,000 from Bay View Capital, LLC
and repaid $261,000 of that amount. We also raised $745,000 from sales of our
Series D Preferred Stock.
We believe that required investment capital will be available to us,
but there can be no assurance that we will be able to raise funds on terms
acceptable to us, or at all. We have the ability to adjust the level of research
and development and selling and administrative expenses to some extent based on
the availability of resources. However, reductions in expenditures could delay
development and adversely affect our ability to generate future revenues.
Any equity-based source of additional funds could be dilutive to
existing equity holders and the dilution could be material. The lack of
sufficient funds from operations or additional capital could force us to curtail
or scale back operations and would therefore have an adverse effect on our
business. Other than cash and cash equivalents, we have no unused sources of
liquidity at this time. We expect to incur additional operating losses as a
result of expenditures for research and development and marketing costs for our
security products and technologies. The timing and amounts of these expenditures
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and the extent of our operating losses will depend on many factors, some of
which are beyond our control. Accordingly, there can be no assurance that our
current expectations regarding required financial resources will prove to be
accurate. We anticipate that the commercialization of our technologies may
require increased operating costs; however, we cannot currently estimate the
amounts of these costs.
GOING CONCERN
For the fiscal year ended June 30, 2003, we incurred a net loss from
continuing operations of $3,835,594 and had a working capital deficiency of
$1,235,306. We had limited finances and required additional funding in order to
market and license our products. There was no assurance that we could reverse
our operating losses, or that we could raise additional capital to allow us to
continue our planned operations. These factors raised substantial doubt about
our ability to continue as a going concern.
Our ability to continue as a going concern remains dependent upon our
ability to obtain additional financing or through the generation of positive
cash flows from continuing operations.
FINANCING IN 2004
Since December 31, 2003, we have raised an aggregate of $2,657,000 in
new equity capital through private placements of our Series D Preferred Stock
and common stock and warrants. At various times between January 1, 2004 and May
3, 2004 we raised aggregate proceeds of $2,657,000 (net of finders fees) through
private placements of our Series D Preferred Stock to an institutional investor.
On April 2, 2003, we sold 3,333,333 shares of common stock and warrants to
purchase 3,333,333 shares of our common stock for $2,000,000 to three investors
in a private placement. After deducting expenses, we received approximately
$1,750,000 in cash proceeds from this transaction. On April 16, 2003, we sold
2,500,000 shares of our common stock and warrants to purchase 2,500,000 shares
of our common stock for $2,000,000 to ten investors in a private placement.
After deducting expenses, we received approximately $1,890,000 in cash proceeds
from this transaction. On May 3, 2004, we sold 7,089,750 shares of our common
stock and warrants to purchase 7,098,750 shares of our common stock for
$5,679,000 to 34 investors. We paid $533,140 and issued warrants to purchase
529,800 shares of common stock to finders in connection with these private
placements.
If the common stock purchase warrants sold in the three private
placements are exercised in their entirety, we will receive up to $19,092,824.
We used the net proceeds of these private placements for working
capital and to repay approximately $2,000,000 of indebtedness including
approximately $1,200,000 we owed to Bay View Capital, LLC. As of May 9, 2004, we
had approximately $7,850,000 in cash.
CONTRACTUAL CASH OBLIGATIONS
The following summarizes our contractual cash obligations and commercial
commitments at December 31, 2003, and the effect such obligations are expected
to have on liquidity and cash flows in the future periods.
Contracted Obligations
Long-Term Debt Total Less Than 1 Year
-------------- ----- ----------------
Secured Convertible note $ 458,334 $ 458,334 (a)
Note Payable - Bay View Capital 1,197,769 1,197,769 (b)
Insurance Premium Financing 40,976 40,976
Acquisition note 375,000 375,000
------------ ------------
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Total Contractual Obligations $ 2,072,079 $ 2,072,079
Commercial Commitments -0- -0-
(a) converted to common stock April, 2004
(b) repaid out of private placements completed in April, 2004
CRITICAL ACCOUNTING POLICIES
The preparation of Markland's financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and the disclosure
of contingent assets and liabilities as of the date of the financial statements
and revenues and expenses during the periods reported. We base our estimates on
historical experience, where applicable, and other assumptions that we believe
are reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.
The sections below present information about the nature of and
rationale for our critical accounting policies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Markland
and its wholly-owned subsidiaries, Security Technology, Inc. and Ergo Systems,
Inc. We have eliminated all significant inter-company balances and transactions
in consolidation.
CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards ("SFAS") No. 105,
"Disclosure of Information about Financial Instruments With Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk," requires
that we disclose any significant off-balance-sheet and credit risk
concentrations. We are subject to concentrations of credit risk because the
majority of our revenues and accounts receivable are derived from the US Navy,
Computer Science Corporation and The Department of Homeland Security, none of
whom is required to provide collateral for amounts owed to us. We do not believe
that we are subject to any unusual credit risks, other than the normal level of
risk attendant to operating our business.
For the year ended June 30, 2003, the Department of Homeland Security
accounted for 81% of total revenues. At June 30,2003, this customer represented
approximately 70% of accounts receivable. For the year ended June 30, 2002,
there were no revenues or accounts receivable from either of these customers.
RESEARCH AND DEVELOPMENT
We charge research and development costs to expense as incurred. We
capitalize costs related to acquired technologies that have achieved
technological feasibility and have alternative uses. We expense acquired
technologies, which are in-process at the date of acquisition or have no
alternative uses as research and development costs. Included in research and
development costs for the year ended June 30, 2003 is $300,000 payable to
Syquest, a related party, for development costs related to a vehicle stopping
technology.
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LOSS PER SHARE
We compute basic net loss per common share based on the weighted
average number of shares of common stock outstanding during the periods
presented. Common stock equivalents, consisting of a secured convertible
promissory note, Series A and D Convertible Preferred Stock and Series C 5%
Cumulative Convertible Preferred Stock, discussed in the notes to consolidated
financial statements, were not included in the calculation of the diluted loss
per share because their inclusion would have had the effect of decreasing the
loss per share otherwise computed.
IMPAIRMENT OF LONG-LIVED ASSETS
We continually monitor events and changes in circumstances that could
indicate carrying amounts of our long-lived assets, including intangible assets,
may not be recoverable. We recognize and impairment loss when expected cash
flows are less than the asset's carrying value. Accordingly, when indicators of
impairment are present, we evaluate the carrying value of such assets in
relation to the operating performance and future undiscounted cash flows of our
underlying business. Our policy is to record an impairment loss when it is
determined that he carrying amount of the asset may not be recoverable.
REVENUE RECOGNITION
We recognize revenue when the following criteria are met: (1) we have
persuasive evidence of an arrangement, such as agreements, purchase orders or
written requests; (2) we have completed delivery and no significant obligations
remain, (3) our price to our customer is fixed or determinable, and (4)
collection is probable. We recognize revenues at the time we perform services
related to border security logistic support. With respect to our revenues from
our chemical detectors, we recognize revenue under the units-of-delivery method.
At the time the units are shipped to the warehouse of the United States Navy,
the Company recognizes as revenues the contract price of each unit and
recognizes the applicable cost of each unit shipped.
ALLOWANCE FOR DOUBTFUL
The allowance for doubtful accounts reflects management's best estimate
of probably losses inherent in the accounts receivable balance. Management
determines the allowance based on known trouble accounts, historical experiences
and other currently available evidence. The Company's receivables are from
government contracts. The Company has not experienced any losses in accounts
receivable and has provided no allowance at December 31, 2003.
ESTIMATED USEFUL LIVES OF INTANGIBLE ASSETS
We amortize our amortizable intangible assets over the shorter of the
contractual/legal life or the estimated economic life. We are amortizing the
intangible assets acquired as of a result of the Ergo and ASI acquisitions over
a three-year life commencing with the date of acquisition. With respect to the
Science & Technology Research, Inc. acquisition, we currently hired an
independent firm to perform an independent valuation. The valuation was not
completed as of the date of this registration statement. The December 31, 2003
financial statements were prepared assuming that all of the excess of the
purchase price over the net intangible assets ($6,006,808) was allocated to
Goodwill and accordingly, no amortization expenses was included in the December
31, 2003 statement of operations. Depending on the outcome of the outside
valuation and using an estimate of a five-year economic lifer for any amounts
allocated to amortizable intangible assets, future amortization expense could
range from $0 to approximately $1,200,000 per year.
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RECOVERY OF GOODWILL
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," we review goodwill for impairment annually, or more frequently if an
event occurs or circumstances change that would more likely than not reduce the
fair value of our business enterprise below its carrying value. The impairment
test requires us to estimate the fair value of our overall business enterprise
down to the reporting unit level. We estimate fair value using both a discounted
cash flows model, as well as an approach using market comparables, both of which
are weighted equally to determine fair value. Under the discounted cash flows
method, we utilize estimated long-term revenue and cash flows forecasts
developed as part of our planning process, as well as assumptions of terminal
value, together with an applicable discount rate, to determine fair value. Under
the market approach, fair value is determined by comparing us to similar
businesses (or guideline companies). Selection of guideline companies and market
ratios require management's judgment. The use of different assumptions within
our discounted cash flows model or within our market approach model when
determining fair value could result in different valuations for goodwill.
CHANGES IN ACCOUNTANTS
On January 23, 2003, our board of directors determined not to further
retain Sherb & Co., LLP, Markland's independent accountants for the year ending
June 30, 2003. On January 24, 2003, Marcum & Kliegman LLP was engaged as our new
independent accountants.
Sherb & Co., LLP's reports on Markland's financial statements for the
year ended June 30, 2002, the six months ended June 30, 2001 and the year ended
December 31, 2000 did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principle, except that the opinion on the year ended June 30, 2002, the six
months ended June 30, 2001 and the year ended December 31, 2000 financial
statements included an explanatory paragraph expressing substantial doubt
regarding the Company's ability to continue as a going concern.
In addition, during our two most recent fiscal years and through
January 23, 2003, there was no disagreement with Sherb & Co., LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction, would have caused them to make reference to the subject
matter of the disagreement in connection with its reports.
During the year ended June 30, 2002, the six months ended June 30, 2001
and the year ended December 31, 2000 and through the date hereof, the Company
did not consult Marcum & Kliegman LLP regarding any matters or events set forth
in Item 304(a)(1)(iv) of Regulation S-B and related instructions.
BUSINESS
BUSINESS HISTORY
Markland Technologies, Inc. is the successor to A. P. Sales Inc., a
corporation incorporated in Colorado in 1995. In December 1998, A. P. Sales was
dissolved as a Colorado corporation and re-domiciled in Florida under the name
Quest Net Corporation. In March 2000, Quest Net acquired CWTel, Inc., a Florida
corporation. CWTel filed a voluntary bankruptcy petition in November 2001 and
was issued a final decree in March 2002. In March 2001, Quest Net acquired all
of the outstanding stock of Vidikron of America, Inc., a Delaware corporation.
As a result, Vidikron's sole stockholder, Market LLC, a Cayman Islands limited
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liability company, became Quest Net's majority stockholder and Vidikron became a
wholly-owned subsidiary of Quest Net. Quest Net subsequently changed its name to
Markland Technologies, Inc. In order to cure a default in our obligations to
Market LLC, we transferred all of our interest in Vidikron to Market LLC in June
2002. As a result, at the end of fiscal 2002 we had no active business
operations.
In December of 2002, we entered into a transaction with Eurotech, Ltd.,
ipPartners, Inc., Market LLC, and James LLC. Pursuant to this transaction to
following took place:
o We formed a subsidiary corporation called Security Technology,
Inc.
o Eurotech transferred certain rights to its acoustic core
technology relating to illiat material detection to our
subsidiary.
o Crypto.com Inc. (a subsidiary of Eurotech) and ipPartners
transferred certain rights to their cryptology technologies to
our subsidiary.
o 90% of the shares of our common stock held by Market LLC and
James LLC were retired.
o We issued shares of common stock representing 80% of our then
issued and outstanding common stock to Eurotech and shares of
common stock representing 10% of our then issued and
outstanding shares of common stock to ipPartners.
o We issued $5,225,000 in stated value of our Series C 5%
Cumulative Convertible Preferred Stock to Market LLC and James
LLC in satisfaction of $5,225,000 of convertible notes held by
Market LLC and James LLC as well as for their agreement to
surrender 4,498,638 shares of our common stock.
In January 2003, we acquired all the common stock of Ergo Systems,
Inc., a company in the business of providing border security logistic support
and product development services to the U.S. government. Ergo has a contract
with the Department of Homeland Security to maintain, integrate and implement
design enhancements to border security systems installed at five U.S. ports of
entry San Ysidro, California, Otay Mesa, California, El Paso, Texas, Detroit,
Michigan, and Buffalo, New York. In consideration for this acquisition we agreed
to pay $400,000 in cash, payable at certain milestones which are related to
research efforts.
In March 2003, we entered into an agreement to acquire the intellectual
property (including patents), equipment, and government contracts for certain
gas plasma antenna technology from ASI Technology Corporation. We closed this
transaction in September 2003. We paid a purchase price of $150,000 in cash and
283,333 shares of our common stock.
In October of 2003, we acquired all of the common stock of Science and
Technology Research Corporation, Inc. This company is the producer of the U.S.
Navy's Shipboard Automatic Chemical Agent Detection and Alarm System. In
consideration for this acquisition we issued 1,539,779 shares of common stock
and agreed to pay $900,000 in cash, and issued a promissory note for $375,000.
BUSINESS OVERVIEW
We have three business areas: chemical detectors, border security and
advanced technologies. We focus on providing products, services and emerging
technologies to protect our country's borders, infrastructure assets and
personnel. Our mission is to build world-class integrated solutions for border
systems and threat detection through the expansion of our existing contracts,
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development of our emerging technologies and acquisition of revenue producing
assets. Our primary sources of operating revenue are sales of the Automatic
Chemical Agent Detection and Alarm System, border security logistics products
and services and SBIR funded research programs in the development of gas plasma
antenna technology.
In fiscal year 2003 and in the six months ended December 31, 2003, we
derived revenue of approximately $546,400 and $440,276, respectively, from our
border security products and services, and $112,251 and $79,465 respectively
from SBIR research grant performed for the development of gas plasma antenna
technology. In the six months ended December 31, 2003 we derived revenue of
approximately $2,898,009 from sales of our Automatic Chemical Agent Detection
and Alarm System.
CHEMICAL DETECTORS
In October 2003, our subsidiary, Security Technology, Inc., acquired
all of the common stock of Science and Technology Research, Inc., a chemical
detector manufacturer, as part of our ongoing business strategy of creating an
integrated portfolio of homeland security solutions.
We have a contract with the U.S. Navy to be the sole producer of the
U.S. Navy's shipboard Automatic Chemical Agent Detection and Alarm System used
to detect all classic nerve and blister agents as well as other chemical warfare
agent vapors. This is our primary source of operating revenue. Our contract
provides that the U.S. Navy may order up to $37,000,000 worth of the Automatic
Chemical Agent Detection and Alarm System. To date, our subsidiary STR has
recognized approximately $12,000,000 of revenue from this product, and we expect
that we will get additional orders on this contract. The U.S. Navy accounted for
81% of our revenue in the 6 months ended December 31, 2003 and 0% in the year
ended June 30, 2003.
Designed and patented by the U.S. Navy, our system is designed to
operate in a shipboard environment and to detect agents at low concentrations in
real time while ignoring the presence of common vapor interferents. Our system
has visible and audible alarms. The ability of the system to disregard common
shipboard interferents, thus minimizing false alarms, distinguishes it from
other systems on the market. Our system is designed to be easily upgradeable for
new and novel nerve and blister agents.
Our system analyzes vapor by the use of two ion-mobility spectroscopy
cells, a radioactive source, sealed inside each cell and issued as an ionizer.
The operational performance of our shipboard Automatic Chemical Agent Detection
and Alarm System has been successfully tested in the field and laboratories
against live agents and against various interferents present in shipboard
environments. Our shipboard Automatic Chemical Agent Detection and Alarm System
can operate approximately three hours on its rechargeable battery box and
indefinitely on its 110V AC power cord.
We are presently working on the design of a next generation chemical
detector product, which will also operate utilizing ion mobility spectography
cell technology and provide networked wireless communication capability.
On December 23, 2003, the U.S. Navy signed a license agreement with us
to transfer certain chemical detection technology intellectual property rights
to us. We believe the license will allow us to further expand the applications
for the chemical detection technology, and market the technology to non-defense
customers such as foreign governments and commercial entities. We expect to
continue to manufacture the Automatic Chemical Agent Detection and Alarm System
for the U.S. Navy and simultaneously pursue opportunities with the Department of
Homeland Security as well as foreign military sales.
We recently entered into an international distribution agreement with
Tradeways, Ltd, to market and sell Markland's Shipboard ACADA chemical detection
systems to foreign militaries to market our product in Argentina, Australia,
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Austria, Bahrain, Canada, Chile, Croatia, Denmark, Egypt, Estonia, Finland,
Greece, Ireland, Israel, Italy, Japan, Jordan, Korea, Kuwait, Malaysia, The
Netherlands, New Zealand, Norway, Oman, Pakistan, Portugal, Qatar, Saudi Arabia,
Spain, Sweden, Taiwan, Turkey, and the United Arab Emirates. To date, we have
not sold any products through this channel.
BORDER SECURITY
We acquired the assets of Ergo Systems, Inc., in January 2003. This
acquisition provided us with contracts with the Department of Homeland Security
to maintain, integrate, and implement design enhancements to border security
systems installed at five U.S. ports of entry: San Ysidro, California, Otay
Mesa, California, El Paso, Texas, Detroit, Michigan, and Buffalo, New York. Our
system, named the Dedicated Commuter Lane, is part of a larger U.S. Customs and
Immigration and Naturalization Service initiative to reduce wait times, improve
data accuracy, and improve overall efficiencies at all border crossings for both
freight and passengers.
The Dedicated Commuter Lane integrates several important security
checks. It employs automatic vehicle identification technology, which allows
participants to pass through the border crossing more efficiently than without
automatic screening. Participants run a card through a swipe card reader, which
instantaneously sends patron information, including a photograph, to the
inspector's screen for clearance. The gate rises and allows the patron through.
The whole process takes about 30 seconds. The Dedicated Commuter Lane software
also controls a variety of security subsystems, including video surveillance,
gates, and tire shredders.
We entered into a contract with Computer Science Corporation to
subcontract a portion of their border maintenance services in San Ysidro and
Otay Mesa, California from December 2003 to September 2004. Computer Science
Corporation is one of three potential contractors for the U.S. VISIT program. We
believe that we could benefit by receiving increasing subcontract revenues from
that contract, if it is awarded to Computer Science Corporation. We cannot
provide any assurance that this contract will be awarded to Computer Science
Corporation or that they will subcontract any part of it to us.
These systems are part of a larger Department of Homeland Security
initiative to increase security, reduce wait times, improve data accuracy, and
improve overall efficiencies at all border crossings for both freight and
passengers by creating and implementing a "trusted traveler" concept of traffic
flow. The "trusted traveler" concept is designed for frequent border crossers
who are willing to undergo a background check, and travel under certain
restrictions, to have the right to use a dedicated commuter lane. This dedicated
commuter lane substantially decreases the amount of time it takes drive through
the border. We believe that our experience in integrating solutions will remain
attractive to the Department of Homeland Security as it confronts the various
issues of protecting our borders although there can be no assurances that the
trusted traveler concept will result in an increase in our sales or revenues.
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ADVANCED TECHNOLOGIES
Through research and development as well as intellectual property
acquisitions, we have established a portfolio of advanced and emerging
technologies, which we intend to commercialize and utilize within our own
proprietary products or license out for the purpose of revenue generation. These
advanced technologies and intellectual property are as follows:
o Gas plasma antenna,
o Vehicle stopping system,
o Acoustic Core(TM) signature analysis,
o APTIS(TM) human screening portal, and
o cryptography software.
GAS PLASMA ANTENNA: We acquired gas plasma antenna technology assets
and a sub-license for plasma sterilization and decontamination from ASI
Technology Corporation in August 2003. The assets include three ongoing funded
SBIR government contracts and nine issued and pending U.S. patents related to
gas plasma antenna technology with demonstrated applications in the fields of
ballistic missile defense, phased array radar, and forward deployed
decontamination.
A plasma antenna's performance equals that of a metal antenna, but the
gas plasma antenna is lighter. These antennae can be used for any purpose for
which a metal antenna is used. A gas plasma antenna weighs substantially less
than metal antenna of comparable performance. When a plasma antenna is turned
off, it is transparent, immune to electronic countermeasures and allows other
adjacent antennas to transmit or receive without interference.
Plasma antenna technology employs ionized gas enclosed in a tube (or
other enclosure) as the conducting element of an antenna. This is a fundamental
change from traditional antenna design that generally employs solid metal wires
as the conducting element. Ionized gas is an efficient conducting element with a
number of important advantages over wire. Since the gas is ionized only for the
time of transmission or reception, "ringing" and associated effects of solid
wire antenna design are eliminated. The design allows for extremely short
pulses, important to many forms of digital communication and radars. The design
further provides the opportunity to construct an antenna that can be compact and
dynamically reconfigured for frequency, direction, bandwidth, gain and beam
width. We believe plasma antenna technology will enable the design of antennas
that are more efficient, lower in weight and smaller in size than traditional
solid wire antennas.
We believe our plasma antenna offers numerous advantages over
traditional wire antennas including stealth for military applications and higher
digital performance in commercial applications. We are developing the plasma
technology for military and commercial applications. However, we cannot predict
when these products will be ready for commercial or military use.
Our gas plasma research team has been awarded US patent # 6,710,746 for
a gas plasma antenna element demonstrating re-configurable length. The
development of this technology has been funded to date through Small Business
Innovative Research grants from the US Navy and Army.
The US patent relates to plasma antennas having re-configurable length,
beamwidth, and bandwidth. Traditionally, antennas have been defined as metallic
devices for radiating or receiving radio waves, or as a conducting wire, which
is sized to emit radiation at one or more selected frequencies. As a result, the
paradigm for antenna design has heretofore been focused on antenna geometry and
physical dimensions. We believe that our gas plasma antenna design will provide
design antennas which have greater flexibility and security than conventional
antennas.
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VEHICLE STOPPING SYSTEM: Under a funded government contract, we
developed a vehicle stopping system to address the increasing risks of
unauthorized and illegal entry into the U.S. Our vehicle stopping system is
designed to safely capture vehicles that are trying to gain entry without
authorization. Our vehicle stopping system consists of a net, buried beneath the
road, that will spring up when a car or truck attempts to speed out of the
border illegally. The net is attached to two spindles that unwind with
increasing tension as the illegal car is trapped. Our Vehicle Stopping System is
capable of stopping a vehicle attempting to gain illegal entry at speeds up to,
and exceeding, 65 miles per hour safely and without personal injury to occupants
and U.S. government border personnel. The vehicle stopping system was
successfully tested in June 2003 at the San Ysidro, California port of entry. As
a result, we expect to market the vehicle stopping system to the Department of
Homeland Security as well as Department of Defense and local traffic and highway
authorities, however, we do not have any purchase commitments for this system.
ACOUSTIC CORE(TM): We acquired rights to the the Acoustic Core(TM)
technology, as it related to illicit material detection, from Eurotech, Ltd. in
December 2002. The Acoustic Core(TM) technology utilizes acoustics sensing and
signature analysis technologies to detect a variety of materials.
Acoustic Core(TM) is a non-intrusive acoustic remote sensing
technology, which exhibits the potential for the automated detection of a large
variety of potentially harmful materials such as C4, plastic flare guns, and
ceramics. This technology is capable of computerized automatic screening of
containers, vehicles and humans. It can detect a broad range of illegal
materials at high rates of speed, with low false alarm rates and utilizes low
frequency acoustic energy, which is safe for humans. This speed and accuracy
makes the technology suitable for primary screening applications where large
volumes of containers or humans need to be screened quickly and accurately such
as in an airport or at a border crossing.
After almost a decade of intensive laboratory and field research, we
believe the Acoustic Core(TM) technology has the potential to enter the security
marketplace to fill high-priority homeland security needs. Because Acoustic
Core(TM) technology can utilize the unique and independent acoustic signatures
of various materials, products can be developed and programmed to detect a large
array of harmful substances, including explosives, and bio-hazardous and
radioactive compounds.
We believe that the Acoustic Core(TM) technology can screen large
containers while they are in motion such as while they are being transported by
cranes, trucks, or railcars. Primary screening of containers in this manner
allows for segregation of suspicious containers for secondary screening by a
handheld version of the remote sensing products.
We completed a project with the U.S. Air Force through a Co-Operative
Research and Development Agreement to utilize our proprietary Acoustic Core(TM)
technology to inspect cargo. While this contract does not generate revenue for
us, we expect to develop the technology into commercially viable products.
However, we cannot predict when these products will be ready for commercial or
military use.
APTIS(TM): We are involved in the design and testing of APTIS(TM),
which is an acoustic screening portal that is intended to be used to facilitate
screening humans for concealed metallic and non-metallic weapons such as ceramic
knives and plastic guns. The technology is very flexible and can be used to
safely screen humans for explosives when incorporated into existing entry portal
systems such as metal detectors, eliminating the need to replace these systems.
Although we continue to develop this prototype, we cannot predict when it will
be ready for commercial use.
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CRYPTOLOGY: We have cryptology assets in the form of cryptographic
algorithms and software that are under development for telecommunications and
commercial encryption applications. We acquired this technology from Eurotech's
subsidiary, Crypto.com, Inc., in December 2002.
We believe the need for increased cyber security has never been as
critical as at the present time. To meet the fundamental confidentiality,
integrity, and availability objectives of computer security, better encryption
than currently employed is required to defend against unauthorized access to
data and communications. This need for better encryption systems also extends to
protection that cannot be decrypted today or in the future, even in the face of
much improved computer speed and capacity.
