SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 14, 2005
TECHNEST HOLDINGS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEVADA 000-27023 88-0357272
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
90 GROVE STREET, SUITE 205, RIDGEFIELD, CT 06877
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(Address of Principal Executive Offices) (Zip Code)
(203) 431-1611
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, If Changed Since Last Report)
Check the appropriate box below if the form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below).
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
INDEX
ITEM 1.01 ENTRY INTO A DEFINITIVE MATERIAL AGREEMENT
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES
ITEM 5.01 CHANGE IN CONTROL OF THE REGISTRANT
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS
ITEM 5.03 AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS
ITEM 8.01 OTHER EVENTS
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report on Form 8-K contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position, business and financing plans are forward-looking
statements. These statements can sometimes be identified by our use of
forward-looking words such as "may," "will," "should," "expect," "anticipate,"
"project," "designed," "estimate," "plan" and "continue." Although we believe
that our expectations in such forward-looking statements are reasonable, we
cannot promise that our expectations will turn out to be correct. These
forward-looking statements generally relate to plans and objectives for future
operations and are based upon reasonable estimates and assumptions regarding
future results or trends. These forward-looking statements are subject to
certain risks, uncertainties and assumptions relating to Technest Holdings, Inc.
("Technest", the "Company", "we" or "our"). Factors that could cause actual
results to differ materially from Technest expectations include the uncertainty
regarding Technest ability to repay existing indebtedness, lack of continuing
operations, possible inability of Technest to continue in business and other
risks detailed from time to time in Technest SEC reports. No assurance can be
given that investors of Technest will retain any level of value. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, the Company's future performance and actual results
of operations may vary significantly from those anticipated, projected,
believed, expected, intended or implied. The Company undertakes no obligation to
update any of the forward-looking statements, which speak only as of the date
they were made.
CAUTIONARY STATEMENT REGARDING LACK OF INFORMATION ABOUT GENEX
Prior to February 14, 2005, Genex, as a privately held company, had not been
subject to the reporting requirements of the Exchange Act, and therefore, there
is little public information about Genex currently available. While certain
information is provided herein, and additional information will become available
in due course as Technest complies with its ongoing Exchange Act reporting
requirements, the current lack of such information, among other factors, makes
an investment in the Company's common stock highly speculative. You should
carefully consider all of the information included in this current report and in
other filings we make with the Securities and Exchange Commission. In
particular, you should consider carefully the factors discussed below under
"Risk Factors" before deciding to invest in our common stock.
GENERAL
In this current report on Form 8-K, references to the "Technest" and similar
words mean Technest Holdings, Inc., references to "Markland" means Markland
Technologies, Inc., and references to "Genex" means Genex Technologies, Inc.
unless the context otherwise requires.
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MARKLAND TECHNOLOGIES, INC. ("Markland"), a homeland and defense contractor, is
a public company with a class of equity securities registered pursuant to
Section 12(g) of the Exchange Act.
TECHNEST HOLDINGS, INC. ("Technest") is a public company with a class of equity
securities registered under Section 12(g) of the Exchange Act. In 2002 and 2003,
Technest disposed of all of its operating businesses. Since then, Technest has
had no business operations and only minimal assets.
GENEX TECHNOLOGIES, INC., a company incorporated under the laws of the State of
Maryland, offers imaging products and complete solutions for three-dimensional
(3D) Imaging and Display, Intelligent Surveillance, and 3D Facial Recognition.
Technest intends to continue to use Genex assets for this purpose.
THE INVESTORS are Southridge Partners LP, Southshore Capital Fund Limited, Verdi
Consulting, Inc., ipPartners, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR
Soundshore Strategic Holding Fund, Ltd. and Deer Creek Fund, LP mean (together
the "Investors" or individually the "Investor").
CERTAIN DEFINED TERMS
For the purposes of this report, the acquisition of a controlling interest in
Technest by Markland in exchange for Markland shares is hereafter referred to as
the Markland Acquisition.