Our cryptology provides encryption security and forms the basis for a
series of government and commercial, computer and communications security
software packages. The standards in the industry use encryption technologies
with either secret key or a public/private key encryption method, which becomes
part of a system, transmitted to another party for decoding purposes or is
stored in password protected electronic files. These secret keys are vulnerable
to intruders. Our cryptology is a double cipher, keyless transmission system,
with no transmitted key subject to compromise. This is a new class of cryptology
that prevents decipher of intercepted messages by powerful methods or computers.
Our cryptology software is still under development and not yet ready for
commercial sale.
We believe that, as decryption methods become more efficient and
computing power more available, the current industry standards will become more
vulnerable, while requiring more and more bandwidth, to prolong their inevitable
compromise. Because of our keyless transmission system, we expect that our
cryptology will remain invulnerable to compromise without requiring
ever-increasing bandwidth to stay ahead of attacks. Our cryptology is adaptable
to telephone conversations, networked systems, private email messages, file
transfers, and can be adapted to levels of security appropriate to the
communication link. It provides a high level of security available for
transmission of large files, email, and graphics, as well as, for important
small files such as passwords, credit card information, ID card, and personal
authentication.
Alpha stage demonstrations of software implementations of our VYN(TM)
algorithm for communications, file transfers, passwords, and credit cards have
demonstrated the applicability of the mathematical approach to the generation of
secure encryption algorithms. Our encryption technology development has
proceeded to the stage where it is ready for adaptation to computer operating
systems, programming languages, communications protocols, and hardware device
drivers.
COMPETITION
The markets for our products and solutions are extremely competitive
and are characterized by rapid technological change as a result of technical
developments exploited by competitors, the changing technical needs of the
customers, and frequent introductions of new features. We expect competition to
increase as other companies introduce products that are competitively priced,
that may have increased performance or functionality, or that incorporate
technological advances not yet developed or implemented by us. Some of our
present and potential competitors may have financial, marketing, and research
resources substantially greater than ours. In order to compete effectively in
this environment, we must continually develop and market new and enhanced
products at competitive prices, and have the resources to invest in significant
research and development activities. There is a risk that we may not be able to
make the technological advances necessary to compete successfully. Existing and
new competitors may enter or expand their efforts in our markets, or develop new
products to compete against ours. Our competitors may develop new technologies
or enhancements to existing products or introduce new products that will offer
superior price or performance features. New products or technologies may render
-38-
our products obsolete. Many of our primary competitors are well established
companies that have substantially greater financial, managerial, technical,
marketing, personnel and other resources than we do.
We have certain proprietary technologies, some of which have been
developed, and others that are in development. We will focus on our proprietary
technologies, or leverage our management experience, in order to differentiate
ourselves from these organizations. There are many other technologies being
presented to the Department of Homeland Security that directly compete with our
technologies. The Department of Homeland Security may pursue solutions different
from ours.
INTELLECTUAL PROPERTY
Our ability to compete effectively depends to a significant extent on
our ability to protect our proprietary information. We rely primarily on patents
and trade secret laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. We own nine U.S. and foreign patents.
We enter into confidentiality agreements with our consultants and key employees,
and maintain controls over access to and distribution of our technology,
software and other proprietary information. The steps we have taken to protect
our technology may be inadequate to prevent others from using what we regard as
our technology to compete with us.
We do not generally conduct exhaustive patent searches to determine
whether the technology used in our products infringes patents held by third
parties. In addition, product development is inherently uncertain in a rapidly
evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies.
We may face claims by third parties that our products or technology
infringe their patents or other intellectual property rights in the future. Any
claim of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is invalid, and could distract the
attention of our management. If any of our products are found to violate
third-party proprietary rights, we may be required to pay substantial damages.
In addition, we may be required to re-engineer our products or seek to obtain
licenses from third parties to continue to offer our products. Any efforts to
re-engineer our products or obtain licenses on commercially reasonable terms may
not be successful, which would prevent us from selling our products, and, in any
case, could substantially increase our costs and have a material adverse effect
on our business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
We did not spend any money on research and development during the
fiscal year ending June 30, 2002 because we were not an operating business.
During the fiscal year ended 2003, we spent $522,657 on research and
development.
Our research and development activities consist of projects funded by
us and projects funded with the assistance of Small Business Innovative Research
(SBIR) grants and SBIR projects are generally directed towards the discovery of
specific information requested by the government research sponsor.
We believe that focused investments in research and development are
critical to our future growth and competitive position in the marketplace. Our
research and development efforts are directed to timely development of new and
enhanced products that are central to our business strategy. The industries in
which we compete are subject to rapid technological developments, evolving
-39-
industry standards, changes in customer requirements, and new product
introductions and enhancements. As a result, our success depends in part upon
our ability, on a cost-effective and timely basis, to continue to enhance our
existing products and to develop and introduce new products that improve
performance and meet customers' operational and cost requirements. We may be
unable to successfully develop products to address new customer requirements or
technological changes, and any products we develop may not achieve market
acceptance.
DEPENDENCE ON GOVERNMENT CONTRACTS
For the six months ended December 31, 2003, sales to the U.S. Navy, our
largest customer accounted for 81% of our sales. If the Navy terminates this
contract or ceases or materially diminishes orders under it, we will lose our
primary source of revenue.
GOVERNMENT REGULATION
Most of our U.S. Government business is subject to unique procurement
and administrative rules based on both laws and regulations, including the U.S.
Federal Acquisition Regulation that provide various profit and cost controls,
rules for allocations of costs, both direct and indirect, to contracts and
non-reimbursement of unallowable costs such as interest expenses and certain
costs related to business acquisitions, including for example the incremental
depreciation and amortization expenses arising from fair value increases to the
historical carrying values of acquired assets.
Companies supplying defense-related equipment to the U.S. Government
are subject to certain additional business risks specific to the U.S. defense
industry. Among these risks are the ability of the U.S. Government to
unilaterally suspend a company from new contracts pending resolution of alleged
violations of procurement laws or regulations. In addition, U.S. Government
contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program on a
September 30 fiscal year basis, even though contract performance may take
several years. Consequently, at the outset of a major program, the contract is
usually partially funded, and additional monies are normally committed to the
contract by the procuring agency only as appropriations are made by Congress for
future fiscal years.
U.S. Government contracts are, by their terms, subject to unilateral
termination by the U.S. Government either for its convenience or default by the
contractor if the contractor fails to perform the contracts' scope of work. Upon
termination other than for a contractor's default, the contractor will normally
be entitled to reimbursement for allowable costs and an allowance for profit.
Foreign defense contracts generally contain comparable provisions permitting
termination at the convenience of the government. To date, none of our
significant contracts have been terminated.
As is common in the U.S. defense industry, we are subject to business
risks, including changes in the U.S. Government's procurement policies (such as
greater emphasis on competitive procurement), governmental appropriations,
national defense policies or regulations, service modernization plans, and
availability of funds. A reduction in expenditures by the U.S. Government for
products and services of the type we manufacture and provide, lower margins
resulting from increasingly competitive procurement policies, a reduction in the
volume of contracts or subcontracts awarded to us or the incurrence of
substantial contract cost overruns could materially adversely affect our
business.
Certain of our sales are direct commercial sales to foreign
governments. These sales are subject to U.S. Government approval and licensing
under the Arms Export Control Act. Legal restrictions on sales of sensitive U.S.
technology also limit the extent to which we can sell our products to foreign
governments or private parties. Currently we do not have any sales from overseas
customers.
-40-
SALES AND MARKETING
We currently divide the marketing efforts of our products and services
into three areas: (1) directly to federal or local government agencies, (2) to
large partners who may represent an opportunity for us as subcontractors, and
(3) to commercial entities. These marketing duties are divided among upper
management.
MANUFACTURING
Our primary manufacturing facilities are located in Fredericksburg, VA.
There are approximately 20 employees n that facility whom produce ACADA
shipboard chemical detection equipment. We utilize our offices in Providence, RI
and San Diego, CA as manufacturing prototype development facilities.
Manufacturing of chemical detectors is overseen by Mr. Edward Kessler and
manufacturing of production prototypes is overseen by Mr. Michael Curran.
EMPLOYEES
As of April 2004, we employed approximately 30 full-time employees. We
believe our future success will depend upon the continued service of our key
technical and senior management personnel and upon our continued ability to
attract and retain highly qualified technical and managerial personnel. None of
our employees is represented by a labor union. We have never experienced a work
stoppage and consider our relationship with our employees to be good.
PROPERTY
We have a one year lease for our executive offices of approximately
1,000 square feet located in Ridgefield, Connecticut and a month-to-month lease
for a manufacturing facility of approximately 5,000 square feet located in
Fredericksburg, Virginia. A six month lease for field support offices in San
Diego, CA of approximately 2,000 square feet and an administrative office in
Providence, RI which is utilized under a monthly sublease comprising
approximately 4,000 square feet. We believe that our present facilities are
adequate to meet our current needs. If new or additional space is required, we
believe that adequate facilities are available at competitive prices.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Each director serves as director until his successor is duly elected
and qualified. Our executive officers are elected by, and serve at the
discretion of, our board of directors. There are no family relationships between
our executive officers and directors.
Our executive officers and directors are as follows:
NAME AGE POSITION YEAR BEGAN
- ------------------------ ----- ---------------------------------- ----------
Robert Tarini........... 44 Chief Executive Officer, Chairman 2002
of the Board of Directors
Kenneth Ducey, Jr....... 38 President, Chief Financial Officer 2002
and Director
ROBERT TARINI, has served as our chief executive officer since November
14, 2003 and as our chairman of the board of directors since December 9, 2002.
In April 2003 Mr. Tarini founded Syquest Inc., a firm which specializes in the
design and manufacture of acoustic remote sensing devices utilized in marine and
land based applications. In April 2001, Mr. Tarini founded Trylon Metrics Corp.,
a developer of acoustic remote sensing technology, and acted as President of
Trylon from April 2001 to present. In May 2001, Mr. Tarini founded ipPartners
Inc. and has served as its President to present. ipPartners Inc. specializes in
the development of acoustic remote sensing devices. Since 1999, Mr. Tarini has
served as the chief executive officer of Ocean Data Equipment Corporation, where
he oversaw the design and development of a complete line of scientific
instruments targeted fro geophysical and hydrographic research and developed a
remote sensing technique, which is currently being applied to detecting illicit
materials. From June 1982 to July 1990, Mr. Tarini worked at Raytheon, where he
designed active sonar and sonar trainers for US and foreign customers which were
installed onto every 688 class attack submarine and every SQQ-89 surface ship
combat system, over 100 seafaring vessels in total.
-41-
KENNETH P. DUCEY, JR., has served as our president, chief financial
officer and member of our board of directors since December 2002. From 1998 to
2002, Mr. Ducey led three small technology companies while working under the
venture capital firm, Spencer Trask. Mr. Ducey was responsible for developing
new business, typically in a segment in which the company was not yet
practicing. In 1988, Mr. Ducey launched Palmtop Utilities, a consulting company
that developed the first link between the Sharp Wizard and ACT! Contact
management software. Mr. Ducey led Palmtop Utilities to become the largest
dealer of Sharp Wizards, and secured licensing arrangements with Sharp, Contact
Software International, and Microsoft. After successfully selling the assets of
Palmtop Utilities in 1992, Mr. Ducey helped to develop The Outsourcing
Institute, where he developed and sold multi-million dollar contracts to MCI and
Price Waterhouse Coopers. From 1985 to 1986, Mr. Ducey was a trader at Salomon
Brothers where he was responsible for actively traded technology companies
listed on the NASDAQ National Market. Mr. Ducey was nationally recognized in
September 2000 by Business Week as a leading expert in outsourcing.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR COMPENSATION
We do not, as a standard practice, compensate our directors for their
service. However, all of our current directors also serve us as either officers
or consultants, and we compensate them for their service in such capacities. In
addition, during the last completed fiscal year, we granted David Danovitch, who
had been serving as a director, "shares of our common stock, with a fair market
value of $" as of the date of grant, in connection with his resignation in
November 2002.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides summary information concerning the
compensation earned by our chief executive officer and our other executive
officers for services rendered for the fiscal years ended December 31, 2003 and
June 30, 2003. Delmar Kintner served as our chief executive officer until
November 2003 and Larry Shatsoff served as our Chief Executive Officer until
December 9, 2002.
ANNUAL COMPENSATION (1)
--------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (2) COMPENSATION ($)
- ------------------------------------------------- ------ ----------- ------------- ----------------
Delmar R. Kintner............................... 2003 $ 120,000 $ 128,051 $ 343,097 (3)
Chief Executive Officer 2002
2001
Robert Tarini................................... 2003 $ 120,000 $ 76,667 $ 650,268 (5)
Chief Executive Officer and Chairman of the 2002
Board of Directors (4) 2001
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Kenneth P. Ducey, Jr. .......................... 2003 $ 180,000 $ 76,667 $ 650,268
President and Chief Financial Officer 2002
2001
Lawrence Shatsoff .............................. 2003 $ 120,000 $ 76,667 $ 5,000 (6)
President and Director 2002
2001
- ------------------------
(1) Other than as described in this table or the footnotes to this table, we
did not pay any executive officer any compensation, including incidental
personal benefits, in excess of 10% of such executive officer's salary.
(2) Figures contained in this column reflect the fair market value of stock
grants made to each named executive officer during the last completed
fiscal year.
(3) Under our employment agreement with Mr. Kintner, we were required to
issue, over the course of the agreement, a number of shares of our stock
equal to 2.27% of the total outstanding shares of equity securities of
the company (including common stock issuable upon conversion of our
outstanding preferred stock or exercise of outstanding purchase
warrants) in five installments. Mr. Kintner's employment with us was
terminated on November o, 2003 prior to the expiration of his employment
agreement. The figure contained in this column represents the fair
market value as of o of the actual number of shares granted to Mr.
Kintner as of April ", 2004, less any amounts granted in the last
completed fiscal year.
(4) Mr. Tarini assumed the rule of Chief Executive Officer upon Mr.
Kintner's resignation in November 2003.
(5) Under our employment agreements with Messrs. Tarini and Ducey, and our
consulting agreement with Verdi Consulting, we were required to issue a
number of shares of our stock equal to 2.27% of the total outstanding
shares of equity securities of the company (including common stock
issuable upon conversion of our outstanding preferred stock or exercise
of outstanding purchase warrants), provided certain performance criteria
are met. As of January, 2004, all of the performance criteria have been
met, and all of the stock grants provided for under these agreements
have been made. The figures contained in this column reflect the fair
market value of all of the stock granted under these agreements, less
any amounts granted in the last completed fiscal year.
(6) Cash payment in lieu of a stock grant in connection with resignation of
Mr. Shatsoff in December 2002.
EMPLOYMENT ARRANGEMENTS
ROBERT TARINI. We entered into an consulting agreement with Mr. Tarini
in January 2003 whereby he will serve as our chairman and chief executive
officer for an initial term of three years at an at a base consulting fee of
$10,000 per month. We also agreed to reimburse Mr. Tarini for all reasonable and
necessary out-of-pocket expenses related to the performance of his duties under
this agreement. Also, we have issued o shares of our common stock . Upon the
conclusion of the term of the agreement, Mr. Tarini is eligible to receive a
performance-based bonus of up to four times his annual base salary. He is also
eligible to participate in any bonus or incentive compensation program
established by our board of directors.
In the event that we terminate Mr. Tarini's engagement without cause,
or Mr. Tarini terminates his engagement for "good reason" (defined in the
agreement as, among other things, the assignment of duties inconsistent with Mr.
Tarini's position or any material breach by us of the consulting agreement), we
will be obligated to continue payments until the earlier of (a) three months
from the date of termination or (b) the date on which Mr. Tarini obtains a
full-time engagement elsewhere. This agreement also subjects Mr. Tarini's to
certain restrictive covenants, including an obligation to maintain confidential
information.
KEN DUCEY, JR. We entered into an employment agreement with Mr. Ducey
in January 2003 whereby he will serve as our president and chief financial
officer for an initial term of three years at an annual base salary of $185,000.
-43-
The agreement also provides for up to $1,200 a month for his expenses, including
his automobile, health insurance and reasonable expenses associated with setting
up and maintaining a home office.
In the event that we terminate Mr. Ducey's engagement without cause, or
Mr. Ducey terminates his engagement for "good reason" (defined in the agreement
as, among other things, the assignment of duties inconsistent with Mr. Ducey's
position or any material breach by us of the consulting agreement), we will be
obligated to continue payments until the earlier of (a) three months from the
date of termination or (b) the date on which Mr. Ducey obtains a full-time
engagement elsewhere. This agreement also subjects Mr. Ducey's to certain
restrictive covenants, including an obligation to maintain confidential
information.
DELMAR R. KINTNER. We entered into an employment agreement with Mr.
Kintner in January 2003 whereby he would serve as our chief executive officer
for an initial term of one year at an annual base salary of $150,000. The
agreement provided for a grant of up to 2.27% of our common stock on a
fully-diluted basis provided certain performance criteria were met. It also
provided for up to $1,200 a month for his expenses, including his automobile,
health insurance and reasonable expenses associated with setting up and
maintaining a home office. This agreement was terminated in November 2003. Prior
to termination, Mr. Kintner was granted 119,303 shares of our common stock, with
a fair market value of ". We are not required under the agreement with Mr.
Kintner to provide for any further compensation, including any additional grants
of our common stock.
EQUITY COMPENSATION PLAN DISCLOSURE
The following table sets forth certain information as of June 30, 2003,
regarding securities authorized for issuance under our equity compensation
plans, including individual compensation arrangements.
We issue equity compensation in the form of grants of restricted common
stock in connection with various employment and consulting agreements. While the
amounts vary by agreement, they are generally structured as an initial grant
made upon or after the execution of the agreement, followed by an
incentive-based grant made upon the achievement of performance milestones.
WEIGHTED-AVERAGE NUMBER OF SECURITIES
NUMBER OF SECURITIES TO EXERCISE PRICE OF REMAINING AVAILABLE FOR
BE ISSUED UPON EXERCISE OUTSTANDING FUTURE ISSUANCE UNDER
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS PLANS
- --------------------------------------- ----------------------- ----------------- -----------------------
Equity Compensation Plans Approved by
Security Holders 0 $0 0 (1)
Equity Compensation Plans Not Approved
by Security Holders 0 $0 0 (2)
---------------- ---------------- ----------------
TOTAL 0 $0 0
================ ================ ================
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At the close of business on May 10, 2004, there were issued and
outstanding 27,074,899 shares of our common stock. The following table provides
information regarding beneficial ownership of our common stock as of May 10,
2004 by:
o each person known by us to be the beneficial owner of more
than five percent of our common stock;
o each of our directors;
o each executive officers named in the summary compensation
table and three former executive officers; and
o all of our current directors and executive officers as a
group.
The persons named in this table have sole voting and investment power
with respect to the shares listed, except as otherwise indicated. The inclusion
of shares listed as beneficially owned does not constitute an admission of
beneficial ownership. Shares included in the "Right to Acquire" column consist
of shares that may be purchased through the exercise of options that vest within
60 days of May 10, 2004.
- ------------------------------------------------------- -----------------------------------------------------------------
SHARES BENEFICIALLY OWNED
- ------------------------------------------------------- -----------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OUTSTANDING RIGHT TO ACQUIRE TOTAL PERCENT
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Eurotech, Ltd. (1)................................ 2,034,870 0 2,034,870 7.72%
8665 Sudley Road, #608
Manassas, VA 20110-4588
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Montana View Corporation (2)...................... 1,350,000 1,250,000 2,600,000 9.87%
4 Shderot Chen
Herzlia, Israel
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Caslterigg Master Investments, Ltd. (3) .......... 1,000,000 1,000,000 2,000,000 7.59%
1251 Avenue of the Americas
New York, New York 10020
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
George Yang (4) .................................. 1,539,778 0 1,539,778 5.84%
c/o Bruce H. Jurist, Esq.
901 Dulaney Valley Rd., #400
Towson, MD 21204
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Robert Tarini (5)................................. 1,066,323 -- 1,066,323 4.04%
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Kenneth P. Ducey, Jr.............................. 430,474 -- 430,474 1.63%
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Delmar Kintner (6) ............................... 122,116 -- 122,116 *
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
David Danovitch (7) .............................. 3,334 -- 3,334 *
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
Larry Shatsoff (8) ............................... 1,667 -- 1,667 *
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
All directors and executive officers as a group (3
persons)...................................... 1,618,913 -- 1,618,913 6.14%
- ------------------------------------------------------- ------------------ ----------------- -------------- -------------
- ----------------------
* Represents beneficial ownership of less than 1.0%.
-45-
(1) Information is based on a Schedule 13D/A filed by Eurotech, Ltd. with the
Securities and Exchange Commission on October 24, 2003. The Schedule 13D/A
states that Eurotech granted Woodward LLC a security interest in 58,333
shares of its common stock as security for the repayment of indebtedness
owed to Woodward under three promissory notes in the aggregate principal
amount of $120,000. The Schedule 13D/A also states that Eurotech has the
sole power to vote these shares.
(2) Information is based on a Schedule 13G filed by Montana View Corporation
with the Securities and Exchange Commission on April 16, 2004. The Schedule
13G states that Montana View holds a warrant to purchase 1,250,000 shares
of our common stock. However, under the terms of the warrant the number of
shares to be obtained upon exercise of the warrant cannot exceed the number
of shares that, when combined with all other shares of our common stock and
securities owned by Montana View, would result in Montana View owning more
than 4.99% of our outstanding common stock.
(3) Information is based on a 13G filed by Caslterigg Master Investments, Ltd.
with the Securities and Exchange Commission on April 29, 2004.
(4) Includes 465,116 shares held by the Yang Family Charitable Remainder Trust
UA/DTD 12/19/03 Stringner & George Yang TTEES.
(5) Mr. Tarini is the beneficial owner of 499,848 shares of common stock issued
to iP Partners.
(6) Mr. Kintner resigned from our company in November 2003.
(7) Mr. Danovitch resigned from our company in December 2002.
(8) Mr. Shatsoff resigned from our company in December 2002.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Article X of our charter provides that, subject to Section 607.0850 of
the Florida Business Corporation Act, we will indemnify our officers, directors,
former officers and directors against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement arising out of his services as
our officer or director.
Section 607.0850 of the Florida Business Corporation Act states that we
have the power to indemnify any person made a party to any lawsuit by reason of
being our director or officer against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Our employment agreements with our directors and officers contain
provisions requiring us to indemnify them to the fullest extent permitted by
Florida law. The indemnification agreements require us to indemnify our
directors and officers to the extent permitted by our charter and to advance
their expenses incurred in connection with a proceeding with respect to which
they are entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 9, 2002, our subsidiary, Security Technology, Inc.,
acquired intellectual property and assets relating the Acoustic Core(TM)
technology from Crypto.com, Inc., a subsidiary of Eurotech, Ltd. In exchange for
the purchased technology, we agreed to issue for 4,498,638 shares of our common
stock to Eurotech, Ltd. and ipPartners, Inc. Of the shares issued, 3,998,789
were transferred to Eurotech as payment for causing Crypto.com to deliver to us
the purchased technology, and 499,849 were transferred to ipPartners in exchange
for their forgiveness and discharge of certain obligations owed to them by
Crypto in connection to the property transferred. ipPartners, Inc. is controlled
by Robert Tarini, our chief executive officer, however, at the time of this
transaction Mr. Tarini was an unrelated third party. After the transaction,
Eurotech, Ltd. owned eighty percent (80%) of our outstanding common stock,
making us their majority-owned subsidiary. In order to accomplish this
transaction, Market LLC and James LLC, our then controlling shareholders, agreed
to a recapitalization of the Company whereby Market LLC and James LLC
collectively surrendered 4,4498,637 shares of our common stock, and $5,225,000
of convertible promissory notes, in exchange for $5,225,000 in stated value
Series C Cumulative Convertible Preferred Stock. As of May 10, 2004, Eurotech
owned less than 9% of our outstanding common stock, and all of the outstanding
Series C Cumulative Convertible Preferred Stock has been converted and retired.
On January 1, 2003, we entered into a three year contract with Verdi
Consulting, Inc. to perform services assigned to the consultant by our Board of
Directors from time to time. To date Verdi Consulting has assisted us with a
variety of tasks including strategic planning; identifying, structuring and
closing on acquisitions; finding financing; investor relations; and general
business advice. We pay Verdi Consulting $12,500 per month as base compensation
and a $1,000 per month expense allowance under this agreement. In addition, as
incentive compensation, we issued 315,375 shares of common stock to Verdi
Consulting which vested in four installments during calendar 2003 and 115,097
shares which vested on January 1, 2004. Finally, Verdi Consulting is eligible to
receive a bonus of up to $1,200,000 if Verdi Consulting is instrumental in
assisting us to obtain contracts with a total value in excess of $1,000,000
during the life of the contract. We expect to award Verdi Consulting
substantially all of this bonus prior to our fiscal year end. This contract is
terminable by us without cause on thirty day's notice. We have agreed to pay
Verdi Consulting three month's base compensation if we terminate this contract
without cause.
During January 2003, we completed our acquisition of Ergo Systems, Inc.
from Ocean Data Equipment Corporation, now called Syqwest, Inc. Robert Tarini,
our chief executive officer, is also the chief executive officer of Syqwest,
Inc. Ergo's main asset consists of an annually renewable U.S. Government General
Services Administration contract to provide logistic support and product
development for five U.S. ports of entry. In exchange for Ergo we agreed to pay
Syqwest $400,000 in cash, due in installments that are triggered with the
completion of research milestones. As of April 30, 2004, we have paid Syqwest
$176,900 of which $126,900 is an advance representing partial payment for monies
that will be due with the completion of the first milestone.
On March 27, 2003, we entered into an exchange agreement with Eurotech
whereby Eurotech exchanged 1,666,666 shares of our common stock for 16,000
shares of our Series D Cumulative Convertible Preferred Stock. Our Series D
Cumulative Convertible Preferred Stock has a stated value of $1,000 per share
and has a beneficial conversion feature where each share is immediately
convertible into common stock at a discount to market prices. During the past
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six months we have also issued shares of our Series D Cumulative Convertible
Preferred Stock to James LLC. James LLC has invested a total of $3,832,000 in
our Series D Cumulative Convertible Preferred Stock. As of May 9, 2004, the
Series D Cumulative Convertible Preferred Stock held by James LLC was
convertible into 4,128,768 shares of our common stock.
On July 24, 2003, we entered into an agreement with Syqwest, Inc., in
which we issued 750,000 shares of our common stock in exchange for the
forgiveness of $450,000 for unpaid services performed by Syqwest in connection
with research conducted in relation to our vehicle stopping technology. Robert
Tarini, our chief executive officer is also the chief executive officer of
Syqwest. We have the right at any time by written notice to repurchase these
shares from Syqwest at a price equal to $.60 per share.
In September 30, 2003 we acquired one hundred percent (100%) of the
outstanding stock of Science and Technology Research, Inc., which produces our
U.S. Navy shipboard automatic chemical agent detection and alarm system product.
We paid the stockholder of Science and Technology Research a total of $6,475,000
consisting of $900,000 in cash, common stock valued at $5,100,000, a promissory
note of $375,000, and acquisition costs of $100,000. To finance this acquisition
we executed a two year, twelve percent (12%), secured Promissory Note with
Bay View Capital, LLC for $1,400,000. Bay View Capital is controlled by Robert
Tarini, our chief executive officer, and Chad Verdi, a consultant to Markland.
The outstanding balance and accrued interest of this note were repaid in full on
April, 2004.
The Company believes that all transactions described above were made on
terms no less favorable to it than would have been obtained from unaffiliated
third parties. All future transactions, if any, with its executive officers,
directors and affiliates will be on terms no less favorable to it than could
have been obtained from unrelated third parties.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 500,000,000 shares of common
stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock,
$0.0001 par value per share. As of May 10, 2004, we had 27,074,899 shares of our
common stock issued and outstanding.
COMMON STOCK
VOTING. Holders of our common stock are entitled to one vote per share
held of record on all matters to be voted upon by our stockholders. Our common
stock does not have cumulative voting rights. Persons who hold a majority of the
outstanding common stock entitled to vote on the election of directors can elect
all of the directors who are eligible for election.
DIVIDENDS. Subject to preferences that may be applicable to the holders
of any outstanding shares of our preferred stock, the holders of our common
stock are entitled to receive such lawful dividends as may be declared by our
board of directors.
LIQUIDATION AND DISSOLUTION. In the event of our liquidation,
dissolution or winding up, and subject to the rights of the holders of any
outstanding shares of our preferred stock, the holders of shares of our common
stock will be entitled to receive pro rata all of our remaining assets available
for distribution to our stockholders.
OTHER RIGHTS AND RESTRICTIONS. Our charter prohibits us from granting
preemptive rights to any of our stockholders. All outstanding shares are fully
paid and nonassessable.
LISTING. Our common stock is traded on the over-the-counter bulletin
board.
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PREFERRED STOCK
Our articles of incorporation authorize us to issue shares of our
preferred stock from time to time in one or more series without stockholder
approval. As of May 10, 2004, we had designated 30,000 shares as Series A
preferred stock, all of which were issued and outstanding on that date, and
40,000 shares of our preferred stock as Series D Preferred Stock, 19,286 of
which were issued and outstanding on that date. The following is a summary
description of the principal terms of each series of our preferred stock. For a
complete statement of all the terms of each series of preferred stock, please
review the applicable certificate of designation that we have previously filed.
SERIES A NON-VOTING REDEEMABLE CONVERTIBLE PREFERRED STOCK
VOTING RIGHTS: Except as otherwise provided under Florida law, the
Series A preferred stock has no voting rights.
DIVIDENDS: The Series A preferred stock does not accrue dividends.
CONVERSION: Each share of the Series A preferred stock is convertible
at our option into 20 shares of our common stock.
ANTIDILUTION: Upon the occurrence of a stock split or stock dividend,
the conversion rate shall be adjusted so that the conversion rights of the
Series A preferred stock stockholders shall be nearly equivalent as practicable
to the conversion rights of the Series A preferred stock stockholders prior to
such event.
REDEMPTION: We may redeem all or any portion of the outstanding shares
of the Series A preferred stock upon cash payment of $10.00 per share.
DISSOLUTION: In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, the Series A preferred stock will be
treated as senior only to our common stock. If, upon any winding up of our
affairs, and after the Series D preferred stockholders are paid in full, our
assets available to pay the holders of Series A preferred stock are not
sufficient to permit the payment in full, then all our assets will be
distributed to those holders on a pro rata basis.
SERIES D CONVERTIBLE PREFERRED STOCK
VOTING RIGHTS: Except as otherwise provided under Florida law, the
Series D preferred stockholders have no right to vote with the holders of our
common stock. However, our charter requires that the Series D preferred
stockholders approve any amendment to the rights and preferences of the Series D
preferred stock. Where the Series D preferred stockholders do have the right to
vote as a class, whether under our charter or pursuant to Florida law, the
affirmative vote of the holders of at least 67% of the outstanding shares of
Series D preferred stock is necessary to constitute approval.
DIVIDENDS: The Series D preferred stock does not accrue dividends.
CONVERSION: The Series D preferred stock is convertible at the option
of the stockholder at any time. The number of shares of our common stock into
which each share of Series D preferred is convertible is determined by dividing
$1,000 by the discounted bid price. The "discounted" bid price is the average
closing bid price of our common stock during the five business days immediately
preceding the conversion date multiplied by the applicable discount factor, as
set forth below.
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AVERAGE CLOSING BID PRICE (1) DISCOUNT FACTOR
- ------------------------------------------------------- ---------------
$15.00 or less 80%
more than $15.00, but less than or equal to $30.00 75%
more than $30.00, but less than or equal to $45.00 70%
more than $45.00 65%
- --------------------
(1) After an adjustment for a 1-for-60 reverse stock split effective October 27,
2003.
The Series D preferred stock can be converted only to the extent that
the Series D stockholder will not, as a result of the conversion, hold in excess
of 9.999% of the total outstanding shares of our common stock.
ANTIDILUTION: Upon the occurrence of a transaction that results in a
change of control, or a split off of the company assets, or a stock split or
stock dividend, the price at which the Series D preferred stock is convertible
shall be adjusted so that the conversion rights of the Series D preferred stock
stockholders shall be nearly equivalent as practicable to the conversion rights
of the Series D preferred stock stockholders prior to the transaction.
REDEMPTION: We have the right to redeem any outstanding shares of our
Series D preferred stock at any time. The redemption price is equal to $1,000,
multiplied by 135%. Our Series D preferred stock is convertible, even after we
have provided a notice of redemption, until the Series D stockholder has
received full cash payment for the shares we are redeeming.
DISSOLUTION: In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, the Series D preferred stock will be
treated as senior to all preferred stock and our common stock. If, upon any
winding up of our affairs, our assets available to pay the holders of Series D
preferred stock are not sufficient to permit the payment in full, then all our
assets will be distributed to those holders on a pro rata basis.
COMMON STOCK PURCHASE WARRANTS
WARRANTS ISSUED IN APRIL 2, 2004 PRIVATE PLACEMENT.
In our private placement transaction completed on April 2, 2004, we
issued common stock purchase warrants to purchase an aggregate of 3,333,333
shares of common stock with an exercise price of $1.00 per share to the
investors. In addition, we issued a common stock purchase warrant to purchase
333,333 shares of our common stock with an exercise price of $1.40 per share to
West Hastings Ltd. as a finder's fee.
These warrants have a so-called "most favored nation" provision
pursuant to which the exercise price of the warrants and the terms of the
warrants will automatically be changed if we issue warrants with a lower
exercise price or with terms more favorable to the holder at any time prior to
180 days after the effective date of a registration statement providing for the
resale of shares issuable upon exercise of the warrant. If we issue warrants
with a lower exercise price than the warrants we issued on April 2, 2004 during
this period, the exercise price of the warrants we issued on April 2, 2004 will
be reduced to that new lower price. If we issue warrants with terms more
favorable to the warrant holder than the terms set forth in the warrants we
issued on April 2, 2004, such new more favorable terms will automatically be
incorporated into the April 2 warrants.
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WARRANTS ISSUED IN APRIL 16, 2004 PRIVATE PLACEMENT.
In our private placement transaction completed on April 16, 2004, we
issued common stock purchase warrants to purchase an aggregate of 2,500,000
shares of common stock with an exercise price of $1.50 per share to the
investors. In addition, we issued a common stock purchase warrant to purchase
25,000 shares of our common stock with an exercise price of $2.00 per share to
Baker Consulting as a finder's fee.
These warrants have a so-called "most favored nation" provision
pursuant to which the exercise price of the warrants will automatically be
changed (but only to the extent that such change does not itself cause a change
to the warrants we issued on April 2, 2004, on account of the most favored
nation clause contained in the April 2 warrants), if we issue warrants with a
lower exercise price at any time prior to 180 days after the effective date of a
registration statement providing for the resale of shares issuable upon exercise
of the warrant. If we issue warrants with a lower exercise price than the
warrants we issued on April 16, 2004 during this period, the exercise price of
the warrants we issued on April 16, 2004 will be reduced to that new lower
price.
WARRANTS ISSUED IN MAY 3, 2004 PRIVATE PLACEMENT.
In our private placement transaction completed on May 3, 2004, we
issued redeemable common stock purchase warrants to purchase an aggregate of
7,098,750 shares of common stock with an exercise price of $1.50 per share to
the investors. These common stock purchase warrants are redeemable by us, at any
time, after our common stock has a closing bid price of not less than $2.25 per
share for 20 consecutive trading days after such effective date for $0.0001 per
share; provided that this registration statement, of which this prospectus is a
part, has been declared effective by the SEC.
These warrants do not have a so-called "most favored nation" clause.
All the warrants are exercisable for a period of three (3) years. All
of the warrants contain provisions that protect holders against dilution by
adjustment of the exercise price in certain events such as stock dividends and
distributions, stock splits, recapitalizations, mergers, consolidations, and
issuances of common stock below their respective exercise price per share. The
terms of the common stock purchase warrants provide that the number of shares to
be obtained by each of the holders of the warrants, upon exercise of our common
stock purchase warrants cannot exceed the number of shares that, when combined
with all other shares of common stock and securities then owned by each of them,
would result in any one of them owning more than 4.99% (or, in some cases,
9.99%) of our outstanding common stock at any given point in time. The holder of
a warrant will not possess any rights as a stockholder until the holder
exercises the warrant.
FLORIDA LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Provisions of Florida law, our charter and by-laws could make it more
difficult to acquire us by means of a merger, tender offer, proxy contest, open
market purchases and otherwise. These provisions, which are summarized below,
are expected to discourage types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging takeover or acquisition proposals because negotiation of these
proposals could result in an improvement of their terms.
-51-
AUTHORIZED BUT UNISSUED STOCK. We have shares of common stock and
preferred stock available for future issuance, in some cases, without
stockholder approval. We may issue these additional shares for a variety of
corporate purposes, including public offerings to raise additional capital,
corporate acquisitions, stock dividends on our capital stock or equity
compensation plans.
The existence of unissued and unreserved common stock and preferred
stock may enable our board of directors to issue shares to persons friendly to
current management or to issue preferred stock with terms that could render more
difficult or discourage a third-party attempt to obtain control of us, thereby
protecting the continuity of our management. In addition, if we issue preferred
stock, the issuance could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation.
SPECIAL MEETING OF STOCKHOLDERS. Our by-laws provide that special
meetings may be called only by our board of directors or by holders of not less
than 10% of all the votes entitled to be cast on any issue proposed to be
considered at the proposed special meeting. This provision may make it more
difficult for stockholders to take action opposed by our board of directors.
AMENDMENT TO OUR BY-LAWS. Section 607.1004 of the Florida Business
Corporation Act provides that preferred stockholders have the right to vote as a
class on amendments to our charter that would negatively impact their rights or
preferences as preferred stockholders of such class, our charter, however,
provides that our board of directors has the exclusive authority to alter, amend
or repeal them. This provision of our charter may also make it more difficult
for stockholders to take action opposed by our board of directors.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Florida
Atlantic Stock Transfer, Inc..
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. The selling stockholders and any of their pledgees, donees,
transferees and successors-in-interest receiving shares from a named selling
stockholder after the date of this prospectus may, from time to time, sell any
or all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares and these transactions may
or may not involve brokers or dealers.
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
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o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares in open market
transactions under Rule 144 under the Securities Act of 1933, as amended, if
available, rather than under this prospectus. Broker-dealers engaged by the
selling stockholders may arrange for other brokers-dealers to participate in
sales. Broker-dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling stockholder may from time to time pledge or grant a
security interest in some or all of the common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933. The selling
stockholders have informed us that none of them have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock, nor is there an underwriter or coordinating broker acting in connection
with the proposed sale of shares by the selling stockholders.
Upon being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
our common stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Act, disclosing (i) the name of each such selling stockholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction. In addition, upon the company being notified by a
selling stockholder that a donee or pledgee intends to sell more than 500 shares
of common stock, a supplement to this prospectus will be filed.
We are required to pay all fees and expenses incurred by us incident to
the registration of the shares of common stock. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments to which such selling shareholders or their respective
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pledgees, donees, transferees or other successors in interest may be required to
make in respect thereof. Any shares of common stock covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as
amended, may be sold under Rule 144 rather than pursuant to this prospectus.
AVAILABLE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. Copies of the reports, proxy statements and other information may be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of such documents by writing to
the SEC and paying a fee for the copying cost. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains a web site at (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
This prospectus is part of a registration statement on Form SB-2 that
we filed with the SEC. Certain information in the registration statement has
been omitted from this prospectus in accordance with the rules and regulations
of the SEC. We have also filed exhibits and schedules with the registration
statement that are excluded from this prospectus. For further information you
may:
o read a copy of the registration statement, including the
exhibits and schedules, without charge at the SEC's Public
Reference Room; or
o obtain a copy from the SEC upon payment of the fees prescribed
by the SEC.
LEGAL MATTERS
Foley Hoag LLP of 155 Seaport Boulevard, Boston, Massachusetts 02210
has advised us about the legality and validity of the shares. We know of no
members of Foley Hoag who are beneficial owners of our common stock or preferred
stock.
EXPERTS
Our consolidated financial statements as of June 30, 2003 included in
this prospectus have been audited by Marcum & Kliegman LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
Our consolidated financial statements as of June 30, 2002 included in
this prospectus have been audited by Sherb & Co., LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
Financial statements as of September 30, 2003 and December 31, 2002 for
Science and Technology Research Corporation, Inc. which are included in this
prospectus have been audited by Marcum & Kliegman LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
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INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT ACCOUNTS CONSOLIDATED FINANCIAL
STATEMENTS FOR MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED JUNE 30, 2003
Independent Auditors' Report of Marcum & Kliegman LLP.....................................................F-1
Independent Auditors' Report of Sherb & Co., LLP..........................................................F-2
Consolidated Balance Sheet at June 30, 2003...............................................................F-3
Consolidated Statements of Operations for the Years Ended June 30, 2003 and 2002..........................F-4
Consolidated Statements of Stockholders' (Deficiency) Equity for the Years Ended
June 30, 2003 and 2002..................................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2003 and 2002..........................F-8
Notes to Consolidated Financial Statements................................................................F-10
UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR MARKLAND
TECHNOLOGIES, INC. FOR THE PERIOD ENDED DECEMBER 31, 2003
Condensed Consolidated Balance Sheet at December 31, 2003.................................................F-36
Condensed Consolidated Statement of Operations for the Six Months Ended
December 31, 2003 and 2002..............................................................................F-37
Condensed Consolidated Statements of Operations for the Three Months Ended
December 31, 2003 and 2002..............................................................................F-38
Condensed Consolidated Statement of Stockholders' Equity for the Six Months ended
December 31, 2003.......................................................................................F-39
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2003 and 2002..............................................................................F-43
Notes to Consolidated Financial Statements................................................................F-45
REPORT OF INDEPENDENT ACCOUNTS CONSOLIDATED FINANCIAL STATEMENTS
FOR SCIENCE & TECHNOLOGY RESEARCH, INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND THE YEAR ENDED DECEMBER 31, 2002
Independent Auditors' Report of Marcum & Kliegman LLP.....................................................F-59
Balance Sheets............................................................................................F-60
Statements of Operations..................................................................................F-61
Statement of Changes in Shareholder's Equity..............................................................F-62
Statements of Cash Flow...................................................................................F-63
Notes to Consolidated Financial Statements................................................................F-65
Pro Forma Consolidated Financial Statements (Unaudited)
FINANCIAL STATEMENTS
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
Board of Directors and Stockholders
Markland Technologies, Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of Markland
Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2003 and the
related consolidated statements of operations, stockholders' (deficiency)
equity, and cash flows for the year ended June 30, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Markland
Technologies, Inc. and Subsidiaries at June 30, 2003 and the results of their
operations and their cash flows for the year ended June 30, 2003, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of approximately
$2,837,000 during the year ended June 30, 2003. As of June 30, 2003, the Company
had a working capital deficiency of approximately $1,235,000. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 2.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
New York, New York
September 15, 2003
F-1
Board of Directors and Stockholders
Markland Technologies, Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of Markland
Technologies, Inc. and Subsidiaries as of June 30, 2002 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year ended June 30, 2002, the six months ended June 30, 2001 and the year
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, the consolidated financial position of Markland Technologies, Inc. and
Subsidiaries at June 30, 2002 and the consolidated results of its operations and
its cash flows for the year ended June 30, 2002, the six months ended June 30,
2001 and the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses in each of the last two fiscal years and as more fully described in Note
2, the Company anticipates that additional funding will be necessary to sustain
the Company's operations through the fiscal year ending June 30, 2002. These
conditions raise substantial doubt about the Company's ability to continue as a
going-concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/Sherb & Co., LLP
----------------
Sherb & Co., LLP
Certified Public Accountants
New York, New York
October 4, 2002
F-2
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
ASSETS
------
CURRENT ASSETS:
Cash $ 5,465
Accounts receivable (including $112,251 due from related party) 314,222
Prepaid insurance 22,917
-------------
TOTAL CURRENT ASSETS 342,604
-------------
OTHER ASSETS:
Advances on purchase of ASI technology - related party 65,000
Intangible assets - ERGO, net of accumulated amortization of $66,668 333,332
Technology rights (Acoustic Core) 1,300,000
-------------
TOTAL OTHER ASSETS 1,698,332
-------------
TOTAL ASSETS $ 2,040,936
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable (including $573,100 due to related party) $ 1,441,636
Accrued expenses and other current liabilities 119,270
Note payable 17,004
-------------
TOTAL CURRENT LIABILITIES 1,577,910
SECURED CONVERTIBLE PROMISSORY NOTE, less debt discount
of $83,334 416,666
-------------
TOTAL LIABILITIES 1,994,576
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A redeemable convertible preferred stock - no par value; 30,000
authorized, issued and outstanding at June 30, 2003; liquidation preference
of $300,000 300,000
Series B convertible preferred stock - $.0001 par value; 10 authorized
and -0- issued and outstanding -
Series C 5% cumulative redeemable convertible preferred stock -
$.0001 par value; 8,000 - authorized; 5,395 issued and outstanding
; liquidation preference of $5,395,000 1
Series D redeemable convertible preferred stock -
$.0001 par value; 40,000 authorized; 16,430 issued
and outstanding; liquidation preference of $16,430,000 2
Common stock - $.0001 par value; 500,000,000 authorized;
220,294,405 shares issued and outstanding 22,029
Additional paid-in capital 13,878,442
Unearned compensation (4,381,379)
Accumulated deficit (9,772,735)
-------------
TOTAL STOCKHOLDERS' EQUITY 46,360
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,040,936
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
June 30,
----------------------------------
2003 2002
-------------- --------------
REVENUES (including $112,251 of revenues from a related party) $ 658,651 $ --
COST OF REVENUES (including $99,973 of costs incurred to a
related party) 445,218 --
-------------- --------------
GROSS PROFIT 213,433 --
-------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 1,186,379 247,677
Research & development 522,657 --
Compensatory element of stock issuances for
selling, general and administrative fees 2,051,822 --
Amortization of intangible asset 66,668 --
-------------- --------------
TOTAL OPERATING EXPENSES 3,827,526 247,677
-------------- --------------
OPERATING LOSS FROM CONTINUING OPERATIONS (3,614,093) (247,677)
-------------- --------------
OTHER EXPENSES (INCOME), NET:
Interest expense 226,751 --
Other expense (income), net (5,250) --
-------------- --------------
TOTAL OTHER EXPENSES (INCOME), NET 221,501 --
-------------- --------------
LOSS FROM CONTINUING OPERATIONS (3,835,594) (247,677)
-------------- --------------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS:
Gain on disposition -- 1,046,133
Gain (loss) from discontinued operations 998,713 (3,259,421)
-------------- --------------
TOTAL GAIN (LOSS) FROM DISCONTINUED OPERATIONS 998,713 (2,213,288)
-------------- --------------
NET LOSS (2,836,881) (2,460,965)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 --
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 --
PREFERRED STOCK DIVIDEND - Series C 152,716 --
-------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (7,598,852) $ (2,460,965)
============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.03) $ 0.00
Gain (loss) from discontinued operations 0.00 (0.01)
-------------- --------------
Net loss $ (0.03) $ (0.01)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 300,163,421 299,909,179
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Series A Convertible Series C Convertible
Common Stock Preferred Stock Preferred Stock
----------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------- ------------- ------------- ------------- ------------- -------------
Balance - July 1, 2001 299,909,179 $ 29,990 -- $ -- -- $ --
Write-off of accounts payable-CWTEL -- -- -- -- -- --
Net Loss -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance - June 30, 2002 299,909,179 29,990 -- -- -- --
Stock cancelled in connection with
December 9, 2002 exchange
agreement (269,918,261) (26,992) -- -- -- --
Stock issued in connection with
December 9, 2002 exchange
agreement 269,918,261 26,992 -- -- -- --
Conversion of promissory notes and
interest into Series C convertible
preferred stock -- -- -- -- 5,225 1
Stock issued for directors'
compensation, net 300,000 30 -- -- -- --
Stock issued in connection with
private placement 6,800,000 680 -- -- -- --
Value assigned to beneficial
conversion feature of convertible
debt -- -- -- -- -- --
Preferred stock dividend - Series C -- -- -- -- -- --
Preferred stock dividend -
beneficial conversion feature -
Series C -- -- -- -- -- --
Value allocated to Series C
preferred stock - beneficial
conversion feature dividend -- -- -- -- -- --
Stock issued in connection with
consulting agreement 140,000 14 -- -- -- --
Stock issued in connection with
consulting agreements 7,951,706 795 -- -- -- --
Stock issued in connection with
employment agreements 5,193,520 520 -- -- -- --
Amortization of consulting agreements -- -- -- -- -- --
Amortization of employment agreements -- -- -- -- -- --
Sale of 170 shares of Series C
convertible preferred stock -- -- -- -- 170 --
Conversion of liabilities from
discontinued operations into
Series A convertible
preferred stock -- -- 30,000 300,000 -- --
Conversion of common stock into
Series D convertible preferred
stock (100,000,000) (10,000) -- -- -- --
Sale of Series D convertible
preferred stock -- -- -- -- -- --
Preferred stock dividend -
beneficial conversion feature -
Series D -- -- -- -- -- --
Value allocated to Series D
preferred stock - beneficial
conversion feature dividend -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance - June 30, 2003 220,294,405 $ 22,029 30,000 $ 300,000 5,395 $ 1
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Series D Convertible
Preferred Stock
-------------------------- Unearned
Shares Amount Compensation
------------ ------------ ------------
Balance - July 1, 2001 -- $ -- $ --
Write-off of accounts payable-CWTEL -- -- --
Net Loss -- -- --
------------ ------------ ------------
Balance - June 30, 2002 -- -- --
Stock cancelled in connection with December 9,
2002 exchange agreement -- -- --
Stock issued in connection with December 9,
2002 exchange agreement -- -- --
Conversion of promissory notes and interest
into Series C convertible preferred stock -- -- --
Stock issued for director's compensation, net -- -- --
Stock issued in connection with private
placement -- -- --
Value assigned to beneficial conversion
feature of convertible debt -- -- --
Preferred stock dividend - Series C -- -- --
Preferred stock dividend - beneficial
conversion feature - Series C -- -- --
Value allocated to Series C Preferred stock -
beneficial conversion feature dividend -- -- --
Stock issued in connection with consulting
agreement -- -- --
Stock issued in connection with consulting
agreements -- -- (4,037,237)
Stock issued in connection with employment
agreements -- -- (3,573,966)
Amortization of consulting agreements -- -- 1,178,002
Amortization of employment agreements -- -- 2,051,822
Sale of 170 shares of Series C convertible
preferred stock -- -- --
Conversion of liabilities from discontinued
operations into Series A convertible
preferred stock -- -- --
Conversion of common stock into Series D
convertible preferred stock 16,000 2 --
Sale of Series D convertible preferred stock 430 -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- --
Value allocated to Series D Preferred stock -
beneficial conversion feature dividend -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance - June 30, 2003 16,430 $ 2 $(4,381,379)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Total
Additional Stockholders'
Paid-in Accumulated (Deficiency)
Capital Deficit Equity
------------- ------------- -------------
Balance - July 1, 2001 $ -- $ (5,346,191) $ (5,316,201)
Write-off of accounts payable-CWTEL -- 871,302 871,302
Net Loss -- (2,460,965) (2,460,965)
------------- ------------- -------------
Balance - June 30, 2002 -- (6,935,854) (6,905,864)
Stock cancelled in connection with December 9,
2002 exchange agreement 26,992 -- --
Stock issued in connection with December 9,
2002 exchange agreement 1,273,008 -- 1,300,000
Conversion of promissory notes and interest
into Series C convertible preferred stock 5,224,999 -- 5,225,000
Stock issued for director's compensation, net 2,970 -- 3,000
Stock issued in connection with private
placement 339,320 -- 340,000
Value assigned to beneficial conversion
feature of convertible debt 125,000 -- 125,000
Preferred stock dividend - Series C (152,716) -- (152,716)
Preferred stock dividend - beneficial
conversion feature - Series C (501,755) -- (501,755)
Value allocated to Series C Preferred stock -
beneficial conversion feature dividend 501,755 -- 501,755
Stock issued in connection with consulting
agreement 30,386 -- 30,400
Stock issued in connection with consulting
agreements 5,214,924 -- 1,178,482
Stock issued in connection with employment
agreements 4,413,385 -- 839,939
Amortization of consulting agreements (1,178,002) -- --
Amortization of employment agreements (2,051,822) -- --
Sale of 170 shares of Series C convertible
preferred stock 170,000 -- 170,000
Conversion of liabilities from discontinued
operations into Series A convertible
preferred stock -- -- 300,000
Conversion of common stock into Series D
convertible preferred stock 9,998 -- --
Sale of Series D convertible preferred stock 430,000 -- 430,000
Preferred stock dividend - beneficial
conversion feature - Series D (4,107,500) -- (4,107,500)
Value allocated to Series D preferred stock -
beneficial conversion feature dividend 4,107,500 -- 4,107,500
Net loss -- (2,836,881) (2,836,881)
------------- ------------- -------------
Balance - June 30, 2003 $ 13,878,442 $ (9,772,735) $ 46,360
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30,
------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,836,881) $(2,460,965)
(Gain) loss from discontinued operations (998,713) 2,213,288
------------ ------------
Loss from continuing operations (3,835,594) (247,677)
Adjustment to reconcile net loss to net
cash used in operating activities:
Amortization of intangible asset 66,668 --
Amortization of debt discount 41,666 --
Compensatory stock issuance 2,051,822 --
Changes in operating assets and liabilities:
Accounts receivable (314,223) --
Prepaid expenses (1,167) --
Accounts payable 939,774 --
Accrued expenses and other current
liabilities 328,170 --
------------ ------------
NET CASH USED IN CONTINUING OPERATIONS (764,550) (247,677)
NET CASH USED IN DISCONTINUED OPERATIONS -- (700,511)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (764,550) (948,188)
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Payments on acquisition of intangible assets - ERGO (126,900) --
Advances on purchase of ASI (65,000) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (191,900) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Secured line of credit -- 779,531
Proceeds in connection with premium financing agreement 44,000 --
Principal payments relating to premium
financing agreement (26,996) --
Proceeds from sale of common stock in private placement 340,000 --
Proceeds from sale of Series C 5% cumulative
convertible preferred stock 170,000 --
Proceeds from sale of Series D convertible preferred stock 430,000 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 957,004 779,531
------------ ------------
NET INCREASE (DECREASE) IN CASH 554 (168,657)
CASH - BEGINNING OF YEAR 4,911 173,568
------------ ------------
CASH - END OF YEAR $ 5,465 $ 4,911
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------
For the Years Ended
June 30,
------------------------------
2003 2002
------------- ------------
Cash paid during the years for:
Interest $ -- $ --
============= ============
Taxes $ -- $ --
============= ============
Non-cash investing and financing activities:
Conversion of notes payable and accrued interest into
preferred stock $ 5,225,000 $ --
============= ============
Conversion of liabilities from discontinued operations into
Series A convertible preferred stock $ 300,000 $ --
============= ============
Acquisition of technology rights by issuance of common stock $ 1,300,000 $ --
============= ============
Conversion of common stock into Series D convertible preferred
stock $ 10,000 $ --
============= ============
Deemed dividend preferred stock - beneficial conversion
Feature - Series C $ 501,755 $ --
============= ============
Deemed dividend preferred stock - beneficial conversion
Feature - Series D $ 4,107,500 $ --
============= ============
Accrued Dividends on preferred stock $ 152,716 $ --
============= ============
Payable on purchase of Ergo $ 273,100 $ --
============= ============
Secured convertible promissory note debt discount $ 125,000 $ --
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Markland Technologies, Inc. ("Markland" or the "Company"), previously known as
Quest Net, was incorporated in Colorado in November 1995, under the name "A.P.