The acquisition of an interest in Technest by the Investors in exchange for
Technest and Markland securities is hereafter referred to as the Investors
Financing, and, together with the Markland Acquisition is hereafter referred to
as the Investment.
The acquisition of Genex by Technest is hereafter referred to as the Genex
Acquisition. The Investment and the Genex Transaction are hereafter collectively
referred to as the Transactions.
CERTAIN AGREEMENTS
These Transactions are governed by the following agreements dated February 14,
2005 (i) a securities purchase agreement between Markland and Technest (the
"Markland Securities Purchase Agreement"); (ii) a securities purchase agreement
between Technest and certain existing shareholders of Technest and other parties
(the "Investors"), (the "Investors Securities Purchase Agreement"); and (iii) an
agreement and plan of merger between Technest, Markland, Genex, MTECH
Acquisition, Inc., a Delaware corporation ("MTECH") and Jason Geng, (the "Merger
Agreement").
REVERSE STOCK SPLIT
In connection with the Transactions, the Board of Directors of Technest and the
holders of a majority of the common stock of Technest approved a 1 for 211.18
reverse split (the "Reverse Split"). The Reverse Split will become effective not
less than 20 days after a definitive Schedule 14C Information Statement relating
to the Reverse Split is mailed to the stockholders of Technest.
NOT GOING PRIVATE
Markland intends to hold Technest's common stock as an asset. Markland does not
intend to take Technest private.
RISK FACTORS
SET FORTH BELOW ARE A NUMBER OF RISKS ASSOCIATED WITH OUR BUSINESS FOLLOWING
CONSUMMATION OF THE TRANSACTIONS. IN ADDITION TO THE FOLLOWING RISKS, AN
INVESTOR SHOULD BE MINDFUL THAT BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT
FORESEEN BY MANAGEMENT. ACCORDINGLY, IN REVIEWING THIS FORM 8-K, THE READER
SHOULD KEEP IN MIND OTHER RISKS THAT COULD BE IMPORTANT. ANY INVESTMENT IN OUR
COMPANY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. EACH PROSPECTIVE
INVESTOR IS URGED TO CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW, IN ADDITION TO THE RISKS SET FORTH ELSEWHERE IN THIS FORM 8-K. WHILE
THESE ARE THE RISKS AND UNCERTAINTIES THAT WE BELIEVE ARE MOST IMPORTANT TO
CONSIDER, THESE RISKS MAY NOT BE THE ONLY RISKS WHICH OUR COMPANY MAY FACE. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE BUSINESS, PROSPECTS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF OUR COMPANY WOULD LIKELY SUFFER. IN THESE
CIRCUMSTANCES, THE VALUE OF OUR COMMON STOCK COULD DECLINE.
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RISK RELATED TO BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE CURRENT LACK OF AUDIT FINANCIAL INFORMATION AND CURRENT DESCRIPTION OF THE
BUSINESS OF GENEX, AMONG OTHER FACTORS, MAKES AN INVESTMENT IN TECHNEST'S COMMON
STOCK HIGHLY SPECULATIVE
Prior to February 14, 2005, Genex, as a privately held company, had not been
subject to the reporting requirements of the Exchange Act and, therefore, there
is little public information about Genex currently available. While certain
information is provided herein, and additional information will become available
in due course as Technest complies with its ongoing Exchange Act reporting
requirements, the current lack of such information, among other factors, makes
an investment in Technest's common stock highly speculative. You should
carefully consider all of the information included in this Report and in other
filings we make with the Securities and Exchange Commission. In particular, you
should consider carefully the factors discussed below under "Risk Factors"
before deciding to invest in our common stock.
TECHNEST HAS NO OPERATING HISTORY ON WHICH INVESTORS MAY EVALUATE ITS OPERATIONS
AND PROSPECTS FOR PROFITABLE OPERATIONS AND ABILITY TO PRODUCE A RETURN ON GENEX
Technest does not have operating history on which a potential investor may base
an evaluation of it and its prospects and ability to operate Genex profitably.
If Technest is unable to sustain profitable operations, investors may lose their
entire investment in Technest.
TECHNEST HAS A HISTORY OF OPERATING LOSSES AND CANNOT GIVE ASSURANCE OF FUTURE
REVENUES OR OPERATING PROFITS; THEREFORE INVESTORS MAY LOSE THEIR ENTIRE
INVESTMENT.
Technest has had net operating losses each year since its inception. If Technest
continues to suffer losses as it has in the past, investors may not receive any
return on their investment and may lose their entire investment.
WE HAVE A WORKING CAPITAL DEFICIT; WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO
FINANCE OPERATIONS.
The reports of our independent registered public accounting firms, for fiscal
year 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. As a result, you could lose
your entire investment. Our financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
OUR INDEPENDENT AUDITORS BELIEVE THERE IS SUBSTANTIAL DOUBT WE CAN CONTINUE AS A
GOING CONCERN
Our independent auditors believe there is substantial doubt that we can continue
as a going concern which, if true, raises substantial doubt that a purchaser of
our common stock will receive a return on his or her investment. As shown in the
unaudited financial statements included in our quarterly report on 10-QSB for
the period ended September 20, 2004, we had negative working capital of
approximately $293,988 and an accumulated deficit of approximately $15,516,410
incurred through September 30, 2004. These factors raise substantial doubt about
our ability to continue as a going concern.
IF TECHNEST IS UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES IN ITS FIELD
OR COMPETE EFFECTIVELY, TECHNEST WILL BE UNABLE TO OPERATE PROFITABLY.
Technest is engaged in activities in a field, which is characterized by
extensive research efforts and rapid technological progress. If Technest fails
to anticipate or respond adequately to technological developments, Technest's
ability to operate profitably could suffer. Technest cannot assure you that
research and discoveries by other companies will not render Technest's
technologies or potential products or services uneconomical or result in
products superior to those Technest develops, or that any technologies, products
or services that Technest develops will be preferred to any existing or
newly-developed technologies, products or services.
4
RISKS RELATED TO "CONTROLLED COMPANIES"
MARKLAND CONTROLS TECHNEST
As of February 14, 2004, Markland will control approximately 93% of Technest
common outstanding stock. As a result, Markland will have the ability to control
all matters submitted to the stockholders of Technest for approval (including
the election and removal of Directors) and to control Technest's management and
affairs.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation, takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control, which in
turn could materially and adversely affect the market price of the common stock.
Minority shareholders of Technest will be unable to affect the outcome of
stockholder voting as long as Markland or any other party retains a controlling
interest.
TECHNEST'S EXECUTIVE OFFICERS AND DIRECTORS WILL NOT SPEND FULL TIME OPERATING
OUR BUSINESS THEREBY POTENTIALLY DELAYING THE DEVELOPMENT OF TECHNEST'S
BUSINESS.
Technest's Chief Executive Officer, Chief Financial Officer and one of its
Directors are also officers and Directors of other companies, including
Markland. As a result, they may not be able to devote their full time to
Technest. As a result of their participation in business activities of other
companies, their limited attention to Technest may delay the development of
Technest's business.
RISKS RELATED TO CAPITAL STRUCTURE
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF
TECHNEST'S COMMON STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF
OUTSTANDING STOCK IN THE PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF TECHNEST'S
COMMON STOCK.
Pursuant to the terms of the Merger Agreement and the Registration Rights
Agreements executed on February 14, 2005, Technest is obligated to file three
(3) registration statements with the Securities and Exchange Commission within
75-105 days from February 14, 2005. These registration statements will cover the
subsequent resale of outstanding any shares of common stock or shares of common
stock underlying warrants or preferred stock issued or to be issued in
connection with the acquisition of Genex and related transactions. The average
daily volume of Technest since January 3 of 2005 is less than 1,800 shares. The
market may not be able to absorb all of the shares that Technest expects to
register within 75-105 days from February 14, 2005. This may cause the price of
Technest to decrease.