Sales Inc." In December 1998, A.P. Sales Inc. dissolved as a Colorado
corporation, redomiciled in Florida and changed its name to Quest Net Corp.
In March 2000, the Company acquired CWTel, Inc., a Florida-based
telecommunication corporation. On November 11, 2001, CWTel filed a voluntary
bankruptcy petition under Chapter 7 in the State of Florida. On March 11, 2002,
a final decree was issued, the trustee discharged and the case closed.
On March 15, 2001, the Company acquired all of the outstanding capital stock of
Vidikron of America, Inc. ("Vidikron") As a result of this acquisition, the sole
stockholder of Vidikron, Market LLC, controlled a majority of the common stock
of the Company and, accordingly, the transaction was accounted for as a reverse
acquisition and as a recapitalization of Vidikron, pursuant to which Vidikron
was treated as the accounting acquirer. Accordingly the historical financial
statements are those of Vidikron. Vidikron became a wholly-owned subsidiary of
the Company. Subsequently, Quest Net changed its name to Markland Technologies,
Inc. and Vidikron adopted the year-end of Quest Net.
On May 28, 2002, the Company received a notice of default from Market LLC
relating to a loan and security agreement and a related secured convertible
revolving credit note due to the Company's failure to make payments of principal
and interest due under the note. In addition, as a result of the defaults under
the note, Market LLC declared all outstanding principal and interest under the
note, totaling $4,213,300, to be immediately due and payable. In June of 2002,
all of the shares of the Vidikron subsidiary, including all of its operating
assets and liabilities, were transferred to Market LLC in partial satisfaction
of the indebtedness due Market LLC of $50,000. As a result, the Company had no
active business following such event. The assets and liabilities and operating
results of Vidikron have been treated as a discontinued operation in the
accompanying consolidated financial statements.
On November 21, 2002, Security Technology, Inc. ("STI") was incorporated as a
Delaware C corporation and became a wholly-owned subsidiary of Markland
Technologies, Inc.
On December 9, 2002, the Company, Eurotech Ltd. ("Eurotech"), ipPartners, Inc.
("ipPartners")- a related party, Market LLC and James LLC, entered into an
exchange agreement ("Exchange Agreement"). On December 19, 2002, the
transactions contemplated by the Exchange Agreement were consummated. Pursuant
to the Exchange Agreement, Eurotech transferred to the Company certain rights to
Eurotech's Acoustic Core technology, relating to illicit materials detection,
and certain cryptology technology. 90% of the Company's issued and outstanding
common stock held by Market LLC and James LLC, the holders of 100% of the issued
and outstanding common stock of the Company, was retired. The Company issued
239,927,344 shares of common stock, representing approximately eighty percent
(80%) of its outstanding common stock, to Eurotech, and 29,990,917 shares of
common stock, representing approximately ten percent (10%) of its outstanding
common stock, to ipPartners. As a result of this transaction, a change of
control occurred and the Company became an 80%-owned subsidiary of Eurotech (see
Note 4).
F-10
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS (Continued)
In January 2003, the Company acquired all of the common stock of Ergo Systems,
Inc., a provider of security logistic support and related product development
services (see Note 4).
As a result of the technology acquired from Eurotech in December 2002, and the
acquisition of Ergo Systems, Inc. in January 2003, Markland Technologies, Inc.
plans to build a comprehensive offering of integrated security technologies and
services to provide tools necessary to protect personnel, data and
infrastructure assets as part of Homeland Security.
Markland provides end-to-end solutions to the Department of Homeland Security
("DHS") by bringing together and integrating innovative technologies that
currently exist in Universities, small companies, and large defense contractors.
Markland has proprietary technologies and existing government contracts they
leverage to provide these solutions.
Markland's principal end customer is the United States Government.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, for the year ended June 30, 2003, the Company incurred a net loss from
continuing operations of $3,835,594 and had a working capital deficiency of
$1,235,306. The Company has limited finances and requires additional funding in
order to market and license its products. There is no assurance that the Company
can reverse its operating losses, or that it can raise additional capital to
allow it to continue its planned operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
During the year ended June 30, 2003, the Company funded its operations primarily
from proceeds of $340,000 received from a private equity financing of 6,800,000
shares of the Company's common stock and the sale of 170 shares of Series C
preferred stock for $170,000. In addition, during the year the Company sold 430
shares of Series D preferred stock for $430,000. During the second half of the
year ended June 30, 2003, the Company produced revenues from operations of
$658,651 as shown in the consolidated statements of operations.
The Company's ability to continue as a going concern remains dependent upon the
ability to obtain additional financing or through the generation of positive
cash flows from continuing operations. These financial statements do not include
any adjustments relating to the recoverability of recorded asset amounts that
might be necessary as a result of the above uncertainty.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Security Technology, Inc. ("STI"), and Ergo
Systems, Inc. ("Ergo"). All significant inter-company balances and transactions
have been eliminated in consolidation.
F-11
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated statement of cash flows, the Company considers
all investments with a maturity of three months or less when purchased to be
cash equivalents. At June 30, 2003, the Company had no cash equivalents.
Accounts Receivable
- -------------------
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on a review of the
current status of trade accounts receivable. It is reasonably possible that the
Company's estimate of the allowance for doubtful accounts will change. The
Company has not experienced any losses in accounts receivable and has provided
no allowance at June 30, 2003.
Concentration of Credit Risk
- ----------------------------
Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of
Information about Financial Instruments With Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", requires disclosure
of any significant off-balance-sheet and credit risk concentrations. The
principal financial instrument that potentially subjects the Company to
concentrations of credit risk is accounts receivable. The majority of the
Company's revenues and accounts receivable are derived from an agency associated
with the U.S. Government and a related party who are both not required to
provide collateral for amounts owed to the Company. The Company does not believe
that it is subject to any unusual credit risks, other than the normal level of
risk attendant to operating its business.
For the year ended June 30, 2003, two customers accounted for 83% and 17% (a
related party) of total revenues, respectively. At June 30,2003, these two
customers accounted for 64% and 36% (a related party) of accounts receivable,
respectively. For the year ended June 30, 2002, there were no revenues or
accounts receivable from either of these customers.
F-12
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
- ------------------------
Research and development ("R&D") costs are charged to expense as incurred. The
Company capitalizes costs related to acquired technologies that have achieved
technological feasibility and have alternative uses. Acquired technologies,
which are in-process at the date of acquisition or have no alternative uses are
expensed as research and development costs. Included in research and development
costs for the year ended June 30, 2003 is $300,000 payable to Syquest, a related
party, for development costs related to a vehicle stopping technology (see Note
5).
Fair Value of Financial Instruments
- -----------------------------------
Management believes the carrying amounts reported in the consolidated balance
sheets for cash, receivable and payment amounts and accrued expenses approximate
fair value because of the short maturity of these financial instruments.
The Company also believes that the carrying amounts of its secured convertible
promissory note approximates fair value, as the interest rates approximate a
rate that the Company could have obtained under similar terms at the balance
sheet date.
Loss Per Share
- --------------
Basic net loss per common share has been computed based on the weighted average
number of shares of common stock outstanding during the periods presented.
Common stock equivalents, consisting of a secured convertible promissory note,
Series A and D Convertible preferred stock and Series C 5% Cumulative
Convertible preferred stock, discussed in the notes to consolidated financial
statements, were not included in the calculation of the diluted loss per share
because their inclusion would have had the effect of decreasing the loss per
share otherwise computed.
At June 30, 2003, as permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amended SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company has elected to continue
to follow the intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretation including Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. No stock-based employee
compensation cost is reflected in operations, as there are no options
outstanding.
F-13
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long Lived Assets
- -----------------
Intangible Assets are stated at cost less appropriate valuation allowances and
accumulated amortization. Amortization is provided on the straight-line method
from the date the respective asset is placed into service until the shorter of
the estimated useful life of the asset or the respective term of the related
contracts or agreements. As of June 30, 2003, total amortization expense
recorded by the Company amounted to $66,668.
Impairment of Long-Lived Assets
- -------------------------------
Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company continually monitors events and changes in
circumstances that could indicate carrying amounts of long-lived assets,
including intangible assets, may not be recoverable.
An impairment loss is recognized when expected cash flows are less than the
asset's carrying value. Accordingly, when indicators or impairment are present,
the Company evaluates the carrying value of such assets in relation to the
operating performance and future undiscounted cash flows of the underlying
business. The Company's policy is to record an impairment loss when it is
determined that the carrying amount of the asset may not be recoverable.
Income Taxes
- ------------
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carry forwards, deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
Reclassifications
- -----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-14
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in APB No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meets the criteria for classification as an
extraordinary item. The Company adopted SFAS No. 145 in the first quarter of
fiscal 2003. The adoption of the standard did not have a material impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including certain costs incurred in a restructuring." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. These costs include lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement. A fundamental conclusion reached by the FASB in
this statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of the standard did not have a material impact on the financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of WHEN-ISSUED securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of SFAS No. 149 is not expected to have
an impact on the Company's' financial statements.
F-15
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of SFAS No. 150 will have on its results
of operations and financial condition.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The Company adopted FIN 45 as
of December 31, 2002 and during the quarter ended March 31, 2003. The adoption
of this standard did not have a material impact on the Company's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
Revenue Recognition
- -------------------
The Company recognizes revenue when the following criteria are met: 1)
persuasive evidence of an arrangement, such as agreements, purchase orders or
written requests, exists; 2) delivery has been completed and no significant
obligations remain; 3) the Company's price to the buyer is fixed or
determinable; and 4) collection is probable. The Company recognizes revenues at
the time services are performed related to border security logistic support.
F-16
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (continued)
- -------------------
During the year-ended June 30,2003, the Company produced revenues from contracts
with the Department of Homeland Security("DHS") and ASI, a related party, to
provide the following services:
Engineering services related to the design and implementation of
improvements to U.S. ports of entry, as well as, through the maintenance of
booths at these ports of entry. ($423,013 for the year-ended June 30, 2003)
Sale of Dedicated Commuter Lane ("DCL") transponders to the DHS.
($79,025 for the year ended June 30, 2003)
Installation of the Vehicle Stopping System at a U.S. port of
entry.($44,362 for the year ended June 30, 2003)
Contract with related party to provide Plasma Antenna Device Research
($112,251 for the year ended June 30, 2003)
NOTE 4 - TECHNOLOGY ACQUISITIONS
Acoustic Core(TM) Technology
- ----------------------------
On December 9, 2002, in connection with the Exchange Agreement dated as of
December 9, 2002, by and among Eurotech, the Company, Crypto.com, Inc.,
("Crypto" - a wholly-owned subsidiary of Eurotech), Security Technology, Inc.
("STI"), ipPartners, Inc., Market LLC and James LLC (the "Exchange"), Eurotech
and Crypto agreed to license and transfer certain intellectual property to a
newly-formed subsidiary of the Company, STI, in exchange for 239,927,344 shares
of the Company's newly issued common stock (the "Exchange Shares"). The Exchange
Shares constitute 80% of the Company's outstanding common stock making the
Company a majority-owned subsidiary of Eurotech. Subsequent to year end the
Company is no longer a majority-owned subsidiary of Eurotech due to the
issuances of additional common stock. In addition, as part of the agreement,
ipPartners was issued 29,990,917 shares of common stock in exchange for their
forgiveness and discharge of certain obligations owed to ipPartners with respect
to the property transferred to STI. Eurotech is a development-stage, Washington,
D.C.-based, technology company, whose common stock is registered under the
Exchange Act. Prior to the Exchange, Market LLC and James LLC controlled the
Company.
In connection with the Exchange, on December 9, 2002, the Company, Market LLC
and James LLC agreed to a recapitalization of the Company, whereby $5,225,000 in
stated value of a new series of preferred stock, designated Series C 5%
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") was
issued by the Company, in exchange for $5,225,000 of convertible promissory
notes, inclusive of accrued interest, as well as, for the agreement by James LLC
and Market LLC to collectively surrender 269,918,261 shares of the Company's
common stock prior to the consummation of the above Exchange agreement between
the Company and Eurotech, among others.
F-17
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued)
Acoustic Core(TM) Technology (Continued)
- ----------------------------
The rights licensed from Eurotech in the Exchange consist of certain proprietary
technology known as Acoustic Core used to detect illicit substances, and certain
cryptology technology held by Eurotech's subsidiary, Crypto. Since Eurotech
owned 80% of the common stock of the Company on December 9, 2002, the technology
acquired from Eurotech was recorded by the Company at Eurotech's carrying value
of $1,300,000. Eurotech had purchased the rights to such technologies in 2001.
The Company's technical employees and advisors concluded that as of December
2002, the Company has established technological feasibility for its ultimate
security product to be marketed. Additional development services and testing are
necessary to complete the product development. The Company will begin to
amortize this asset over the economic useful life of five years when the
technology is available for general release to its customers. The Company is
engaged in a project with the U.S. Air Force to evaluate the Acoustic Core(TM)
technology for use in the inspection of cargo. The technology utilizes acoustic
waves to detect illicit materials and density changes. In addition, the Company
is in the process of adapting such technology for use in the detection of
concealed weapons on persons that cannot be detected by traditional metallic
screeners.
Acquisition of Ergo Systems, Inc.
- ---------------------------------
On January 14, 2003, the Company completed the acquisition of Ergo, a Virginia
corporation from Ocean Data Equipment Corporation, a Delaware corporation
("ODEC") now called Syqwest, Inc.("Syqwest"). The Chairman of the Company is
also the Chief Executive Officer of Syqwest. The Company agreed to pay Syqwest
$400,000 in cash, payable without interest over a period of one year. This
purchase price was later modified to require $50,000 due at closing, $150,000
due upon the completion of Phase I research efforts as they relate to the
advancement of Acoustic Core technology in the inspection of cargo containers
(of which $126,900 has been advanced to Syqwest as of June 30, 2003), $100,000
due upon completion on Phase 2 research efforts as they relate to cargo
inspection, and a final payment of $100,000 due upon completion of Phase 3
research efforts as they relate to cargo inspection. At June 30, 2003, the
Company was still in Phase 1 of this project (see Note 14c).
The funds for this acquisition are expected to come from operating capital and
future earnings.
Ergo's assets consist of a U.S. Government General Services Administration
contract to provide border security logistic support and product development
services to the United States Government and related unpatented technology. The
Company will continue to provide these support services to five U.S. Border
ports of entry in the states of California, Texas, Michigan and New York. The
government contract is renewable annually, unless cancelled by either party.
F-18
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued)
Acquisition of Ergo Systems, Inc. (Continued)
- ---------------------------------
The purchase price of $400,000 was allocated entirely to this contract. The
contract is being amortized over a three-year period commencing with the date of
the acquisition, January 14, 2003. Amortization expense related to the contract
for the year ended June 30, 2003 was $66,668.
Future amortization expense to be incurred on this contract is as follows:
Years Ending
June 30, Amount
----------- ----------
2004 $ 133,336
2005 133,336
2006 66,660
----------
$ 333,332
==========
The following summarized proforma (unaudited) information assumes the
acquisition had occurred on July 1, 2001.
For the Year For the Year
Ended Ended
June 30,2003 June 30,2002
------------ ------------
Revenue $ 1,253,547 $ 729,896
Loss from
continuing operations (4,050,099) (255,955)
Gain (loss) from
discontinued operations 998,713 (2,213,288)
Net loss $(3,227,716) $(2,405,765)
Loss per share $ (0.03) $ (0.01)
Note: Results of operations of Ergo is included in consolidated financial
statements commencing January 14, 2003
F-19
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TECHNOLOGY ACQUISITIONS (Continued)
Acquisition of Ergo Systems, Inc. (Continued)
- ---------------------------------
At June 30, 2003, the Company owes ODEC $273,100 related to the purchase of
Ergo's assets. This liability is included in Accounts payable in the
accompanying consolidated balance sheet (see Note 5).
Agreement to Acquire ASI Technology Corporation Assets
- ------------------------------------------------------
On March 19, 2003, the Company and ASI Technology Corporation, a Nevada
corporation, ("ASI") entered into a Technology Purchase Agreement (the
"Agreement"). Under the Agreement, ASI agreed to sell and the Company agreed to
purchase certain assets relating to ASI's gas plasma antenna technology,
including patents, patent applications, equipment, government contract rights
and other intellectual property rights. The Chief Executive Officer of the
Company was a significant employee of ASI during the two years prior to this
agreement. The closing of the transaction will occur on the earlier of the date
the last of the government contracts are assigned to Markland or ninety days
after the date of the Agreement (June 17, 2003). The transaction did not close
as of June 30, 2003 and management believes that it will close during the
quarter ending December 31, 2003. No assurance can be given that the transaction
will close. Under an interim arrangement, the Company will receive revenues from
these contracts billed for periods after April 1, 2003 and will be obligated for
all related costs. Markland has agreed to use its best efforts to manage and
administer the contracts during this period prior to closing and to pay ASI a
fee of $2,500 per month for administrative support. These fees amounted to
$7,500 as of June 30, 2003.
In consideration, the Company agreed to pay ASI $1,000,000, of which $150,000 is
payable in cash, $10,000 of which was paid on execution of the Agreement and
$10,000 of which is payable every thirty days following the date of execution of
the Agreement until the closing, at which time the remaining balance is due and
payable. In addition to the cash payment, the Company is required to issue to
ASI, on closing, $850,000 worth of the Company's common stock at the then
current market price (see Note 14 b). In the event that the Company fails to
register such stock on behalf of ASI, or if a registration statement for the
shares is delayed, the Company will have to issue an additional $150,000 worth
of common stock to ASI.
In connection with the Agreement, ASI and the Company entered into a
registration rights agreement entitling ASI to include its shares of the
Company's common stock in future registration statements filed by the Company
under the Securities Act of 1933 in connection with public offerings of the
Company's common stock.
Also in connection with the Agreement, ASI and the Company entered into a
sublicense agreement pursuant to which ASI has sublicensed to the Company the
right to develop and sell products to certain government, military and homeland
security customers in the United States and Canada using the Company's plasma
sterilization and decontamination technology. Markland has agreed to pay ASI
$5,000 per month for these rights for a period of 24 months, of which $20,000
has been paid to ASI under this agreement and is included in selling, general
and administrative expenses for the year ended June 30, 2003.
F-20
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TECHNOLOGY ACQUISITIONS (continued)
Agreement to Acquire ASI Technology Corporation Assets (continued)
- ------------------------------------------------------
The closing of the purchase of the plasma antenna technology is subject to a
number of conditions and the Agreement may be terminated prior to closing under
certain circumstances.
As of June 30, 2003, the Company has made total payments of $65,000 to ASI in
connection with the Agreement, which was included in Advances on Purchase of ASI
Technology in the accompanying consolidated balance sheet. As of June 30, 2003,
this agreement has not yet been finalized. For the year ended June 30, 2003, the
Company had total revenues of $112,251 and costs of revenues of $99,973 from
this contract.(excludes administrative support and license fees)
NOTE 5 - ACCOUNTS PAYABLE
Included in accounts payable at June 30, 2003 are the following expenses:
Research & Development costs - related party $ 300,000
Research & Development costs 222,657
Ergo purchase - related party (Note 4) 273,100
Border security logistics costs 207,229
Dividends payable 152,716
Legal and professional fees 131,243
General and administrative expenses 110,855
Sales and marketing expenses 43,836
-----------
$1,441,636
===========
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Included in accrued expenses and other current liabilities at June 30, 2003 are
the following expenses:
Accrued border security logistics costs $ 72,520
Accrued expenses - other 30,000
Accrued Interest 16,750
----------
$ 119,270
==========
F-21
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -LINES OF CREDIT
Secured Line of Credit
- ----------------------
On May 28, 2002, the Company received a notice of default from its secured
lender, Market LLC, relating to a loan and security agreement and a related
secured convertible revolving credit note, due to the Company's failure to make
payments of principal and interest due under the note. As settlement for this
default, on June 4, 2002, the Company entered into a Debt Restructuring
Agreement, whereby the Company agreed to transfer legal title to the Vidikron
shares to the lender in partial satisfaction of the indebtedness in the amount
of $50,000.
In addition, on June 4, 2002, the Company entered into an Amended Secured
Convertible Revolving Credit Note Agreement, whereby the Company could borrow up
to $4,500,000. Interest under this agreement accrued at the annual interest rate
of 6% per annum. The maturity date of this amended note was December 31, 2002
and was secured by various liens on the Company's assets. The balance
outstanding at the date of this agreement was $4,163,300.
On December 9, 2002, as part of the Company's recapitalization, in accordance
with the Exchange Agreement entered between the Company and Market LLC,
$3,812,000 representing principal and accrued interest under this line of credit
was converted into 3,812 shares of the Company's newly issued Series C 5%
Cumulative Convertible Preferred Stock (see Note 9).
On December 10, 2002, the Company entered into a Restated and Amended Secured
Convertible Revolving Credit Note Agreement for $500,000. Interest under this
note accrues at the annual interest rate of 6% per annum. The principal and
accrued interest under this note is due on June 30, 2004, however, may be
prepaid by the Company at any time without penalty. As of June 30, 2003,
approximately $16,750 of interest has been accrued on this note and is included
in accrued expenses on the consolidated balance sheet.
The note may be converted at any time, in whole or in part, into shares of the
Company's common stock. The total number of shares of common stock issuable upon
conversion will be determined by dividing the principal amount of this note
being converted by 80% of the closing bid price of the common stock based on the
average of the five trading days immediately preceding the date of conversion.
The value of the beneficial conversion feature of $125,000 is being amortized as
interest expense over the period ending June 30, 2004. Amortization of this debt
discount for the year ended June 30, 2003 was $41,666.
New Equity Line
- ---------------
On September 10, 2003 Markland entered into a Private Equity Credit Agreement
with Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue
and sell to Brittany up to $10,000,000 worth of its common stock over the next
three years. Prior to any sales, the Company is required to file a registration
statement with the Securities and Exchange Commission, relating to the shares to
be issued, and to have such registration statement declared effective.
F-22
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SECURED LINE OF CREDIT (CONTINUED)
New Equity Line (continued)
- ---------------
After the registration statement is declared effective, Markland would be able
to put shares to Brittany according to the terms outlined in the agreement. The
minimum put amount is $1,000,000 over the life of the agreement and $25,000 per
put. Failure to satisfy the minimum put requirement over the life of the Private
Equity Credit Agreement will result in a charge to Markland.
Shares will be issued to Brittany, in connection with each put, at 92% of the
average of the closing bid prices for the lowest (3) three (not necessarily
consecutive) trading days during the (10) trading day period immediately
following the put date. Under certain conditions, the Company will be required
to issue additional shares and/or accrue financial penalties.
There can be no assurances that the Company will receive any proceeds from this
agreement.
NOTE 8 - NOTES PAYABLE
At June 30, 2002, notes payable consisted of a convertible note payable of
$1,367,027, due to James LLC, which bore interest at 8% per annum. Principal and
any accrued interest were due on December 31, 2002. The note payable was
convertible into shares of common stock of the Company at a conversion price for
each share of common stock equal to the current market price on the date of
notice of conversion.
On December 9, 2002, in accordance with the Exchange Agreement between the
Company and James LLC, $1,413,000, including accrued interest of $45,973, was
converted into 1,413 shares of the Company's newly issued Series C 5% Cumulative
Convertible Preferred Stock in full settlement of the note (see Note 9).
On December 4, 2002, the Company entered into a note payable agreement with
Market LLC for the principal amount of $11,500. Principal, together with
interest, which accrued at the rate of 10% per annum, were both due upon demand.
This note was paid-off in full on March 6, 2003.
In December 2002, the Company acquired one-year Directors and Officers Life
Insurance Policy, effective December 9, 2002 through December 9, 2003. Terms
include an option to extend the policy for an additional year at 200% of the
current year's annual premium amount, which is $55,000. The Company is
amortizing such amount into selling, general and administrative expense on a
straight-line basis. At June 30, 2003, the total un-amortized premiums included
in "prepaid insurance" in the accompanying consolidated balance sheet amounted
to $22,917.
F-23
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE (Continued)
On December 31, 2002, the Company entered into a premium financing agreement
with a lending institution to finance the aforementioned policy. Under the terms
of the agreement, the Company made an initial payment of $11,000 and commencing
January 2003, is required to make 10 additional monthly installment payments of
$4,549, which includes principal and interest of 7.33% per annum. As of June 30,
2003, the Company has total principal outstanding under this note in the amount
of $17,004, which is included in Note Payable in current liabilities in the
accompanying consolidated balance sheet.
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY
Preferred Stock
- ---------------
The Company is authorized to issue five million shares of
preferred stock which may be issued in series with such designations,
preferences, stated values, rights, qualifications or limitations as determined
by the Board of Directors.
Series A Non-Voting Redeemable Convertible Preferred Stock
- ----------------------------------------------------------
On February 25, 2000, the Company entered into a Stock Purchase Agreement,
effective March 1, 2000 to purchase CWTel, Inc. from Charles Wainer for the sum
of $1,200,000. Of the purchase price $200,000 was paid at closing, $700,000 was
paid by the issuance of 360,000 shares of the Company's restricted common stock
and $300,000 was to be paid in three equal payments at 90 days, 180 days, and
270 days from closing. These payments were represented by a promissory note in
the amount of $300,000, which were included in liabilities from discontinued
operations at June 30, 2002 and were collateralized by 30,000 shares of Series A
Non-Voting Redeemable Convertible Preferred Stock ("Series A Preferred Stock").
During the year ended June 30, 2003, the Company issued these shares to Charles
Wainer pursuant to the stock purchase agreement in settlement of their
obligation under this promissory note.
The Series A Preferred Stock has no par value, is non-voting and has a stated
value of $10 per share. The Preferred Stock is convertible at any time at the
option of the Company, and cannot be converted by the holder. This stock is
convertible at the rate of twenty (20) shares of common stock for each share of
Series A Preferred Stock. This conversion rate may be adjusted at any time by
the Company as a result of either the sale of the Company or as a result of a
stock split or stock dividend that is issued by the Company while these shares
remain outstanding.
The Company shall have the right, but not the obligation to, at any time after
the issuance of these shares to redeem all or any portion of the outstanding
shares of Series A Preferred Stock from the holder in cash at the stated value
of $10 per share by sending notice to the holder. The Series A Preferred Stock
has a liquidation preference of $10 per share. This stock does not accrue
dividends.
F-24
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued)
Series B Convertible Preferred Stock
- ------------------------------------
On March 16, 2001, the Company issued 10 shares of its Series B convertible
preferred stock to Market LLC in connection with the acquisition of Vidikron.
The preferred stock was convertible into approximately 85% of the Company's
outstanding common stock, on a non-diluted basis upon the effectiveness of a
reverse stock split of the Company's outstanding common stock. The reverse stock
split was effective June 21, 2001. The automatic conversion resulted in the
Company's issuance of an aggregate of 254,911,356 shares of the Company's common
stock to Market LLC on that date. As of June 30, 2003, there are no shares of
Series B Preferred Stock issued and outstanding.
Series C 5% Cumulative Redeemable Convertible Preferred Stock
- -------------------------------------------------------------
On December 9, 2002, the Company entered into an Exchange Agreement, among the
Company and Market LLC and James LLC who agreed to exchange their convertible
notes payable in the amount of $3,812,000 and $1,413,000, respectively
($5,225,000 in value), inclusive of accrued interest for 5,225 shares ($1,000
stated value) of the Company's newly issued Series C Preferred Stock. The Series
C Preferred Stock is non-voting and has a liquidation preference of $1,000 per
share.
The holders of the Series C Preferred Stock are entitled to receive dividends on
each share of preferred stock, which shall accrue on a daily basis at the rate
of 5% per annum on the sum of the liquidation preference plus all accumulated
and unpaid dividends thereon. These dividends shall accrue whether or not they
have been declared or there are legally available funds with which to pay them,
and at the option of the holders are payable either in cash or in unrestricted
common stock.
During February 2003, the Company sold an additional 170 shares of Series C
Preferred Stock to James LLC for $170,000.
The Series C Preferred Stock is redeemable at any time by the Company, and
cannot be converted by the holders without written permission for a period of 6
months following the issuance of the shares and then only 10% may be converted
per month thereafter. The Series C Preferred Stock is convertible at the option
of the holder at a conversion price ranging from 65% to 80% of the common
stock's market price at the time of the conversion, subject to an adjustment
pursuant to any stock split. The amount of the associated discount is dependent
upon the market price at the time of the conversion.
F-25
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Series C 5% Cumulative Redeemable Convertible Preferred Stock (Continued)
- -------------------------------------------------------------
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company calculated that as of the date of issuance there was a beneficial
conversion feature in the amount of $1,367,821. The Company has recorded deemed
dividends of $501,755, for the year ended June 30, 2003, relating to the
accretion of these beneficial conversion features on the Preferred Stock. The
deemed dividends increase the loss applicable to common stockholders in the
calculation of basic and diluted net loss per common share and are included in
stockholders' equity as a charge to accumulated deficit and a credit to
additional paid-in capital. As the Series C Preferred Stock is convertible in
stages over a period of 16 months, the Company will record the accrual of the
deemed dividend of the beneficial conversion feature over this same period.
In addition, the Company has determined that the maximum potential exposure
under the beneficial conversion feature using the assumptions that the fair
market value is $0.15 at the date of conversion and accordingly a conversion
price at 65% of market value should be used, amounts to approximately
$2,800,000.
For the year ended June 30, 2003, dividends of $152,716 were accrued for the
Series C Preferred Stock.
The holders are not subject to any limitations on the number of conversions of
Series C Preferred Stock or subsequent sales of the corresponding common stock
that they can effect, other than a prohibition on any holder having a beneficial
ownership of more than 9.999% of the outstanding shares of the Company's common
stock.
Series D Redeemable Convertible Preferred Stock
- -----------------------------------------------
On June 17, 2003, the Company issued to Eurotech 16,000
shares of Series D Redeemable Convertible Preferred Stock in exchange for 100
million shares of the Company's common stock. The Series D Redeemable
Convertible Preferred Stock ("Series D Preferred Stock") has a stated value of
$1,000 per share, and a total liquidation value of $16 million. These shares are
non-voting and do not accrue dividends.
The Series D Preferred Stock is convertible into shares of the Company's common
stock at a variable percentage of the then current market price, subject to
certain adjustments. If the market price of Markland common stock is less than
or equal to $0.25, it is convertible at 80% of the market price. If the market
price is greater than $0.25, but less than or equal to $0.50, it is convertible
at 75% of the market value. If the market price is greater than $0.50, but less
than or equal to $0.75, it is convertible at 70% of the market price. And if the
market price is greater than $0.75, it is convertible at 65% of the market
price.
F-26
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued)
Series D Redeemable Convertible Preferred Stock (Continued)
- -----------------------------------------------
Markland can redeem the Series D Preferred Stock according to the following
schedule. During the first 180 days after the closing it can be redeemed at 120%
of the stated value and accrued dividends. From 181 days until 270 days it can
be redeemed for 125% of the stated value and dividends. From 271 days and ending
360 days after the closing it can be redeemed for 135% of the stated value and
dividends.
In accordance with EITF 98-5, the Company calculated that as of the date of
issuance there was a beneficial conversion feature in the amount of $4,000,000.
The Company has recorded deemed dividends of $4,000,000 for the year ended June
30, 2003, relating to the accretion of these beneficial conversion features on
the Series D Preferred Stock. The deemed dividends increase the loss applicable
to common stockholders in the calculation of basic and diluted net loss per
common share and are included in stockholders' equity as a charge to accumulated
deficit and a credit to additional paid-in capital. The Series D Preferred Stock
is convertible immediately.
In addition, the Company has determined that the maximum potential exposure
under the beneficial conversion feature using the assumptions that the fair
market value of the common stock is $0.19 at the date of conversion and
accordingly a conversion price at 65% of market value should be used, amounts to
approximately $8,800,000.
During the fourth quarter of fiscal 2003, the Company sold an additional 430
shares of Series D Preferred Stock to James LLC for net proceeds of $430,000.
The Company has determined that as of the date of issuance there was a
beneficial conversion feature in the aggregate amount of $107,500. The Company
has recorded deemed dividends of $107,500 for the year ended June 30, 2003,
relating to the accretion of these beneficial conversion features on the Series
D Preferred Stock.
F-27
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Series D Redeemable Convertible Preferred Stock (Continued)
- -----------------------------------------------
During June of 2003, the Company sold an additional 180 shares of Series D
Preferred Stock for net proceeds of $180,000. This issuance of preferred stock
is subject to the same rights and preferences as the other Series D Preferred
Stock that was issued by the Company during the year. As a result, the Company
has determined that as of the date of issuance there was a beneficial conversion
feature in the aggregate amount of $45,000. The Company has recorded deemed
dividends of $45,000 for the year ended June 30, 2003, relating to the accretion
of these beneficial conversion features on the Series D Preferred Stock. The
deemed dividends increase the loss applicable to common stockholders in the
calculation of basic and diluted net loss per common share and are included in
stockholders' equity as a charge to additional paid-in capital and a credit to
additional paid-in capital. The Series D Preferred Stock is convertible
immediately.
In addition, the Company has determined that the maximum potential exposure
under the beneficial conversion feature at the date of conversion using the
maximum possible conversion price at 65% of market value amounted to
approximately $97,000.
Common Stock
- ------------
- - Private Placement of Common Stock
---------------------------------
In December 2002, the Company entered into a private equity-financing agreement
with two investors in order to raise $340,000 of new capital to finance
operations. In exchange for the capital, the investors received an aggregate of
6,800,000 shares of the Company's common stock.
- - Director's Compensation
-----------------------
In December 2002, the Company issued an aggregate of 400,000 shares of its
common stock to two of its former directors as compensation for services
rendered while employed with the Company. In February 2003, the Company agreed
to pay one of the aforementioned directors $5,000 in lieu of 100,000 shares of
previously issued common stock. For the year ended June 30, 2003, a charge to
compensation expense related to the above transactions amounted to $8,000.
F-28
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' (DEFICIENCY) EQUITY (continued)
Net Loss Per Share
- ------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future, and that were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented, consists of the
following:
Shares Issuable
at Assumed
Average Market
At June 30, Price at June 30,
2003 2003 ($0.06)
------------ -----------------
Convertible notes payable
(Converted at 80% of market) $ 500,000 10,417,000
Series A Redeemable Convertible preferred
stock 300,000 600,000
Series C 5% Cumulative Redeemable Convertible
preferred stock (converted at 75% of market) 5,395,000 119,889,000
Series D Redeemable Convertible preferred
stock (converted at 80% of market) 16,430,000 342,292,000
------------ ------------
Total as of June 30, 2003 $22,625,000 473,198,000
============ ============
Subsequent commitments after June 30, 2003:
Common and potential common stock issued:
Shares issued to consultants 1,500,000
Shares issued to ASI for purchase of assets 17,000,000
Shares issued to Syqwest, Inc. for
unpaid services 45,000,000
360 shares of Series D preferred stock
issued for cash (assumed average market
price of $0.06 converted at 80% of market) 7,500,000
------------
71,000,000
============
Common shares potentially issuable to
management, directors and a consultant
pursuant to compensation agreements 59,000,000
============
F-29
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Business Risks
- --------------
The Company requires additional funds to commercialize its technologies and
continue research and development efforts. The Company continues to incur
substantial expenses and operating losses. No assurances can be given that the
Company can complete development of any technology not yet completely developed
or that, with respect to any technology that is fully developed, products
incorporating the technology can be manufactured on a large scale or at a
feasible cost. Further, no assurance can be given that any technology will
receive market acceptance. The Company is subject to all of the risks inherent
in the establishment of a new enterprise and the marketing and manufacturing of
a new product, many of which are beyond the control of the Company.
Compensation and Consulting Agreements
- --------------------------------------
Effective January 2003, the Company entered into a one-year compensation
agreement with an officer and three three-year agreements with an officer and
two consultants to the Company, which provide for aggregate monthly remuneration
of $47,500.
One of these agreements provide for the issuance of 1.67% of the Company's
outstanding common stock in three installments, 50% of the shares were issued on
or about March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of
the shares on or about October 1, 2003. If necessary, an additional issuance
will occur on December 31, 2003, so that the total amount of shares issued up to
December 31, 2003 will equal 1.67% of the outstanding common stock as of
December 31, 2003.
Based on approximately 220 million common shares outstanding as of June 30,
2003, a total of approximately 3,700,000 shares of common stock would be
issuable under this compensation agreement, of which 2,596,760 were issued
during the year ended June 30, 2003. The amount charged to operations related to
this agreement for the year ended June 30, 2003 amounted to approximately
$124,000.
F-30
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Compensation and Consulting Agreements (continued)
- --------------------------------------
In addition, these three agreements, provide in total for the issuance of 5.01%
of the Company's outstanding common stock in four installments on a fully
diluted basis based upon certain performance criteria being met. Upon contract
signing, the Company issued a number of shares of Common Stock then equivalent
to 0.5% of the total number of shares of Common Stock then outstanding,
inclusive of such Employee's/Consultant's Shares; on or about July 1, 2003,
Company will issue to these Employee/Consultants a number of shares of Common
Stock then equivalent to 0.5% of the total number of shares of Common Stock then
outstanding, inclusive of such Employee's/Consultant's Shares if the Second
Quarter gross revenue target has been met; and on or about October 1, 2003
Company will issue to these Employee/Consultants a number of shares of Common
Stock then equivalent to 0.67% of the total number of shares of Common Stock
then outstanding, inclusive of such Employee's/Consultant's Shares, minus the
aggregate number of Shares issued to these parties in the first two installments
if the Third Quarter gross revenue target has been met. If necessary, an
additional issuance will occur in January 2004, so that the total amount of
shares issued will equal 5.01% of the outstanding common stock calculated on a
fully-diluted basis assuming the conversion of all convertible securities as of
December 31, 2003.
The Company determined that approximately 37,000,000 shares of common stock may
be issuable under these compensation agreements, of which 6,748,465 were issued
during the period ended June 30, 2003. The amount charged to operations related
to these agreements for the year ended June 30, 2003 was approximately $513,000.
The four agreements referred to above, also include a provision whereby each of
these employees and consultants are eligible for an additional stock award which
will be vested and issued after the first year anniversary of employment (such
anniversary being January 1, 2004) equal to 0.6% of the Equity, then outstanding
(2.4% in the aggregate). As of June 30, 2003, the Company has determined that
the total number of shares which may issued under this award, amounts to
approximately 18,000,000 shares, of which none have been issued during the year
ended June 30, 2003. The amount charged to operations related to this award for
the year ended June 30, 2003 amounted to approximately $1,100,000.
During December 2002 and amended on January 18, 2003, the Company entered into a
consulting agreement for six months with an option to renew for an additional
six months for services relating to corporate communications. The agreement
provides for monthly fees of $7,000, plus expenses, and 20,000 shares of the
Company's common stock. For the year ended June 30, 2003, the Company has issued
this consultant 140,000 shares of restricted common stock total and has charged
approximately $30,000 to operations related to these stock issuances.
During the months of February and March 2003, the Company entered into four new
one-year consulting agreements, which provide for aggregate monthly remuneration
of $3,000. In connection with those agreements, the Company issued 3,800,000
shares of restricted common stock. The shares were valued at $600,000, of which
approximately $285,000 was charged to operations during the year ended June 30,
2003.
F-31
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (continued)
Litigation
- ----------
The Quest Net Corp. and CWTel, Inc. were named defendants in a lawsuit filed in
the Circuit Court in Broward County, Florida. The lawsuit alleges the Company
has failed to pay a promissory note dated September 8, 2000 in the amount of
$66,672 and issued a check as payment on the note that was returned due to
insufficient funds. As of August 15, 2003 there has been no active litigation
activity on the case for approximately twenty months. There have been some
sporadic settlement discussions but no agreement has been reached at this time.
No estimate can be given as to the ultimate loss which would be suffered by the
Company should it lose this lawsuit.
The Company is also subject to various matters of litigation during its normal
course of operations. Management believes that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
NOTE 11 - DISCONTINUED OPERATIONS
The Company has treated the disposition of CWTel in March 2002 and Vidikron in
May 2002 as discontinued operations. The following information summarizes the
operating results and liabilities of the discontinued operations included in the
consolidated financial statements:
For the Year For the Year
Ended Ended
June 30, June 30,
2003 2002
------------ ------------
Revenues $ - $ 1,887,927
============ ============
Income (loss) from operations 998,713 (3,259,421)
Gain on disposition - 1,046,133
------------ ------------
Income (loss) from
discontinued operations $ 998,713 $(2,213,288)
============ ============
The income from discontinued operations for the year ended June 30, 2003 of
$998,713 is a result of management of the Company completing an analysis of
various obligations related to the discontinued operations. Management
determined that $297,404 of liabilities related to the discontinued operations
were either three years old (past the statute of limitations) or represented an
overestimate of an accrual. In addition, a real estate lease obligation, which
had been recorded in previous years at $706,309, was settled for $5,000.
F-32
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - DISCONTINUED OPERATIONS (Continued)
During the year ended June 30, 2003, the Company converted a $300,000 promissory
note related to the discontinued operations into 30,000 shares of Series A
non-voting redeemable preferred stock (see Note 9).
As of June 30, 2003, there were no assets or liabilities remaining from
discontinued operations.
The gain on disposition of discontinued operations for the year ended June 30,
2002 of $1,046,133 (net of $0 of income taxes) represented a gain from the
discharge of indebtedness of the liabilities of CWTel, Inc. pursuant to a
voluntary bankruptcy petition under Chapter 7, which was concluded in March
2002.
NOTE 13 - INCOME TAXES
The tax effects of temporary differences and net operating loss carry forwards
that give rise to deferred tax assets or liabilities at June 30, 2003 are
summarized as follows:
Net operating loss carry forward $ 3,400,000
Valuation allowance on net deferred tax asset (3,400,000)
------------
Deferred Tax Asset, Net $ -
============
The Company has provided for a full valuation allowance on the net deferred tax
asset due to the uncertainty of its realization.
There were no provisions for income taxes during the years ended June 30, 2003
and 2002 due to the Company's net losses. The Company has estimated federal net
operating loss carryforwards to be approximately $9,740,000, which are available
to offset future taxable income, if any, expiring through 2023. These losses may
be subject to substantial limitations as a result of IRC Section 382 rules
governing changes in control.
Further, the Company has not filed any federal, state or local income or
franchise tax returns for the previous three years. Such failure may have a
material adverse effect on the amount of any net operating loss carryforwards
and may subject the Company to fines.
F-33
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS
a. In July 2003, the Company entered into a consulting agreement with Emerging
Concepts, a California entity, whereby the Company issued to them 1,500,000
shares of its restricted common stock in exchange, for consulting services,
which will be provided for a period of one year commencing on July 7 2003 and
expiring on July 7 2004, unless terminated by either party, as defined in the
agreement.
b. On July 10, 2003, the Company issued 17,000,000 shares of common stock to ASI
in settlement of their obligation to issue $850,000 worth of common stock in
connection with the Company's purchase of ASI technology. (Note 4)
c. On July 24, 2003, the Company entered into an Amended and Restated Exchange
Agreement (the "Amended Exchange Agreement") with Syqwest, Inc., a Rhode Island
corporation, and related party, formerly known as Ocean Data Equipment
Corporation ("Syqwest"). Under this Amended Exchange Agreement, Syqwest agreed
to receive 45,000,000 shares of the Company's restricted common stock, which was
valued at $0.01 per share, as payment for $450,000 of unpaid services, which
were performed by Syqwest in connection with the research efforts as it relates
to the Vehicle Stopping Technology. (see Note 3).
Pursuant to the Amended Exchange Agreement, the Company has the right at any
time by written notice to repurchase from Syqwest these 45,000,000 shares of
restricted common stock at a purchase price of $0.01 per share.
d. During July and August 2003, the Company sold to a third party an additional
360 shares of Series D Preferred Stock for gross proceeds of $360,000. The
Company has determined that as of the date of issuance there was a beneficial
conversion feature in the aggregate amount of $90,000. The Company will record
this deemed dividend of $90,000 in the first quarter of 2003, relating to the
accretion of these beneficial conversion features on the Series D Preferred
Stock. The deemed dividends increase the loss applicable to common stockholders
in the calculation of basic and diluted net loss per common share and are
included in stockholders' equity as a charge to additional paid-in capital and a
credit to additional paid-in capital. The Series D Preferred Stock is
convertible immediately.
The Company has determined that the maximum potential exposure under the
beneficial conversion feature at the date of conversion using the maximum
possible conversion price at 65% of market value amounted to approximately
$129,000.
e. On September 4, 2003, the Company signed a term sheet with Bay View Capital,
LLC, a related party, in order to obtain a $1,400,000 bridge financing loan.
This loan is not anticipated to cause any stock dilution and the proceeds from
this loan will be used by the Company to fund the acquisitions of the Ergo and
ASI assets (see Note 4). For consideration, the Company is required to make 24
monthly payments of principal and interest. Principal is calculated on a monthly
basis using a "Cash Flow Recapture Mechanism" as defined in the agreement.
Interest is payable at a rate of 12% per annum. The note is secured by, among
other things, a first security interest in all assets of the Company.
F-34
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (Continued)
f. On September 4, 2003, The Company's Board of Directors approved a resolution
to affect a one-for-sixty reverse stock split. As a result, each sixty shares of
common stock will be converted automatically into one share of common stock. To
avoid the issuance of fractional shares of common stock, each fractional share
resulting from the reverse split will be rounded up to a whole share. The
reverse stock split does not reduce the 500,000,000 shares of common stock that
the Company is authorized to issue. The resolution, which impacts shareholders
of record as of September 5, 2003, is expected to become effective on or about
October 26, 2003.
g. On September 4, 2003, The Company's Board of Directors approved a resolution
to cancel its Series B convertible preferred stock.
h. During July 2003, 570 shares of Series C 5% Cumulative Redeemable Preferred
Stock were converted into 12,500,000 shares of the Company's common stock.
F-35
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
AND
SCIENCE & TECHNOLOGY RESEARCH, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated balance sheet aggregates the
balance sheet of Markland Technologies, Inc. and Subsidiaries ("Markland") as of
September 30, 2003 and the balance sheet of Science & Technology Research, Inc.
("STR") as of September 30, 2003, accounting for the transaction as a business
combination pursuant to statement of Financial Accounting Standards No. 141 and
using the assumptions described in the following notes, giving effect to
Markland's acquisition of STR (see note 1 to pro forma consolidated financial
statements), as if the transaction had occurred as of September 30, 2003.
The following unaudited pro forma consolidated statement of operations combine
the results of operations of Markland for the year ended June 30, 2003 and the
pro forma results of operations of STR for the twelve months ended September 30,
2003 as if the transaction had occurred as of the beginning of the period. The
pro forma results of operations for STR for the twelve months ended September
30, 2003 reflects the results of operations of STR for the nine months ended
September 30, 2003, added to one fourth of the results of its operations for the
year ended December 31, 2002.
The pro forma consolidated financial statements should be read in conjunction
with the separate historical financials statements of Markland, and the
historical financial statements of STR appearing elsewhere herein. These pro
forma financial statements are not necessarily indicative of the consolidated
financial position, had the acquisition occurred on the date indicated above, or
the consolidated results of operations which might have existed for the periods
indicated or the results of operations as they may be in the future. For the
purposes of preparing its consolidated financial statements, Markland will
establish a new basis for the STR's assets and liabilities based upon the fair
value thereof, including the costs of the acquisition. The unaudited pro forma
condensed consolidated balance sheet and the statements of operations reflects
Markland's best estimates of this allocation; however, the final allocation may
differ from the pro forma amounts.