IF TECHNEST FAILS TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL
REPORTING, THE PRICE OF ITS COMMON STOCK MAY BE ADVERSELY AFFECTED.
Technest's internal controls over financial reporting may have weaknesses and
conditions that need to be addressed, the disclosure of which may have an
adverse impact on the price of Technest's common stock. Technest is required to
establish and maintain appropriate internal controls over financial reporting.
Failure to establish those controls, or any failure of those controls once
established, could adversely impact Technest's public disclosures regarding
Technest's business, financial condition or results of operations. In addition,
management's assessment of internal controls over financial reporting may
identify weaknesses and conditions that need to be addressed in its internal
controls over financial reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions that need to be
addressed in Technest's internal controls over financial reporting, disclosure
of management's assessment of its internal controls over financial reporting or
disclosure of Technest' public accounting firm's attestation to or report on
management's assessment of Technest's internal controls over financial reporting
may have an adverse impact on the price of its common stock.
STANDARDS FOR COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE
UNCERTAIN, AND IF TECHNEST FAILS TO COMPLY IN A TIMELY MANNER, ITS BUSINESS
COULD BE HARMED AND ITS STOCK PRICE COULD DECLINE.
Rules adopted by the Securities and Exchange Commission pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 require annual assessment of Technest's
internal control over financial reporting, and attestation of its assessment by
Technest's independent registered public accountants. This requirement will
first apply to its annual report for fiscal 2005. The standards that must be met
5
for management to assess the effectiveness of the internal control over
financial reporting are new and complex, and require significant documentation,
testing and possible remediation to meet the detailed standards. Technest may
encounter problems or delays in completing activities necessary to make an
assessment of its internal control over financial reporting. In addition, the
attestation process by Technest's independent registered public accountants is
new and Technest may encounter problems or delays in completing the
implementation of any requested improvements and receiving an attestation of its
assessment by Technest's independent registered public accountants. If Technest
cannot assess its internal control over financial reporting as effective, or its
independent registered public accountants are unable to provide an unqualified
attestation report on such assessment, investor confidence and share value may
be negatively impacted.
TECHNEST DOES NOT FORESEE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
Technest has not paid cash dividends on its stock and does not plan to pay cash
dividends on its stock in the foreseeable future.
WE MAY NOT HAVE ENOUGH SHARES TO COVER THE EXERCISE AND CONVERSION OF WARRANTS
AND PREFERRED STOCK
Technest has 442,059,447 shares of common stock outstanding (before the Reverse
Split) and 500,000,000 authorized. Technest does not have enough authorized
shares to issue to holders of our preferred stock of they elect to convert their
shares and the holders of our warrants if they elect to exercise their warrants.
In connection with the Transactions, the holders of a majority of our shares of
common stock authorized a Reverse Split. This Reverse Split will not take affect
until 20 days after an appropriate information statement has been filed with the
SEC and mailed to our stockholders. Should we need to issue shares of common
stock before then, we will be limited in our ability to do so.
RISKS RELATED TO INVESTING
IN LOW- PRICED STOCK
IT MAY BE DIFFICULT FOR YOU TO RESELL SHARES OF COMMON STOCK OF TECHNEST IF AN
ACTIVE MARKET FOR OUR COMMON STOCK DOES NOT DEVELOP.
Our common stock is not actively traded on a registered securities exchange and
we do not meet the initial listing criteria for any registered securities
exchange or the NASDAQ National Market System. It is quoted on the less
recognized OTC Bulletin Board. This factor may further impair your ability to
sell your shares when you want and/or could depress our stock price. As a
result, you may find it difficult to dispose of, or to obtain accurate
quotations of the price of, our securities because smaller quantities of shares
could be bought and sold, transactions could be delayed and security analyst and
news coverage of our company may be reduced. These factors could result in lower
prices and larger spreads in the bids and ask prices for our shares.
TECHNEST'S COMMON STOCK IS "PENNY STOCK", WITH THE RESULT THAT TRADING OF OUR
COMMON STOCK IN ANY SECONDARY MARKET MAY BE IMPEDED.
Due to the current price of our common stock, many brokerage firms may not be
willing to effect transactions in our securities, particularly because
low-priced securities are subject to SEC rules imposing additional sales
requirements on broker-dealers who sell low-priced securities (generally those
below $5.00 per share). These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for our stock as it is
subject to these penny stock rules. Therefore, stockholders may have difficulty
selling those securities. These factors severely limit the liquidity, if any, of
our common stock, and would likely have a material adverse effect on its market
price and on our ability to raise additional capital.
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock, to deliver a standardized risk disclosure document prepared by the
Commission, that:
(a) contains a description of the nature and level of risk in the
market for penny stocks in both public offerings and secondary trading;
(b) contains a description of the broker's or dealer's duties to the
customer and of the rights and remedies available to the customer with
respect to a violation to such duties or other requirements of
Securities' laws;
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(c) contains a brief, clear, narrative description of a dealer market,
including bid and ask prices for penny stocks and the significance of
the spread between the bid and ask price;
(d) contains a toll-free telephone number for inquiries on disciplinary
actions;
(e) defines significant terms in the disclosure document or in the
conduct of trading in penny stocks; and
(f) contains such other information and is in such form, including
language, type, size and format, as the SEC may require by rule or
regulation.
In addition, the broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with:
(a) bid and offer quotations for the penny stock;
(b) the compensation of the broker-dealer and its salesperson in the
transaction;
(c) the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of the
market for such stock; and
(d) monthly account statements showing the market value of each penny
stock held in the customer's account.
Also, the penny stock rules require that prior to a transaction in a penny stock
not otherwise exempt from those rules, the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written acknowledgment of the receipt of a
risk disclosure statement, a written agreement to transactions involving penny
stocks, and a signed and dated copy of a written suitability statement.
We cannot predict the extent to which investor interest in our stock or a
business combination, if any, will lead to an increase in its market price or
the development of an active trading market or how liquid that market, if any,
might become.
MARKLAND MAY BECOME AN INVESTMENT COMPANY IF ITS CONTROLLING INTEREST IN
TECHNEST FALLS BELOW 51%. IF SO, OUR COMPLIANCE AND REGISTRATION COSTS WILL
INCREASE.
If Markland's ownership of Technest ceases to meet the definition of "majority
owned subsidiary" as defined by the Investment Company Act of 1940 (the "'40
Act"), Markland could be subject to regulation under the '40 Act. In such event,
Markland would be required to register as an investment company and could be
expected to incur significant registration and compliance costs and we may
become subject to liability under the '40 Act, the Securities Act of 1933 and
the Securities Exchange Act of 1934 and rules and regulations adopted
thereunder. Compliance with these rules could adversely affect Markland and
Technest because it would use management and financial resources.
On February 14, 2004, Markland entered into definitive agreements with Technest,
a public company with no revenue and minimal assets and operations, Genex, and
the Investors, which resulted in Markland acquiring controlling interests in
Technest simultaneous with and conditioned upon the Technest acquisition of
Genex. These transactions were completed on February 14, 2004.
THE MARKLAND INVESTMENT
GENERAL
Markland's investment in Technest was effected pursuant to the terms of a
Securities Purchase Agreement between Markland and Technest, dated February 14,
2005 (the "Markland Securities Purchase Agreement"). A copy of the Markland
Securities Purchase Agreement has been filed as Exhibit 2.2 to this current
report and incorporated by reference herein.
7
In accordance with the terms of the Markland Securities Purchase Agreement, on
February 14, 2005, Technest issued to Markland 412,650,577 shares of its common
stock (before the Reverse Split) in exchange for 10,168,764 shares of Markland
common stock and Markland agreed to issue shares of common stock upon conversion
of Technest's Series B Preferred Stock (which, together with the Technest Series
C Preferred Stock and warrants, was sold to the Investors in the Investor
Financing described under the heading "Investor Financing" below). The issuance
of these securities was not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but was made in reliance upon the exemptions
from the registration requirements of the Securities Act set forth in Section
4(2) thereof.