F-36
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Balance Sheet
September 30, 2003
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
------ Markland
Technologies Science &
Inc. and Technology Pro forma
Subsidiaries Research, Inc. Adjustments Pro forma
------------- ------------- ------------- -------------
(unaudited) (unaudited)
CURRENT ASSETS
- --------------
Cash $ 27,574 $ 215,830 (1) $ 1,189,000 $ 432,404
(1) (900,000)
(1) (100,000)
Accounts receivable 342,312 438,795 -- 781,107
Prepaid insurance and other current assets 11,028 129,032 -- 140,060
------------- ------------- ------------- -------------
Total Current Assets 380,914 783,657 189,000 1,353,571
------------- ------------- ------------- -------------
OTHER ASSETS
- ------------
Intangible assets 2,599,998 -- (1) 6,006,808 8,606,806
Property and Equipment - net -- 53,467 -- 53,467
------------- ------------- ------------- -------------
Total Other Assets 2,599,998 53,467 6,006,808 8,660,273
------------- ------------- ------------- -------------
TOTAL ASSETS $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 1,257,907 $ 131,351 $ -- $ 1,389,258
Accrued expenses and other current liabilities 141,191 237,581 -- 378,772
Note payable 13,600 -- (1) 296,875 310,475
------------- ------------- ------------- -------------
Total Current Liabilities 1,412,698 368,932 296,875 2,078,505
------------- ------------- ------------- -------------
LONG-TERM DEBT (1) 78,125
437,499 -- (1) 1,189,000 1,704,624
------------- ------------- ------------- -------------
Total Liabilities 1,850,197 368,932 1,564,000 3,783,129
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDERS' EQUITY
- --------------------
Series A redeemable convertible preferred stock 300,000 -- -- 300,000
Series C 5% Cumulative redeemable convertible
preferred sto1k 1 -- -- 1
Series D redeemable convertible preferred stock 2 -- -- 2
Common stock 498 120 (1) (120)
(1) 154 652
Additional paid in capital 15,478,366 79,880 (1) 5,099,846
(1) (79,880) 20,578,212
Unearned compensation (3,963,481) -- (3,963,481)
Retained Earnings (accumulated deficit) (10,684,671) 388,192 (1) (388,192) (10,684,671)
------------- ------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,130,715 468,192 4,631,808 6,230,715
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844
============= ============= ============= =============
F-37
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Markland Science &
Technologies Technology Pro forma
Inc. and Research, Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 658,651 $ 6,054,167 $ -- $ 6,712,818
COST OF REVENUES 445,218 5,235,812 -- 5,681,030
------------ ------------ ------------ ------------
GROSS PROFIT 213,433 818,355 -- 1,031,788
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 1,186,379 173,932 -- 1,360,311
Research and development 522,657 224,803 -- 747,460
Compensatory element of stock issuance for selling,
general and administrative fees 2,051,822 -- -- 2,051,822
Amortization of intangible assets 66,668 -- -- 66,668
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,827,526 398,735 -- 4,226,261
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (3,614,093) 419,620 -- (3,194,473)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 226,751 11,608 (2) 142,680 381,039
Other expense (income), net (5,250) (43) -- (5,293)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (INCOME), NET 221,501 11,565 142,680 375,746
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,835,594) 408,055 (142,680) (3,570,219)
Income taxes -- 175,460 (3) (175,460) 0
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,835,594) 232,595 32,780 (3,570,219)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 -- -- 501,755
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 -- -- 4,107,500
PREFERRED STOCK DIVIDEND - Series C 152,716 -- -- 152,716
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(8,597,565) $ 232,595 $ 32,780 (8,332,190)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (1.72) $ (1.27)
============ ============
Weighted Average Number of Common Shares Outstanding, as
Adjusted for September, 2003 reverse stock split 5,002,724 1,539,779 6,542,503
============ ============ ============
F-38
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Markland Science &
Technologies Technology Pro forma
Inc. and Research, Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 306,724 $ 503,654 $ -- $ 810,378
COST OF REVENUES 256,956 436,769 -- 693,725
------------ ------------ ------------ ------------
GROSS PROFIT 49,768 66,885 -- 116,653
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 497,812 44,731 -- 542,543
Research and development -- 67,924 -- 67,924
Compensatory element of stock issuance for selling,
general and administrative fees 401,980 -- -- 401,980
Amortization of intangible assets 33,334 -- -- 33,334
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 933,126 112,655 -- 1,045,781
------------ ------------ ------------ ------------
OPERATING LOSS FROM CONTINUING
OPERATIONS (883,358) (45,770) -- (929,128)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 28,578 1,995 (2) 35,670 66,243
Other expense (income), net -- (6) -- (6)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (INCOME), NET 28,578 1,989 35,670 65,237
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (911,936) (47,759) (35,670) (995,365)
Income taxes -- (20,059)(3) 20,059 --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (911,936) (27,700) (55,729) (995,365)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 90,000 -- -- 90,000
PREFERRED STOCK DIVIDEND - Series C 65,689 -- -- 65,689
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS APPLICABLE
TO COMMON STOCKHOLDERS $(1,067,625) $ (27,700) $ (55,729) (1,151,054)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.23) $ (1.18)
============ ============
Weighted Average Number of Common Shares Outstanding, as
Adjusted for September, 2003 reverse stock split 4,746,887 1,539,779 6,286,666
============ ============ ============
F-39
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING
Effective October 1, 2003, Markland completed the acquisition of 100% of the
common stock of STR, by its subsidiary, Security Technology, Inc., a Delaware
Corporation ("STI"), through a merger of STI with newly formed STR Acquisition
Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's
Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy
deploys the "man-portable" point detection system to detect all classic nerve
and blister agents as well as other chemical warfare agent (CWA) vapors.
The purchase price totaled $6,475,000 and consisted of $900,000 in cash, which
was paid in October 2003, 1,539,779 shares of Markland common stock valued at
$5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The
promissory note bears no interest. Holders of the shares of common stock were
granted piggy-back registration rights. The promissory note is collateralized by
all of the assets of STR and 40% of the Common Stock of STR held by the
Markland. The promissory note is payable on or about as follows:
March 25, 2004 $ 93,750
May 24, 2004 125,000
July 23, 2004 78,125
October 26, 2004 78,125
---------
$375,000
=========
F-40
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING, (Continued)
A summary of the allocation of the aggregate consideration for the merger to the
fair value of the assets acquired and liabilities assumed is as follows:
Fair value of net assets acquired:
Current assets $ 783,657
Property and equipment 53,467
Liabilities assumed:
Accounts payable & accrued expenses (368,932)
------------
Fair value of identifiable net assets 468,192
Intangibles (a) 6,006,808
------------
Total Purchase Price $ 6,475,000
============
Funding of Purchase Price
Cash $ 900,000
Promissory note 375,000
Common Stock 5,100,000
Cash for acquisition costs 100,000
------------
Total Purchase Price $ 6,475,000
============
(a) Markland has currently hired an independent firm to perform an
independent valuation of the above transaction. Since the outside
valuation of the intangible assets was not completed as of the date of
this filing, the pro forma financial statements assumed that all of the
excess of the purchase price over the net tangible assets was allocated
to Goodwill and accordingly, no amortization expense was included in
the pro forma statements of operations. Depending on the outcome of the
outside valuation and using an estimate of a five-year economic life
for any amounts allocated to the amortizable intangible assets, future
amortization expense could range from $0 to approximately $1,200,000
per year.
The Company funded the cash portion of the acquisition from a loan provided by
Bayview Capital, LLC, ("Bayview"). Robert Tarini, Markland's Chairman is
affiliated with Bayview. The amount of the loan provided by Bayview was
$1,189,000. The loan is collateralized by all of the assets of Markland, is due
on October 27, 2005 and bears interest at a rate of 12% per annum.
F-41
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - PRO FORMA INTEREST EXPENSE AND INCOME TAXES
The Pro forma interest expense for the year ended September 30, 2003 and three
months ended September 30, 2003, assuming the $1,189,000 loan was outstanding
for this period amounts to $142,680 and $85,670, respectively.
NOTE 3 - PRO FORMA INCOME TAXES
STR's income tax expense for the year ended September 30, 2003 of $175,460 was
eliminated as it is assumed that a consolidated tax return would have been filed
utilizing the 2003 net operating loss of Markland against the taxable income of
STR. STR's income tax benefit for the three months ended September 30, 2003 of
$20,059 was eliminated.
F-42
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 118,977
Accounts receivable (including $337,461 due from related party) 1,763,210
Prepaid expenses and other current assets 152,734
-------------
TOTAL CURRENT ASSETS 2,034,921
-------------
OTHER ASSETS:
Property and Equipment, net of accumulated depreciation of $72,771 51,212
Intangible assets - ERGO, net of amortization of $133,336 266,664
Intangible assets - ASI, net of amortization of $83,333 916,667
Technology rights (Acoustic Core) 1,300,000
Intangible assets - STR 6,314,037
-------------
TOTAL OTHER ASSETS 8,848,580
-------------
TOTAL ASSETS $ 10,883,501
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable (including $478,506 due to related party) $ 1,704,673
Accrued expenses and other current liabilities 251,235
Secured Convertible Promissory Note, less debt discount of $41,666 458,334
Note payable - Current 410,674
-------------
TOTAL CURRENT LIABILITIES 2,824,916
Note payable - net of current (related party) 1,197,769
-------------
TOTAL LIABILITIES 4,022,685
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A redeemable convertible preferred stock - no par value;
30,000 authorized, issued and outstanding 300,000
Series C 5% cumulative convertible preferred stock -
$.0001 par value; 8,000 authorized; 4,825 issued and
outstanding; liquidation preference of $4,825,000 1
Series D 5% cumulative convertible preferred stock -
$.0001 par value; 40,000 authorized; 16,790 issued and
outstanding; liquidation preference of $16,790,000 2
Common stock - $.0001 par value; 500,000,000 authorized;
7,357,703 shares issued and outstanding 737
Additional paid-in capital 20,981,657
Unearned compensation (3,097,201)
Compensatory stock to be issued 187,500
Accumulated deficit (11,511,880)
-------------
TOTAL STOCKHOLDERS' EQUITY 6,860,816
-------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 10,883,501
=============
See accompanying notes to condensed consolidated financial statements.
F-43
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
REVENUES (including $225,210 of revenue from related parties) $ 3,563,495 $ --
COST OF REVENUES (Including $192,934 of costs 2,329,581 --
incurred to a related party) ------------ ------------
GROSS PROFIT 1,233,914 --
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 1,126,966 171,552
Compensatory element of stock issuances for
selling, general and administrative fees 1,539,142 --
Amortization of intangible assets 150,001 --
Depreciation and amortization 9,222 --
------------ ------------
TOTAL OPERATING EXPENSES 2,825,331 171,552
------------ ------------
OPERATING LOSS (1,591,417) (171,552)
------------ ------------
OTHER EXPENSES, NET:
Interest expense 147,728 169,786
Other expense (income) -- (25,653)
------------ ------------
TOTAL OTHER EXPENSES, NET 147,728 144,133
------------ ------------
NET LOSS (1,739,145) (315,685)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 186,250 48,380
PREFERRED STOCK DIVIDEND - SERIES C 130,540 15,989
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(2,055,935) $ (380,054)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.32) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,463,757 4,999,857
============ ============
See accompanying notes to condensed consolidated financial statements.
F-44
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
REVENUES (including $116,618 of revenue from related parties) $ 3,256,771 $ --
COST OF REVENUES (Including $78,321 of costs
Incurred to a related party) 2,072,625 --
------------ ------------
GROSS PROFIT 1,184,146 --
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 629,154 125,156
Compensatory element of stock issuances for
selling, general and administrative fees 1,137,162 --
Amortization of intangible assets 116,667 --
Depreciation and amortization 9,222 --
------------ ------------
TOTAL OPERATING EXPENSES 1,892,205 125,156
------------ ------------
OPERATING LOSS (708,059) (125,156)
------------ ------------
OTHER EXPENSES, NET:
Interest expense 119,150 63,354
Other expense (income) -- (8,453)
------------ ------------
TOTAL OTHER EXPENSES, NET 119,150 54,901
------------ ------------
NET LOSS (827,209) (180,057)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 96,250 48,380
PREFERRED STOCK DIVIDEND - SERIES C 64,851 15,989
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (988,310) $ (244,426)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.18) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,156,120 4,999,857
OUTSTANDING ============ ============
See accompanying notes to condensed consolidated financial statements.
F-45
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Series A Convertible
Common Stock Preferred Stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
(1)
Balance - July 1, 2003 3,671,573 $ 367 30,000 $ 300,000
Issuance of Series D convertible
preferred stock -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Conversion of Series C convertible
preferred stock into common stock 208,333 21 -- --
Stock issued in connection with
settlement of liabilities to a
related party 750,000 75 -- --
Stock issued in connection with
consulting agreement 1,000 -- -- --
Stock issued in connection with
acquisition of ASI assets 283,333 28 -- --
Stock issued in connection with
consulting agreements 30,000 3 -- --
Additional stock issued in connection
with employee/consulting agreements 801,350 81 -- --
Variable accounting adjustment of prior/
Unearned compensation -- -- -- --
Preferred stock dividend - Series C
($12.50 per share) -- -- -- --
Stock issued in connection with
consulting agreement 60,826 7 -- --
Stock issued in connection with
employment agreement 11,509 1 -- --
Acquisition of Science and Technology
Research Corporation, Inc. 1,539,779 154 -- --
Amortization of employment/ and
consulting agreements -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance - December 31, 2003 7,357,703 $ 737 30,000 $ 300,000
========== ========== ========== ==========
(1) Share amounts have been restated to reflect the 1-for-60 reverse stock split
effected on October 27, 2003.
See accompanying notes to condensed consolidated financial statements.
F-46
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Series C Convertible Series D Convertible
Preferred Stock Preferred Stock
---------------------- ---------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Balance - July 1, 2003 5,395 $ 1 16,430 $ 2
Issuance of Series D convertible
preferred stock -- -- 745 --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Conversion of Series C convertible
preferred stock into common stock (570) -- -- --
Stock issued in connection with
settlement of liabilities to a
related party -- -- -- --
Stock issued in connection with
consulting agreement -- -- -- --
Stock issued in connection with
acquisition of ASI assets -- -- -- --
Stock issued in connection with
consulting agreements -- -- -- --
Additional stock issued in connection
with employee/consulting agreements -- -- -- --
Variable accounting adjustment of prior unearned
compensation -- -- -- --
Preferred stock dividend - Series C
($12.50 per share) -- -- -- --
Stock issued in connection with
consulting agreement -- -- -- --
Stock issued in connection with
employment agreement -- -- -- --
Acquisition of Science and Technology
Research Corporation, Inc. -- -- -- --
Amortization of employment/ and consulting
agreements -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balance - December 31, 2003 4,825 $ 1 17,175 $ 2
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
F-47
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Additional Compensatory
Unearned Paid-in Stock
Compensation Capital to be Issued
------------- ------------- ------------
Balance - July 1, 2003 $ (4,381,379) $ 13,900,104 $ --
Issuance of Series D convertible
preferred stock -- 745,000 --
Preferred stock dividend - beneficial
conversion feature - Series D -- 186,250 --
Preferred stock dividend - beneficial
conversion feature - Series D -- (186,250) --
Conversion of Series C convertible
preferred stock into common stock -- (21) --
Stock issued in connection with
settlement of liabilities to a
related party -- 449,925 --
Stock issued in connection with
consulting agreement (11,400) 11,400 --
Stock issued in connection with
acquisition of ASI assets -- 849,972 --
Stock issued in connection with
consulting agreements (123,000) 122,996 --
Additional stock issued in connection
with employee/consulting agreements -- (81) --
Variable accounting adjustment of
prior unearned compensation 273,633 (273,633) --
Preferred stock dividend - Series C
($12.50 per share) -- (130,541) --
Stock issued in connection with
consulting agreements (350,000) 173,894 187,500
Stock issued in connection with
employment agreements -- 32,796 --
Acquisition of Science and Technology
Research Corporation, Inc. -- 5,099,846 --
Amortization of employment/and
consulting agreements 401,980 -- --
Net loss -- -- --
------------- ------------- ------------
Balance - September 30, 2003 $ (3,097,201) $ 20,981,657 $ 187,500
============= ============= ============
See accompanying notes to condensed consolidated financial statements.
F-48
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Total
Accumulated Stockholders'
Deficit Equity
------------ ------------
Balance - July 1, 2003 $ (9,772,735) $ 46,360
Issuance of Series D convertible
preferred stock -- 745,000
Preferred stock dividend - beneficial
conversion feature - Series D -- 186,250
Preferred stock dividend - beneficial
conversion feature - Series D -- (186,250)
Conversion of Series C convertible
preferred stock into common stock -- --
Stock issued in connection with
settlement of liabilities to a
related party -- 450,000
Stock issued in connection with
consulting agreement -- --
Stock issued in connection with
acquisition of ASI assets -- 850,000
Stock issued in connection with
consulting agreements -- --
Additional stock issued in connection
with employee/consulting agreements -- --
Variable accounting adjustment of
prior unearned compensation -- (130,541)
Preferred stock dividend - Series C
($12.50 per share) -- 11,400
Stock issued in connection with
consulting agreement -- 32,797
Stock issued in connection with
employment agreement -- --
Acquisition of Science and Technology
Research Corporation, Inc. -- 5,100,000
Amortization of employment/and
consulting agreements -- 1,494,867
Net loss (1,739,145) (1,739,145)
------------- -------------
Balance - September 30, 2003 $(10,566,286) $ 7,806,717
============= =============
See accompanying notes to condensed consolidated financial statements.
F-49
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
For the Six Months Ended
December 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,739,145) $ (315,685)
Adjustment to reconcile net loss to net
cash used in operating activities:
Amortization of intangible assets 150,001 --
Amortization of debt discount 41,668 --
Compensatory stock issuances 1,539,142 4,000
Depreciation 2,255 --
Changes in operating assets and liabilities:
Accounts Receivable (1,448,988) --
Prepaid expenses and other current assets
assets 25,454 21,750
Accounts payable and accrued expenses 545,299 249,655
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (884,314) (40,280)
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of ASI Assets (85,000) --
Purchase of STR (784,170) --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (869,170) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable -premium
financing (17,004) --
Proceeds from Note Payable - Bay View 1,400,000 --
Repayments to Note Payable - Bay View (261,000) --
Proceeds from sale of preferred stock 745,000 --
Proceeds from sale of common stock in
private placement -- 340,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,866,996 340,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 113,512 299,720
CASH - BEGINNING 5,465 4,911
------------ ------------
CASH - ENDING $ 118,977 $ 304,631
============ ============
See accompanying notes to condensed consolidated financial statements.
F-50
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------
2003 2002
------------ ------------
Cash paid during the years for:
Interest $ -- $ --
============ ============
Taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Conversion of notes payable and
accrued interest into preferred
stock $ -- $ 5,225,000
============ ============
Conversion of accounts payable into common
stock $ 450,000 $ --
============ ============
Acquisition of ASI assets by issuance of
common stock $ 850,000 $ --
============ ============
Acquisition of technology rights by
issuance of common stock $ -- $ 1,300,000
============ ============
Acquisition of STR by issuance of common
stock $ 5,100,000 $ --
============ ============
Promissory note issued as part of STR
acquisition $ 375,000 $ --
============ ============
Deemed dividend preferred stock -
beneficial conversion feature $ 186,250 $ 48,380
============ ============
Dividends on preferred stock $ 273,633 $ 15,989
============ ============
See accompanying notes to condensed consolidated financial statements.
F-51
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements of
Markland Technologies, Inc. and Subsidiaries (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information, without being audited, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operation results for
the six months and thru months ended December 31, 2003 are not necessarily
indicative of the result that may be expected for the year ending June 30, 2004.
The unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's 10-KSB for the year ended June 30, 2003 filed with the Securities
and Exchange Commission.
In December 2002, Markland purchased an acoustic core technology (`Acoustic
Core"), in January 2003, Markland purchased the assets of Ergo Systems, Inc.
("Ergo"), in September 2003, Markland purchased the intangible assets of ASI
Technology Corporation ("ASI") and in October 2003, Markland completed a
business combination with Science and Technology Research Corporation, Inc.
("STR"). As a result of these transactions, Markland began to provide end-to-end
solutions to the Department of Homeland Security ("DHS"). Markland's principal
end customer is the United States Government.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred net losses of $1,739,145 and $315,685 for the six months
ended December 31, 2003 and 2002, respectively. Additionally, the Company had a
working capital deficiency of $789,995 at December 31, 2003. The Company has
limited finances and requires additional funding in order to market and license
its products. There is no assurance that the Company can reverse its operating
losses, or that it can raise additional capital to allow it to continue its
planned operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's ability to continue as a going concern remains dependent upon the
ability to obtain additional financing or through the generation of positive
cash flows from continuing operations. These financial statements do not include
any adjustments relating to the recoverability of recorded asset amounts that
might be necessary as a result of the above uncertainty.
F-52
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. REVERSE STOCK SPLIT / LOSS PER SHARE
------------------------------------
Share amounts and per share data have been restated to reflect a 1 for 60
reverse stock split effective as of October 27, 2003.
Basic net loss per common share has been computed based on the weighted average
number of shares of common stock outstanding during the periods presented.
Common stock equivalents, consisting of a secured convertible promissory note,
Series A and D Convertible preferred stock and Series C 5% Cumulative
Convertible preferred stock, discussed in the notes to consolidated financial
statements, were not included in the calculation of the diluted loss per share
because their inclusion would have had the effect of decreasing the loss per
share otherwise computed.
At December 31, 2003, as permitted under SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which amended SFAS No.
123, "Accounting for Stock-Based Compensation", the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretation including Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. No stock-based employee
compensation cost is reflected in operations, as there are no options
outstanding.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of SFAS No. 149, which became effective
for contracts entered into or modified after June 30, 2003, did not have any
impact on the Company's' financial position, results of operations or cash
flows.
F-53
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
----------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did
not have any impact on the Company's consolidated results of operations,
financial condition or cash flows.
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities (other than small business
issuers) for all other types of entities is required in financial statements for
periods ending after December 15, 2004. The adoption of FIN No. 46(R) is not
expected to have an impact on the Company's consolidated financial position,
results of operations or cash flows.
F-54
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS
PURCHASE OF INTANGIBLE ASSETS OF ASI TECHNOLOGY CORPORATION
-----------------------------------------------------------
On March 19, 2003, the Company and ASI Technology Corporation, a Nevada
corporation, ("ASI") closed its Technology Purchase Agreement (the "Agreement").
Under the Agreement, ASI agreed to sell and the Company agreed to purchase
certain assets relating to ASI's gas plasma antenna technology, including
patents, patent applications, equipment, government contract rights and other
intellectual property rights. The Chief Executive Officer of the Company was a
significant employee of ASI during the two years prior to this agreement. Under
an interim arrangement, the Company had received revenues from these contracts
billed for periods after April 1, 2003 and was obligated for all related costs.
Markland had agreed to use its best efforts to manage and administer the
contracts during this period prior to closing and to pay ASI a fee of $2,500 per
month for administrative support. These fees amounted to $15,000 as of December
31, 2003. The closing of this transaction occurred on September 30, 2003.
In consideration, the Company paid $150,000 in cash of which $65,000 was paid by
June 30, 2003 and $85,000 was paid by December 31, 2003. In addition to the cash
payment, the Company issued to ASI, on closing, 283,333 shares of its common
stock valued at $850,000.
In connection with the Agreement, ASI and the Company entered into a
registration rights agreement entitling ASI to include its shares of the
Company's common stock in future registration statements filed by the Company
under the Securities Act of 1933 in connection with public offerings of the
Company's common stock. In the event that the Company fails to register such
stock on behalf of ASI, or if a registration statement for the shares is
delayed, the Company will have to issue an additional $150,000 worth of common
stock to ASI.
Also in connection with the Agreement, ASI and the Company entered into a
sublicense agreement pursuant to which ASI has sublicensed to the Company the
right to develop and sell products to certain government, military and homeland
security customers in the United States and Canada using the Company's plasma
sterilization and decontamination technology. Markland has agreed to pay ASI
$5,000 per month for these rights for a period of 24 months, of which $30,000
has been paid to ASI under this agreement and is included in selling, general
and administrative expenses for the six months ended December 31, 2003.
F-55
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS - Continue
PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc.
-------------------------------------------------
On October 27, 2003, the Company completed the acquisition of 100% of the common
stock of Science and Technology Research Corporation, Inc., a Maryland
corporation ("STR"), by its subsidiary, Security Technology, Inc., a Delaware
Corporation ("STI"), through a merger of STI with newly formed STR Acquisition
Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's
Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy
deploys the "man-portable" point detection system to detect all classic nerve
and blister agents as well as other chemical warfare agent (CWA) vapors. The
Company acquired STR for the reason that it has a contract with United States
Navy and it can potential generate revenues for this contract in excess of $35
million.
The purchase price for the STR totaled $6,475,000 and consisted of $900,000 in
cash, which was paid in October 2003, 1,539,779 shares of common stock valued at
$5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The
promissory note bears no interest. Holders of the shares of common
stock were granted piggy-back registration rights. The promissory note is
collateralized by all of the assets of STR and 40% of the Common Stock of STR
held by the Company. The promissory note is payable on or about as follows:
March 25, 2004 $ 93,750
May 24, 2004 125,000
July 23, 2004 78,125
October 26, 2004 78,125
---------
$375,000
=========
F-56
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS - Continue
PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc. - Continue
-------------------------------------------------
A summary of the allocation of the aggregate consideration for the merger to the
fair value of the assets acquired and liabilities assumed is as follows:
Cash $ 900,000
Promissory note 375,000
Common Stock (a) 5,100,000
Acquisition costs 100,000
-----------
Total Purchase Price $6,475,000
-----------
Fair value of net assets acquired:
Current assets $ 326,427
Property and equipment 53,467
Liabilities assumed:
Accounts payable & accrued expenses 218,931
Fair value of identifiable net assets acquires 160,963
-----------
Intangibles 6,314,037
Total Purchase Price 6,475,000
-----------
(a) 1,539,779 shares of common stock based upon the average closing price
ten days after 10/8/03 ($4.254 per share). The company has currently
hired an independent firm to perform an independent valuation of the
above transaction.
The results of operations of STR have been included in the Company's condensed
consolidated Statements of operations commencing October 1, 2003. Proforma
financial information has not have been included as financial information for
STR not available at this time. The Company has not completed its 8-K audit or
STR and is considered late.
The Company funded the cash portion of the acquisition from a loan provided by
Bay View Capital, LLC, ("Bay View"). Robert Tarini, Markland's Chairman is
affiliated with Bay View. The entire amount of the loan provided by Bay View was
$1,400,000.
F-57
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
The purchase price of $400,000 related to the January 2003 acquisition of Ergo
was allocated entirely to a contract with the United States Government. The
contract is being amortized over a three-year period commencing with the date of
the acquisition, January 14,2003. Amortization expense related to the contract
for the six months ended December 31,2003 was $66,668.
The intangible assets acquired from ASI on September 30, 2003 totaled
$1,000,000. These assets are being amortized over a three-year period commencing
October 1,2003. Amortization expense related to this contract for the six months
ended December 31,2003 was $83,333.
Future amortization expense related to the above-acquired intangible assets is
as follows:
Years Ending
June 30, Amount
---------------- -----------
2004 (6 months) $ 233,335
2005 466,669
2006 399,993
2007 83,334
-----------
$1,183,331
===========
The intangible assets entitled "Acoustic Core" which has a carrying value of
$1,300,000 are not available for commercial sale as of December 31, 2003.
Accordingly, no amortization expense has been recorded through December 31,
2003.
F-58
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SECURED LINE OF CREDIT
----------------------
On December 10, 2002, the Company entered into a Restated and Amended Secured
Convertible Revolving Credit Note Agreement for $500,000.
Interest under this note accrues at the annual interest rate of 6% per annum.
The principal and accrued interest under this note is due on June 30, 2004,
however, may be prepaid by the Company at any time without penalty. As of
December 31, 2003, approximately $15,000 of interest has been accrued on this
note and is included in accrued expenses on the consolidated balance sheet.
The note may be converted at any time, in whole or in part, into shares of the
Company's common stock. The total number of shares of common stock issuable upon
conversion will be determined by dividing the principal amount of this note
being converted by 80% of the closing bid price of the common stock based on the
average of the five trading days immediately preceding the date of conversion.
The value of the beneficial conversion feature of $125,000 is being amortized as
interest expense over the period ending June 30, 2004. Amortization of this debt
discount for the six months ended December 31, 2003 was $41,668.
7. NEW EQUITY LINE
---------------
On September 10, 2003, Markland entered into a Private Equity Credit Agreement
with Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue
and sell to Brittany up to $10,000,000 worth of its common stock over the next
three years. Prior to any sales, the Company is required to file a registration
statement with the Securities and Exchange Commission, relating to the shares to
be issued, and to have such registration statement declared effective.
After the registration statement is declared effective, Markland would be able
to put shares to Brittany according to the terms outlined in the agreement. The
minimum put amount is $1,000,000 over the life of the agreement and $25,000 per
put. Failure to satisfy the minimum put requirement over the life of the Private
Equity Credit Agreement will result in a charge to Markland.
Shares will be issued to Brittany, in connection with each put, at 92% of the
average of the closing bid prices for the lowest (3) three (not necessarily
consecutive) trading days during the (10) trading day period immediately
following the put date. Under certain conditions, the Company will be required
to issue additional shares and/or accrue financial penalties.
There can be no assurances that the Company will receive any proceeds from this
agreement. As of December 31, 2003 the Company has not drawn down on this equity
line.
F-59
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. NOTES PAYABLE
-------------
Note Payable - NPAI
- -------------------
In December 2003, the Company renewed the Directors and Officers Life Insurance
Policy, for one year effective December 9, 2003 through December 9, 2004. The
Company is amortizing such amount into selling, general and administrative
expense on a straight-line basis. At December 31 2003, the total un-amortized
premiums included in "prepaid insurance" in the accompanying consolidated
balance sheet amounted to $40,976.
Note Payable - Bay View
- ----------------------
On September 4, 2003, the Company signed a term sheet with Bay View Capital,
LLC, a related party, and received in October, 2003 a $1,400,000
bridge-financing loan of which the Company immediately repaid 211,000. The
proceeds from this loan were used by the Company to fund the acquisition of STR
(Note 6). The loan agreement provides for the Company to make 24 monthly
payments of principal and interest. Principal is calculated on a monthly basis
using a "Cash Flow Recapture Mechanism" as defined in the agreement. Interest is
payable at a rate of 12% per annum payable monthly in arrears. The note requires
monthly payments in the amount equal to twenty five percent of the gross revenue
of STR for the immediately preceding calendar month. The entire principal amount
together with any unpaid interest is payable in full on October 27, 2005. If the
monthly payments relating to the gross monthly revenues are not paid there is a
5% percent penalty and the interest will change to 18% for the reminder of the
loan. The note is secured by, among other things, a security interest in all
assets of the Company. The balance due Bay View Capital at December 31, 2003 was
$1,197,769 and is currently classified as a long term liability.
9. STOCKHOLDERS'EQUITY
---------------------------------
Preferred Stock
- ---------------
Series B Convertible Preferred Stock
- ------------------------------------
On September 4, 2003, the Company's board of directors approved a resolution to
cancel its Series B convertible preferred stock.
F-60
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
---------------------------------
Series C 5% Cumulative Redeemable Convertible Preferred Stock
- -------------------------------------------------------------
During July 2003, 570 shares of Series C 5% Cumulative Redeemable Preferred
Stock were converted into 208,333 shares of the Company's common stock.
As of December 31, 2003, accumulated dividends of $273,633 were accrued
for the Series C Preferred Stock.
Series D Redeemable Convertible Preferred Stock
- -----------------------------------------------
During the six months ended December 31,2003, the Company sold to a third party
745 shares of Series D Preferred Stock for gross proceeds of $745,000. The
Company has determined that as of the date of issuance there was a beneficial
conversion feature in the aggregate amount of $186,250. The Company recorded
this deemed dividend of $186,250 during the six months ended December 31, 2003,
relating to the accretion of these beneficial conversion features on the Series
D Preferred Stock. The deemed dividends increases the loss applicable to common
shareholders in the calculation of basic and diluted net loss per common share
and is included in stockholders' equity as a charge to additional paid-in
capital and a credit to additional paid-in capital. The Series D Preferred Stock
is convertible immediately.
Reverse Stock Split
- -------------------
On September 4, 2003, the Company's board of directors approved a resolution to
effect a one-for-sixty reverse stock split. As a result, each sixty shares of
common stock was converted automatically into one share of common stock. To
avoid the issuance of fractional shares of common stock, each fractional share
resulting from the reverse split was rounded up to a whole share. The reverse
stock split did not reduce the 500,000,000 shares of common stock that the
Company is authorized to issue. The resolution, which impacts shareholders of
record as of September 5, 2003 became effective on October 27, 2003.
Common Stock Issuances
- ----------------------
In July 2003, the Company entered into a consulting agreement with Emerging
Concepts, a California entity, whereby the Company issued to them 25,000 shares
of its common stock in exchange for consulting services which will be provided
for a period of one year commencing on July 7 2003 and expiring on July 7 2004,
unless terminated by either party, as defined in the agreement.
F-61
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
----------------------------------
Common Stock Issuances - continue
- ----------------------
On July 24, 2003, the Company entered into an Agreement (the "Agreement") with
Syqwest, Inc., a Rhode Island corporation, and related party, formerly known as
Ocean Data Equipment Corporation ("Syqwest"). Under this Agreement, Syqwest
agreed to receive 750,000 shares of the Company's restricted common stock as
full consideration for $450,000 of unpaid services, which were performed by
Syqwest in connection with the research efforts as it relates to the Vehicle
Stopping Technology. Pursuant to the Agreement, the Company has the right at any
time by written notice to repurchase from Syqwest these 750,000 shares of
restricted common stock at a purchase price of $0.60 per share. Based on this
redemption right and the restriction on the sale of such securities, the Company
has valued these shares at the redemption price of $450,000.
During September and October 2003, the Company issued to a consultant a bonus of
5,000 shares of common stock valued at $20,500. These shares were issued for
enhanced media and corporate communications programs between June and December
2003. In Addition, the Company issued 1,000 shares of it common stock valued at
$11,400, as part of the consultants quarterly compensation.
In November 2003, the Company entered into an agreement with MarketShare
Recovery, Stuart Siller, and George Martin to perform certain services with
regard to investor relations for the Company. In consideration for these
services, the Company agreed to issue a cumulative total of 90,908 shares of its
common stock of which 22,727 shares were issue valued at $62,500 during the
quarter ended December 31, 2003.
In November 2003, the Company entered into an agreement with Research Works to
prepare an equity research report. In consideration for these services, the
Company issued Research Works a total of 37,099 shares valued at $100,000.
During the six months ended December 31, 2003 the Company also awarded three
non-officer employees of the company a total of 11,509 shares valued at $34,020
for services rendered during the period.
F-62
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. NET LOSS PER SHARE
------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future, and that were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented, consists of the
following:
Shares Issuable
at Assumed
At Average Market
December 31, Price at December 31,
2003 2003 ($2.46)
------------ -------------------
Convertible notes payable
(Converted at 80% of market) $ 500,000 254,065
Series A Redeemable Convertible
Preferred stock $ 30,000 10,000
Series C 5% Cumulative Redeemable Convertible
preferred stock plus accrued dividends
(converted at 80% of market) $ 5,103,027 2,590,570
Series D Redeemable Convertible preferred
stock (converted at 80% of market) $17,175,000 8,727,133
------------ ------------
Total as of December 31, 2003 $22,808,027 11,581,768
============ ============
F-63
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMPENSATION AND CONSULTING AGREEMENTS
--------------------------------------
Effective January 2003, the Company entered into a one-year compensation
agreement with an officer and three three-year agreements with an officer and
two consultants to the Company, which provide for aggregate monthly remuneration
of $47,500.
One of these agreements provide for the issuance of 1.67% of the Company's
outstanding common stock in three installments, 50% of the shares were issued on
or about March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of
the shares on or about October 1, 2003.
If necessary, an additional issuance will occur on December 31, 2003, so that
the total amount of shares issued up to December 31, 2003 will equal 1.67% of
the outstanding common stock as of December 31, 2003.
The three three-year compensation agreements provide in total for the issuance
of 5.01% of the Company's outstanding common stock in four installments on a
fully diluted basis based upon certain performance criteria being met.
The amount charged to operations related to this agreement for the six months
ended December 31, 2003 amounted to approximately $914,000.
The Company has also entered into a one year consulting agreement with the
former President and principal of the acquired company STR ("Consultant"). In
consideration for the consulting services to be rendered by Consultant, the
Company shall pay to Consultant the sum of $285,000 (the "FEE"). The Fee shall
be payable as follows: $61,250 shall be payable on March 15, 2004, a second
payment in the amount of $81,500, shall be due May 15, 2004, a third payment in
the amount of $51,125 shall be on July 15, 2004, the fourth and final payment in
the amount of $91,125, shall be on October 15, 2004.
12. LITIGATION
----------
The Quest Net Corp. and CWTel, Inc. were named defendants in a lawsuit filed in
the Circuit Court in Broward County, Florida. The lawsuit alleges the Company
has failed to pay a promissory note dated September 8, 2000 in the amount of
$66,672 and issued a check as payment on the note that was returned due to
insufficient funds. As of August 15, 2003 there has been no active litigation
activity on the case for approximately twenty months. There have been some
sporadic settlement discussions but no agreement has been reached at this time.
No estimate can be given as to the ultimate loss which would be suffered by the
Company should it lose this lawsuit.
The Company is also subject to various matters of litigation during its normal
course of operations. Management believes that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
F-64
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENT
-----------------
Conversion of Series C Preferred Stock.
Subsequent to December 31, 2003 the holders of the Series C Preferred Stock
converted all of the shares of Series C Preferred stocks plus accrued dividends
for 5,194,218 shares of Markland common stock.
Sale of Series D Preferred Stock.
Subsequent to December 31, 2003, the Company sold 2,921 shares of Series D
Preferred Stock and received net proceeds of $2,657,000.
Conversion of Convertible Secured Debt.
Subsequent to December 31, 2003, a secured lender converted the principal amount
of $500,000 and all accrued interest into 404,265 shares of Markland's common
stock.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 2, 2004
Pursuant to a private placement transaction completed on April 2, 2004,
Markland issued the following:
o 3,333,333 shares of Markland common stock;
o 3,333,333 shares of Markland common stock to be obtained by
exercising three-year common stock purchase warrants with an
exercise price of $1.00 per share;
o 333,333 shares of Markland common stock to be obtained by
exercising three-year common stock purchase warrants with an
exercise price of $1.40 per share that were issued as finder's
compensation.
Markland agreed to register for resale 150% of the 3,333,333 shares of
its common stock in this offering and 110% of the 3,333,333 shares of its common
stock that are issuable to certain stockholders upon exercise of the warrants to
cover the shares of its common stock, if any, issuable to certain selling
stockholders as liquidated damages for breach of certain covenants contained in
or as a result of adjustments contemplated by certain provisions of the
Securities Purchase Agreement dated as of April 2, 2004 or the Registration
Rights Agreement dated as of April 2, 2004. Markland also agreed to register
110% of the 333,333 shares of its common stock that are issuable to certain
stockholders upon exercise of the warrants issued as finder's fee.
Markland received gross proceeds of $2,000,000 and net proceeds of
$1,750,000 (after deducting finders' fees and transaction costs) from this
private placement.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON APRIL 16, 2004
Pursuant to a private placement transaction completed on April 16,
2004, Markland issued the following:
o 2,500,000 shares of Markland common stock;
o 2,500,000 shares of Markland common stock to be obtained by
exercising three-year common stock purchase warrants with an
exercise price of $1.50 per share;
o 25,000 shares of Markland common stock to be obtained by
exercising three-year common stock purchase warrants with an
exercise price of $2.00 per share that were issued as finder's
compensation.
Markland agreed to register for sale 150% of the 2,500,000 shares of
its common stock sold to certain selling stockholders pursuant to the Securities
Purchase Agreement dated April 16, 2004 and 110% of the 2,500,000 shares of its
common stock that are issuable to certain stockholders upon exercise of the
warrants sold in this private placement, to cover the shares of its common
stock, if any, issuable to certain selling stockholders as liquidated damages
for breach of certain covenants contained in or as a result of adjustments
contemplated by certain provisions of the Securities Purchase Agreement dated as
of April 16, 2004 or the Registration Rights Agreement dated as of April 16,
2004.
Markland received gross proceeds of $2,000,000 and net proceeds of
$1,890,000 (after deducting finders' fees and transaction costs) from this
private placement.
PRIVATE PLACEMENT TRANSACTION COMPLETED ON MAY 3, 2004
Pursuant to a private placement transaction completed on May 3, 2004,
Markland issued the following:
o 7,098,750 shares of its common stock;
o 7,098,750 shares of its common stock to be obtained by exercising
three-year redeemable common stock purchase warrants with an
exercise price of $1.50 per share;
o 529,800 shares of its common stock to be obtained by exercising
three-year redeemable common stock purchase warrants with an
exercise price of $1.50 per share.
Markland received gross proceeds of $5,679,000 and net proceeds of $5,133,860
(after deducting finders' fees and transaction costs) from this private
placement Under certain conditions, Markland can redeem the warrants issued in
the May 3, 2004 private placement at a price of $.0001 per warrant.
Note Payable - Bay View Capital
Subsequent to December 31, 2003, the Company paid in the full balance of a note
payable to Bay View Capital of $1,197,769 and all accrued interest.
F-65
SCIENCE & TECHNOLOGY RESEARCH, INC.
FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2003
and the Year Ended December 31, 2002
F-66
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholder of
Science & Technology Research, Inc.
We have audited the accompanying balance sheet of Science & Technology Research,
Inc. as of September 30, 2003, and the related statements of operations, changes
in stockholder's equity, and cash flows for the nine-month period ended
September 30, 2003 and the year ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Science & Technology Research,
Inc. as of September 30, 2003, and the results of its operations and cash flows
for the nine month period ended September 30, 2003 and the year ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the financial statements, effective October 1, 2003,
Science & Technology Research, Inc. was acquired by Markland Technologies, Inc.,
a publicly traded company.
/s/ Marcum & Kliegman LLP
February 25, 2004
New York, New York
F-67
SCIENCE & TECHNOLOGY RESEARCH, INC.
BALANCE SHEET
September 30, 2003
- --------------------------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 215,830
Accounts receivable - long-term contracts 438,795
Inventoried costs relating to long-term contracts in
process net of progress payments 96,530
Other current assets 32,502
-------------
Total Current Assets $ 783,657
PROPERTY AND EQUIPMENT, Net 53,467
- ---------------------- -------------
TOTAL ASSETS $ 837,124
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 131,351
Income taxes payable 150,000
Accrued expenses and other current liabilities 87,581
-------------
TOTAL LIABILITIES $ 368,932
-------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDER'S EQUITY
- --------------------
Common stock, par value $.01; 100,000 shares authorized;
12,000 shares issued and outstanding 120
Additional paid in capital 79,880
Retained earnings 388,192
-------------
TOTAL STOCKHOLDER'S EQUITY 468,192
-------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 837,124
=============
The accompanying notes are an integral part of these financial statements.
F-68
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
NET SALES $ 5,502,455 $ 2,206,849
- ---------
CONTRACT COSTS 4,771,784 1,856,113
- -------------- ------------ ------------
GROSS PROFIT 730,671 350,736
------------ ------------
OPERATING EXPENSES
- ------------------
Research and development expenses 203,775 84,114
General and administrative expenses 134,194 150,923
------------ ------------
TOTAL OPERATING EXPENSES 337,969 235,037
------------ ------------
OPERATING INCOME 392,702 115,699
------------ ------------
OTHER INCOME (EXPENSE)
- ----------------------
Interest income 17 104
Interest expense (5,986) (22,487)
------------ ------------
TOTAL OTHER EXPENSE (5,969) (22,383)
------------ ------------
INCOME BEFORE INCOME TAXES 386,733 93,316
INCOME TAXES 169,095 33,487
- ------------ ------------ ------------
NET INCOME $ 217,638 $ 59,829
============ ============
The accompanying notes are an integral part of these financial statements.
F-69
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
BALANCE - January 1, 2002 12,000 $ 120 $ 79,880 $110,725 $190,725
Net income -- -- -- 59,829 59,829
--------- --------- --------- --------- ---------
BALANCE - December 31, 2002 12,000 120 79,880 170,554 250,554
Net income -- -- -- 217,638 217,638
--------- --------- --------- --------- ---------
BALANCE - September 30, 2003 12,000 $ 120 $ 79,880 $388,192 $468,192
========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-70
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
- ------------------------------------------------------------------------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 217,638 $ 59,829
------------- -------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 12,172 13,928
Changes in operating assets and liabilities:
Accounts receivable (68,583) 166,471
Inventoried costs, net 260 (26,320)
Prepaid expenses and other current assets (25,136) 11,273
Accounts payable 22,237 (96,597)
Income tax payable 116,513 33,487
Accrued expenses and other current liabilities 12,547 50,169
------------- -------------
TOTAL ADJUSTMENTS 70,010 152,411
------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 287,648 212,240
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of property and equipment (26,800) --
------------- -------------
NET CASH USED IN
INVESTING ACTIVITIES $ (26,800) $ --
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-71
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF CASH FLOWS, Continued
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
- -------------------------------------------------------------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Repayment of note payable (32,083) (23)
Repayment of advances from affiliates (137,750) (216,365)
------------- -------------
NET CASH USED IN
FINANCING ACTIVITIES (169,833) (216,388)
------------- -------------
NET INCREASE (DECREASE) IN CASH 91,015 (4,148)
CASH - Beginning 124,815 128,963
------------- -------------
CASH - Ending $ 215,830 $ 124,815
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash paid during the periods for:
Interest $ 5,986 $ 22,456
Income taxes $ 52,582 $ --
The accompanying notes are an integral part of these financial statements.
F-72
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Nature of Operations and Merger
-------------------------------
Science & Technology Research, Inc. (the "Company") was incorporated on
November 14, 1988, under the laws of the State of Maryland. Effective
October 1, 2003, Markland Technologies, Inc., a publicly-traded Florida
corporation, ("Markland") completed the acquisition of the Company,
through a merger of STI with newly formed STR Acquisition Corporation, a
Maryland Corporation. Markland agreed to pay the stockholder of the
Company $6,375,000 which consisted of $900,000 in cash, $5,100,000 worth
of Markland common stock, and a promissory note of $375,000. As a result
of this transaction, the Company became a wholly owned subsidiary of STI
effective October 1, 2003.
The Company provides a full range of electrical and mechanical
engineering support as well as fabrication and assembly of electrical and
mechanical systems. The Company is a producer of the United States Navy's
Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA).
The Navy deploys the "man-portable" point detection system to detect all
classic nerve and blister agents as well as other chemical warfare agent
(CWA) vapors. The Company has three contracts with the United States Navy
in the aggregate of approximately $15,368,000. One of these contracts
commenced in the year 2000.
The Company is subject to risks common to companies in the Homeland
Defense Technology industry, including but not limited to, development by
its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology and loss of significant
customers. Since the U.S. Navy represents substantially all of the
Company's current revenue, the loss of this customer would have a
material adverse effect on the Company's future operations.
NOTE 2 - Summary of significant Accounting Policies
------------------------------------------
Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of the accompanying financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates that are particularly susceptible to
change are those assumptions used in determining the allowance for
doubtful accounts receivable and capitalized contract costs and related
gross margins.
Cash
----
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of September 30, 2003.
F-73
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies, continued
------------------------------------------
Allowance for Doubtful Accounts
-------------------------------
The allowance for doubtful accounts reflects management's best estimate
of probable losses inherent in the accounts receivable balance.
Management determines the allowance based on known trouble accounts,
historical experience and other currently available evidence. The
Company's receivables are from government contracts. The Company has not
experienced any losses in accounts receivable and has provided no
allowance at September 30, 2003.
Inventoried Costs
-----------------
Inventoried costs relating to long-term contracts are stated at the
actual production costs, including factory overhead, allocable general
and administrative costs, initial tooling and other related non-recurring
costs, incurred to date reduced by amounts attributed to with revenue
recognized on units delivered. Inventoried costs relating to long-term
contracts are reduced by charging any amounts in excess of estimated
realizable value to cost of sales.
Property and Equipment
----------------------
Property and equipment are valued at cost and are being depreciated using
the straight-line method for financial reporting. Upon sale or
retirement, the asset cost and its related accumulated depreciation are
eliminated from the respective accounts and any resulting gain or loss is
recognized in income. Routine maintenance and repairs are charged to
expense as incurred. Expenditures, which materially increase the value or
extend useful lives, are capitalized.
Revenue Recognition/Concentration of Credit Risk
------------------------------------------------
The Company's accounts receivable and revenue for the periods covered by
these financial statements are substantially all from three fixed-price
contracts with the United States Navy. One contract for approximately
$4.6 million was completed during December 2002. Another contract for
approximately $8.4 million had approximately $2.9 million remaining to be
billed (backlog) as of September 30, 2003. The third contract has no
revenue to date and had approximately $2.3 million remaining to be billed
(backlog) as of September 30, 2003. Under these three contacts, the
Company recognizes revenue under the units-of-delivery method. At the
time the units are shipped to the warehouse of the United States Navy,
the Company recognizes as revenue the contract price of each unit and
recognizes the applicable cost of each unit shipped.
F-74
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies, continued
------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information
at September 30, 2003, as required by Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in that statement and
does not purport to represent the aggregate net fair value to the
Company. The carrying amounts of current assets and current liabilities
approximate their fair market values.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. For the nine months ended
September 30, 2003 and the year ended December 31, 2002 advertising and
promotion expenses were approximately $700 and $1,100, respectively.
Shipping Costs
--------------
Delivery and shipping costs are included in contract costs in the
accompanying statements of operations.
Research and Development
------------------------
Research and development costs are charged to expense as incurred. The
Company capitalizes costs related to acquired technologies that have
achieved technological feasibility and have alternative uses. Acquired
technologies, which are in process at the date of acquisition or have no
alternative uses are expensed as research and development costs.
Income Taxes
------------
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS No. 109 employs an asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes
are recognized for tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to the difference
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under SFAS No. 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. As of September 30, 2003,
there were no significant temporary differences and accordingly, there
were no deferred tax assets or deferred tax liabilities.
F-75
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies, continued
------------------------------------------
Income Taxes, continued
-----------------------
The components of income tax expense are as follows:
For the nine months For the year
ended ended
September 30, 2003 December 31, 2002
------------------ -----------------
Federal $122,687 $ 25,459
State 46,408 8,028
--------- ---------
$169,095 $ 33,487
========= =========
New Pronouncements
------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB
Opinion No. 30, "Reporting Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 requires
that long-lived assets to be disposed of by sale, including discontinued
operations, be measured at the lower of carrying amount or fair value,
less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 also broadens the reporting
requirements of discontinued operations to include all components of an
entity that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from
the rest of the entity. The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144
did not have a material effect on the Company's financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they
meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion
No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those
that are unusual and infrequent that meet the criteria for classification
as an extraordinary item. Adoption of SFAS No. 145 did not have a
material effect on the Company's financial position or results of
operations.
F-76
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies, continued
------------------------------------------
New Pronouncements, continued
-----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. Adoption of SFAS
No. 146 did not have a material effect on the Company's financial
position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition to SFAS No. 123's fair value
method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, `Interim Financial Reporting", to require disclosure in the summary
of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim
financial statements. While the statement does not amend SFAS No. 123 to
require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are applicable to
all companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value method of
SFAS No. 123, or the intrinsic value method of APB Opinion 25. The
Company will continue to account for stock-based compensation according
to APB 25, while its adoption of SFAS No. 148 requires the Company to
provide prominent disclosures about the effect of SFAS No. 123 on
reported income and will require the Company to disclose these effects in
the interim financial statements as well. No stock-based employee
compensation cost is reflected in operations, as there are no options or
other common stock equivalents outstanding.
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
a company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantee
and elaborates on existing disclosure requirements related to guarantees
and warranties. The initial recognition requirements of FIN 45 are
effective for guarantees issued or modified after December 31, 2002 and
adoption of the disclosure requirements are effective for the Company as
of December 31, 2002. The adoption of FIN 45 did not have a significant
impact on the Company's financial position or results of operations.
F-77
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies, continued
------------------------------------------
New Pronouncements, continued
-----------------------------
In January 2003, as amended in December 2003, the FASB issued FASB
Interpretation No. 46 (" FIN 46"), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period ending after December 15,
2004. The Company is currently evaluating the effect that the adoption of
FIN 46 will have on its results of operations and financial condition.
Impairment of Long-Lived Assets
-------------------------------
Pursuant to SFAS No. 144, the Company continually monitors events and
changes in circumstances that could indicate carrying amounts of
long-lived assets, including intangible assets, may not be recoverable.
An impairment loss is recognized when expected cash flows are less than
the asset's carrying value. Accordingly, when indicators or impairment
are present, the Company evaluates the carrying value of such assets in
relation to the operating performance and future undiscounted cash flows
of the underlying business. The Company's policy is to record an
impairment loss when it is determined that the carrying amount of the
asset may not be recoverable.
F-78
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Accounts Receivable
-------------------
The accounts receivable at September 30, 2003 consists of the following:
United States Government:
Amount billed $ 78,795
Accrued profit on units delivered 360,000
----------
Total $ 438,795
==========
Accrued profit represents revenue recognized on units delivered to the
U.S. Navy for which the Company was reimbursed only its recoverable
costs. The amount representing the accrued profit is payable at the end
of the applicable contract. It is anticipated that such accrued accounts
receivable from the U.S. Navy at September 30, 2003 will be paid within
the near term.
NOTE 4 - Inventoried Costs
-----------------
Inventoried cost relating to long-term contracts include the as
following:
Inventoried costs relating to U.S. Government
contracts, net of amounts attributed to revenues
recognized to date $3,881,510
Progress billings 3,784,980
-----------
Net $ 96,530
===========
The Company receives progress payments on a monthly basis equal to 95% of
the allowable costs incurred for each month. Under the contracts, the
United States Navy has ownership of the inventory when the progress
payments are remitted to the Company.
The aggregate amounts of general and administrative costs incurred during
the nine months ended September 30, 2003 and the year ended December 31,
2002 were $356,003 and $486,723, respectively. As stated in Note 2, the
Company allocates general and administrative costs to certain types of
Government contracts. The amounts of general and administrative costs
remaining in inventoried costs at September 30, 2003 are estimated at
$233,000. Such estimates assume that the costs have been removed from
inventories on a basis proportional to the amounts of each cost element
expected to be charged to cost of sales.
F-79
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - Property and Equipment
----------------------
Property and equipment at September 30, 2003 consists of the following:
Estimated
Amount useful lives
---------- -------------
Office equipment and computers $ 79,724 5 - 7 years
Furniture and fixtures 23,631 5 - 7 years
Laboratory equipment 20,628 5 years
----------
123,983
Less: Accumulated depreciation (70,516)
----------
Property and Equipment, Net $ 53,467
==========
Depreciation expense for the nine months ended September 30, 2003 and the
year ended December 31, 2002 was $12,172 and $13,928, respectively.
NOTE 6 - Loan Payable - Bank
-------------------
The Company entered into a loan agreement with a bank during September
2000. The agreement provides for a loan that the Company used to finance
the acquisition of equipment and furniture. The loan required monthly
principal payments of $917 and the remaining outstanding balance was due
at August 28, 2005. The loan carried an interest rate of Prime plus 2%.
The loan was collateralized by the equipment and furniture. During August
2003 the loan was paid in full. As of September 30, 2003 and December 31,
2002 the outstanding loan payable on this loan was $0 and $32,083,
respectively.
NOTE 7 - Loan Payable - Officer
----------------------
An officer and sole stockholder has made advances to the Company through
the normal course of business. The loan was non-interest bearing and had
no defined repayment terms. As of September 30, 2003 and December 31,
2002 the outstanding loan payable on this loan was $0 and $137,750,
respectively.
F-80
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Commitments
-----------
Facility Rental
---------------
The Company leases its primary location in Fredericksburg, Virginia, on
a month-to-month basis without a formal agreement. Rent expense
relating to this location for the nine months ended September 30, 2003
and the year ended December 31, 2002 was $68,191 and $90,283,
respectively.
Employee Benefit Plan
---------------------
The Company has a 408(k) plan covering all eligible employees of the
Company. Contributions to the plan are at the discretion of the
Company, up to 3% and not less than 1% of the employees' contribution.
For the nine months ended September 30, 2003 and the year ended
December 31, 2002, the Company contributed $12,897 and $9,864 to the
plan, respectively.
F-81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850 the Florida Business Corporation Act permits the
indemnification of directors and officers of Florida corporations. Our charter
provides that we shall indemnify our directors and officers to the fullest
extent permitted by Florida law.
Under Florida law, we have the power to indemnify our directors and
officers against claims arising in connection with their service to us except
when an director's or officer's conduct involves: (a) violations of criminal
laws, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (b) deriving an
improper personal benefit from a transaction; (c) voting for or assenting to an
unlawful distribution or (d) willful misconduct or conscious disregard for our
best interests in a proceeding by or in the right of a shareholder.
In addition, we have entered into employment agreements with our
directors and officers that contain provisions requiring us to indemnify them to
the fullest extent permitted by Florida law. The indemnification agreements
require us to indemnify our directors and officers to the extent permitted by
our charter and to advance their expenses incurred in connection with a
proceeding with respect to which they are entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or persons in control
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the act and is therefore unenforceable.
Article II, Section 4 of our bylaws limits the liability of current and
former directors for monetary damages if they have acted in good faith and
conformed to a standard of reasonable care. Furthermore, and notwithstanding
anything to the contrary in our charter or bylaws, Section 607.0831 of the
Florida Business Corporation Act limits the liability of directors for monetary
damages for any statement, vote, decision or failure to act relating to
management or policy of us unless he or she breached or failed to perform her
duties as a director, and the breach or failure constitutes:
(a) a violation of criminal law, unless the director had reasonable
cause to believe the conduct was lawful or had no reasonable cause to believe it
was unlawful;
(b) a transaction from which the director derived an improper personal
benefit;
(c) an unlawful distribution;
(d) in a proceeding by or in the right of us or one or more of our
shareholders, conscious disregard for our best interests or willful misconduct;
or
(e) in a proceeding brought by someone other than us or one or more of
our shareholders, recklessness or an act or omission committed in bad faith,
with malicious purpose, or in a manner exhibiting willful disregard of human
rights, safety or property.
We have purchased insurance with respect to, among other things, the
liabilities that may arise under the statutory provisions referred to above. Our
directors and officers are also insured against certain liabilities, including
certain liabilities arising under the Securities Act of 1933, which might be
incurred by them in such capacities and against which they are not indemnified
by us.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS.
The following table provides information regarding the various
anticipated expenses payable by Markland in connection with the issuance and
distribution of the securities being registered. We are paying the expenses
incurred in registering the shares, but all selling and other expenses incurred
by the selling stockholders will be borne by the selling stockholders. All
amounts shown are estimates except the Securities and Exchange Commission
registration fee.
NATURE OF EXPENSE AMOUNT
---------------------------------------------------- ----------
SEC registration fee ............................... $5,534.95
Accounting fees and expenses ....................... 75,000
Legal fees and expenses ............................ 150,000
Transfer agent fees ................................ 1,500
Printing and related fees .......................... 25,000
Miscellaneous ...................................... 50,000
----------
Total .............................................. $172,035
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We have issued the following unregistered securities within the last
three years. The following information regarding our securities has been
adjusted to reflect a 1-for-40 reverse stock split effected on June 21, 2001 and
a 1-for-60 reverse stock split effected on October 27, 2003.
2001
On March 16, 2001, we issued 10 shares of our Series B Convertible
Preferred Stock to Vidikron of America, Inc. The issuance of these securities
was exempt under Section 4(2) of the Securities Act of 1933, as amended, as a
sale not involving a public offering.
On December 31, 2001, we issued a promissory note to James LLC, a
Cayman Island limited liability company, in the amount of $1,314,367. The
issuance of this security was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a sale not involving a public offering.
2002
On December 9, 2002, we entered into an Exchange Agreement with James
LLC, a Cayman Island limited liability company, and Market LLC, a Cayman Island
limited liability company, wherein we issued to them an aggregate of 5,225
shares of our Series C Convertible Preferred Stock (with a stated value of
$1,000 per share) in exchange for the cancellation of promissory notes in the
aggregate amount of $5,250,000. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
sale not involving a public offering.
On December 9, 2002, we executed an Exchange Agreement with Eurotech,
Ltd., a District of Columbia corporation, and Crypto.com, Inc., a Delaware
corporation, wherein we issued 3,998,789 shares of our common stock in exchange
II-2
for certain assets related to the Acoustic Core(TM) technology for illicit
material detection. In addition, we issued 499,848 shares of our common stock to
ipPartners, Inc., a Rhode Island corporation, in connection with this
acquisition of assets. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
sale not involving a public offering.
On December 10, 2002, we issued a convertible promissory note to Market
LLC, a Cayman Island limited liability company, in the amount of $500,000. The
issuance of this security was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a sale not involving a public offering.
2003
At various times during 2003, we issued to our employees, directors and
consultants the following number of shares of our common stock on the following
dates as compensation for their services. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a sale not involving a public offering.
NAME NUMBER OF SHARES
Commonwealth Acquisitions, Inc. (1) 16,667
David Danovitch (1) 3,334
Dean Denuccio 280,000
Rodney Dodd 7,937
ECON Investor Relations, Inc. (1) 12,049
Oscar Hayes 21,035
Edward Kessler 7,937
Delmar Kintner (2) 119,303
MarketShare Recovery, Inc. (1) 27,272
George Martin (1) 4,546
Ernie Mercier (1) 8,334
Jo-Ann Nichols (2) 3,571
Joe O'Niell (1) 8,334
John Readey 65,000
Lawrence Shatsoff (1) 1,667
II-3
Stuart Siller (1) 13,636
The Research Works, Inc. (1) 37,099
- ---------------------
(1) Acquired shares in consideration of consulting services.
(2) Acquired shares pursuant to an employment agreement.
On February 11, 2003, we issued 170 shares of our Series C Preferred
stock to James LLC, a Cayman Island limited liability company, for a purchase
price of $170,000. The issuance of these securities was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, as a sale not
involving a public offering.
On March 19, 2003, we executed a Technology Purchase Agreement with ASI
Technology Corporation, a Nevada corporation, wherein we acquired certain gas
plasma antenna assets for 283,333 shares of our common stock. In connection with
this acquisition, we also issued On May 4, 2004, we announced, on a preliminary
and unaudited basis, revenues of $1,600,000 for the quarter ended March 31,
2004.shares of our common stock to Patriot Scientific Corporation. The issuance
of these securities was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a sale not involving a public offering.
On March 27, 2003, we executed an Exchange Agreement with Eurotech,
Ltd. wherein we issued 16,000 shares of our Series D preferred stock in exchange
for 1,666,666 shares of our common stock. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a sale not involving a public offering.
In July 2003, we entered into a consulting agreement with Emerging
Concepts. As consideration for the consulting services, we issued 25,000 shares
of our common stock to Emerging Concepts in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended,
for transactions by an issuer not involving any public offering.
On July 24, 2003, we issued 750,000 shares of our common stock to
Syqwest, Inc., a Rhode Island corporation formerly known as Ocean Data Equipment
Corporation, for unpaid services valued at $450,000. The issuance of these
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended, as a sale not involving a public offering.
On September 30, 2003, we executed an Agreement and Plan of Merger with
Science and Technology Research, Inc. In connection with the merger, we issued
1,539,779 shares of our common stock and a promissory note in the amount of
$375,000 to George Yang, the sole stockholder of Science and Technology
Research, Inc. The issuance of these securities was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, as a sale not
involving a public offering.
On each of October 1, 2003, November 3, 2003 and December 1, 2003, we
sold to James LLC, a Cayman Island limited liability company, an aggregate of
385 shares of our Series D preferred stock for an aggregate purchase price of
$385,000. The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving
a public offering.
On November 12, 2003, we issued 37,099 shares of our common stock to
Research Works, Inc., a New Jersey corporation, for the preparation of an equity
research report. The issuance of these securities was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, as a sale not
involving a public offering.
II-4
2004
On February 2, 2004, we sold 277 shares of our Series D preferred stock
to James LLC, a Cayman Island limited liability company, for $152,000. The
issuance of these securities was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, as a sale not involving a public
offering.
On ten different occasions between August 2003 and March 2004, we
issued an aggregate of 4,096 shares of our Series D Preferred Stock to a single
institutional investor for an aggregate consideration of $4,096,000. The
issuance of these securities was exempt under Section 4(2) of the Securities Act
of 1933, as amended, as a sale not involving a public offering.
On April 2, 2004, we issued 3,333,333 shares of our common stock and
warrants to purchase 3,333,333 shares of our common stock at $1.00 per share to
three institutional investors for consideration of $200,000. We also issued a
warrant to purchase 333,333 share of our common stock and paid $200,000 to a
finder in connection with this transaction. The issuance of these securities was
exempt under Section 4(2) of the Securities Act of 1933, as amended, as a sale
not involving a public offering.
On April 16, 2004, we issued 2,500,000 shares of our common stock and
warrants to purchase 2,500,000 shares of our commons stock at $1.50 per share to
ten institutional investors for consideration of $2,000,000. We also issued
warrants to purchase 25,000 shares of our common stock at $2.00 per share and
paid $100,000 to a finder in connection with this transaction. The issuance of
these securities was exempt under Section 4(2) of the Securities Act of 1933, as
amended, as a sale not involving a public offering.
On April 20, 2004, we issued in the aggregate 300,000 shares to the
three investors in our April 2, 2004 private placement in consideration of their
consent to permit us to proceed with a private placement that was subsequently
consummated on May 3, 2004. We also issued warrants to purchase 50,000 shares of
our common stock to counsel for these investors in connection with this
transaction. The issuance of these securities was exempt under Section 4(2) of
the Securities Act of 1933, as amended, as a sale not involving a public
offering.
On May 3, 2004 and May 7, 2004, we issued and aggregate of 7,098,750
shares of our common stock and redeemable warrants to purchase 7,098,750 shares
of our common stock at $1.50 per share to 26 institutional investors 8
individual investors for consideration of $5,679,000. We also issued redeemable
warrants to purchase an aggregate of 529,800 shares of our common stock and paid
an aggregate of $545,140 to five finders in connection with this transaction.
The issuance of these securities was exempt under Section 4(2) of the Securities
Act of 1933, as amended, as a sale not involving a public offering.
II-5
ITEM 27. EXHIBITS.
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
3.1 Articles of Incorporation of Quest Net 8-K March 20, 2000 1.3
Corp., filed with the Florida Secretary of
State on December 28, 1998
3.2 Articles of Merger filed with the Florida 8-K March 20, 2000 1.2
Secretary of State on March 15, 2000
3.3 Articles of Amendment to the Articles of 8-K April 10, 2001 3.1
Incorporation of Quest Net Corp., filed
with the Florida Secretary of State on
April 4, 2001
3.4 Articles of Amendment to the Articles of 8-K April 10, 2001 3.3
Incorporation of Quest Net Corp., filed
with the Florida Secretary of State on June
21, 2001
3.5 Articles of Amendment to the Articles of X
Incorporation of Markland Technologies,
Inc. filed with the Florida Secretary of
State on December 21, 2001
3.6 Articles of Amendment to the Articles of 10-KSB October 14, 2003 3.6
Incorporation of Markland Technologies,
Inc. filed with the Florida Secretary of
State on September 16, 2003
3.7 Certificate of Designations of Rights and 10-KSB October 14, 2003 3.7
Preferences of the Series A Non-Voting
Convertible Preferred Stock
3.8 Certificate of Designations of Rights and 8-K December 20, 2002 3.5
Preferences of the Series C Cumulative
Convertible Preferred Stock
3.9 Certificate of Designations of Rights and 10-KSB October 14, 2003 3.5
Preferences of the Series D Cumulative
Convertible Preferred Stock
3.10 Amended and Restated By-Laws 8-K March 20, 2000 1.4
4.1 Form of common stock certificate of 10-QSB February 14, 2003 4.1
Markland Technologies, Inc.
4.2 Registration Rights Agreement between X
Markland Technologies, Inc., Montana View
Corporation, Elite Properties, Ltd.,
Sparrow Ventures, Inc., dated April 2, 2004
4.3 Form of Common Stock Purchase Warrant dated X
April 2, 2004
II-6
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
4.4 Form of Common Stock Purchase Warrant dated X
April 16, 2004
4.5 Form of Common Stock Purchase Warrant dated X
May 3, 2004
4.6 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.10
19, 2003, by and between ASI Technology
Corporation and Markland Technologies, Inc.
4.7 Registration Rights Agreement by and 10-KSB October 14, 2003 10.17
between Markland Technologies, Inc. and
Brittany Capital Management limited, dated
September 10, 2003.
4.8 Consulting Agreement by and between 8K November 12, 2003 10.3
Markland Technologies, Inc. and George
Yang, dated September 30, 2003.
4.9 Consulting Agreement by and between X
Markland Technologies, Inc. and
Commonwealth Acquisitions, Ltd., dated
March 24, 2003.
4.10 Consulting Agreement by and between ECON X
Investor Relations, Inc., dated January 18,
2003.
4.11 Consulting Agreement by and between X
Markland Technologies, Inc. and Marketshare
Recovery, Inc., dated October 29, 2003
4.12 Consulting Agreement by and between 10-QSB February 23, 2004 10.4
Markland Technologies, Inc. and Emerging
Concepts, Inc., dated July 7, 2003
4.13 Research Agreement by and between Markland X
Technologies, Inc. and The Research Works,
Inc., dated October 29, 2003
4.14 Employment Agreement by and between X
Markland Technologies, Inc. and Jo-Ann
Nichols, dated October 27, 2003.
5.1 Opinion of Foley Hoag LLP *
10.1 Securities Purchase Agreement, between X
Markland Technologies, Inc., Montana View
Corporation, Elite Properties, Ltd., and
Sparrow Ventures, Inc., dated April 2, 2004
II-7
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
10.2 Securities Purchase Agreement by and among X
Markland Technologies, Inc. and the
Investors named therein, dated April 16,
2004
10.3 Securities Purchase Agreement by and X
between Markland Technologies, Inc. and the
Investors named therein, dated May 3, 2004
10.4 Agreement and Plan of Merger by and among 8K November 12, 2003 10.1
Markland Technologies, Inc. and STR
Acquisition Corp., Security Technology,
Inc., Science and Technology Research,
Inc., and George Yang, dated September 30,
2003.
10.5 Promissory Note made by Markland 8K November 12, 2003 10.4
Technologies, Inc., in favor of George
Yang, dated September 30, 2003.
10.6 Security Agreement by and between Markland X
Technologies, Inc. and George Yang, dated
September 30, 2003.
10.7 Guaranty by Markland Technologies, Inc. in X
favor of George Yang, dated September 30,
2003.
10.8 Amendment and Payment Extension Agreement X
by and between Markland Technologies, Inc.
and George Yang, dated March 17, 2004.
10.9 Loan Agreement by and between Security 8K November 12, 2003 10.2
Technology, Inc. and Bay View Capital LLC,
dated September 30, 2003.
10.10 Promissory Note by and among Markland 8K November 12, 2003 10.5
Technologies, Inc., Security Technology,
Inc., and Bay View Capital LLC, dated
September 30, 2003.
10.11 Security Agreement by and between Security X
Technology, Inc. and Bay View Capital LLC,
dated September 30, 2003.
10.12 Security Agreement by and between Markland X
Technologies, Inc. and Bay View Capital LLC.
10.13 Sublicense Agreement by and between X
Markland Technologies, Inc. and ASI
Technology Corporation, dated March 19,
2004.
II-8
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
10.14 SBIR Government Grant *
10.15 SBIR Government *
10.16 SBIR Government Grants *
10.17 Stock Purchase Agreement by and among Ocean 8-K January 28, 2003 10.1
Data Equipment Corporation, Ergo Systems,
Markland Technologies, and Security
Technology, Inc., dated December 9, 2002,
10.18 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.4
by and among Markland Technologies, Inc.,
Market LLC, and James LLC.
10.19 Exchange Agreement, dated December 9, 2002, 8-K December 20, 2002 10.5
by and among Eurotech, Ltd., Crypto.com
Inc., Markland Technologies, Inc., Security
Technology, Inc. ipPartners, Inc., Market
LLC, and James LLC.
10.20 First Amendment to Exchange Agreement, 10-QSB February 14, 2003 10.6
dated December 9, 2002, by and among
Eurotech, Ltd., Crypto.com Inc., Markland
Technologies, Inc., Security Technology,
Inc. ipPartners, Inc., Market LLC, and
James LLC.
10.21 Restated and Amended Convertible Revolving 10-QSB February 14, 2003 10.2
Credit Note Agreement, dated December 10,
2002, by and between Markland Technologies,
Inc. and Market LLC.
10.22 Letter from Sherb & Co., LLP to the 8-K March 17, 2003 16.1
Commission, dated March 12, 2003, concerning
change in certifying accountant.
10.23 Technology Purchase Agreement between 8-K April 4, 2003 10.1
Markland Technologies, Inc. and ASI
Technology Corporation, dated March 19,
2003.
10.24 Exchange Agreement, dated March 27, 2003, 8-K April 4, 2003 10.2
by and between Eurotech, Ltd. and Markland
Technologies, Inc.
10.25 Registration Rights Agreement, dated March 10-KSB October 14, 2003 10.12
27, 2003, by and between Eurotech, Ltd. and
Markland Technologies, Inc.
II-9
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
10.26 Amended and Restated Exchange Agreement, 8-K July 30, 2003 10.1
dated July 24, 2003, by and between
Markland Technologies, Inc. and Syqwest,
Inc.
10.27 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.14
and between Markland Technologies, Inc. and
James LLC, dated February 2, 2003, relating
to the issuance of 170 shares of Series C
5% Convertible Preferred Stock.
10.28 Preferred Securities Purchase Agreement by 10-KSB October 14, 2003 10.15
and between Markland Technologies, Inc.,
and James LLC, dated April 1, 2003,
relating to the issuance of Series D
Convertible Preferred Stock.
10.29 Private Equity Credit Agreement by and 10-KSB October 14, 2003 10.16
between Markland Technologies, Inc. and
Brittany Capital Management Limited, dated
September 10, 2003.
10.30 Employment and consulting agreements, dated 10-KSB October 14, 2003 10.18
December 5, 2002, for Delmar Kintner,
Kenneth Ducey, Robert Tarini, and Verdi
Consulting.
10.31 Nonexclusive License Agreement by and Science
& Technology Research , Inc. and the Secretary
of the Day, dated 11/4/03
10.32 International Distribution Agreement X
between Markland Technologies, Inc. and
Tradeways, Ltd.
10.33 Science & Technology Research contract Naval
Surface Warfare Center, dated January 31, 2003 X
10.34 Subcontract Agreement by and between ERCO
Systems, Inc. and computer sciences
corporation ,dated December 8, 2003 X
10.36 Lease for Property in Fredricksburg, *
Virginia
10.37 Lease for Property in Ridgefield, CT *
10.38 Co-Operative Research and Development *
Agreement between Markland Technologies and
the U.S. Air Force.
23.1 Consent of Foley Hoag LLP (included in
Exhibit 5.1)
On May 4, 2004, we announced, on a preliminary and unaudited basis,
revenues of $1,600,000 for the quarter ended March 31, 2004.
II-10
INCORPORATED BY REFERENCE
FILED WITH --------------------------------------------
EXHIBIT THIS FORM EXHIBIT
NO. DESCRIPTION SB-2 FORM FILING DATE NO.
- ---------- ------------------------------------------- ----------- --------- ------------------ -------
23.2 Consent of Sherb & Co., LLP X
23.3 Consent of Marcum & Kliegman LLP X
24.1 Power of Attorney (contained on the
signature page of this registration
statement)
* To be filed with Amendment No. 1 to Form SB-2.
+ We have requested Confidential Treatment with respect to certain portions of
this Exhibit and we have indicated at the appropriate place in the material
publicly filed that that the confidential portion has been so omitted. An
unredacted version of this Exhibit has been filed separately with the Securities
and Exchange Commission.
II-11
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act:
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Ridgefield State of Connecticut on May 11, 2004.
MARKLAND TECHNOLOGIES, INC.
By: /s/ Kenneth P. Ducey, Jr.
-------------------------------------
Kenneth P. Ducey, Jr.
President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Kenneth P. Ducey and Robert Tarini, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits and schedules thereto, and all other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, which they, or either of them, may
deem necessary or advisable to be done in connection with this Registration
Statement, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their substitute or substitutes or any of them, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------------------
/s/ Robert Tarini Chief Executive Officer and Chairman May 11, 2004
- ------------------------- of the Board of Directors
Robert Tarini
/s/ Kenneth P. Ducey, Jr. President, Chief Financial Officer May 11, 2004
- ------------------------- and Director
Kenneth P. Ducey, Jr.
II-13