Technest used the shares of common stock paid to it by Markland to fund a
portion of the merger consideration paid to Jason Geng, the sole shareholder of
Genex (described under the heading "Genex Acquisition" below). Markland intends
to hold Technest's common stock as an asset. Markland does not intend to take
Technest private.
As described below in the description of the Investor Financing, the Technest
Series B Preferred Stock will be convertible into Markland common stock upon the
earlier to occur of (a) February 14, 2006 or (b) a date which is the first
trading day after the date on which Markland common stock has a closing bid
price of $2.50 or more for five consecutive trading days. The number of shares
to be issued will be determined by dividing the quotient of (a) $5,000,000
divided by the lower of (i) $0.60 and (ii) the market price (as defined in the
Merger Agreement) by (b) 1,149,425.
After giving effect to the consummation of the Transactions, Markland
beneficially owns approximately 93% of the outstanding shares of Technest's
outstanding common stock, on a primary basis, and 39% of Technest's outstanding
common stock, on a fully diluted basis. Under SEC rules, Mr. Tarini, the CEO and
Director of Markland and Technest, may be deemed to be the indirect beneficial
owner of all of the shares of Technest's common stock beneficially owned by
Markland. Mr. Tarini disclaims beneficial ownership of these shares.
REGISTRATION OBLIGATIONS
Technest and Markland entered into a Registration Rights Agreement, dated
February 14, 2005, in connection with Markland's purchase of Technest common
stock. A copy of this agreement has been filed as Exhibit 4.2 to this current
report and is incorporated by reference herein.
Technest has agreed to use its best efforts to file a registration statement on
Form SB-2 as soon as possible after it receives a request for registration from
Markland (or the holder of a majority of the registerable securities if Markland
transfers some or all of its shares) and to cause the registration statement to
be declared effective. Pursuant to this agreement, Technest also agreed to keep
the registration statement effective until the earlier of (a) thirty-six (36)
months following the date of the agreement or (b) such time that the securities
cease to be registrable securities due to the elimination of their transfer
restrictions. Technest may suspend the effectiveness of the registration
statement for a period of no more than fifteen (15) consecutive trading days, or
an aggregate of thirty (30) trading days, each year. If the number of shares to
be registered on the registration statement does not equal the number of
Technest shares of common stock acquirable by the holders of the registrable
securities, Technest must promptly file a separate registration statement
relating to the registrable securities that remain unregistered. In addition,
Markland has piggyback registration rights if, within two (2) years following
the date of the agreement, Technest chooses to register any of its securities
under the Securities Act on an underwritten basis.
LOCK-UP AGREEMENT
Prior to February 14, 2005, Technest was controlled by Garth LLC and Southshore
Capital Management Fund Ltd. who owned approximately 73% of the shares of
Technest common stock. They have executed and delivered lock-up agreements,
substantially in the form attached to this current report as Exhibit 10.4.
Under the terms of these agreements, such shareholders have agreed not to sell
or dispose of their Technest common stock until the earlier of six (6) months
following the filing of this Form 8-K or the date that the registration
statement for the sale of such shares effective. In return, during the lock-up
period, Technest agreed to maintain its "reporting status" with the Securities
and Exchange Commission, to file all reports that are required to be filed, and
to use its best efforts to ensure that the common stock is quoted for public
trading on a nationally recognized medium of a certain caliber. These
stockholders were also granted piggyback registration rights to include their
shares on the next registration statement we file. Technest may waive its
obligations under the lock-up agreement if needed to increase the liquidity of,
or develop the trading market of, the Technest common stock. These agreements
will terminate in the event of certain specified changes in control of Technest.
8
MATERIAL RELATIONSHIPS AND INTERLOCKING MANAGEMENT
Mr. Tarini is also one of the Investors and will be the beneficial owner of
Technest Series C Preferred Stock, convertible into 30,341,954 shares of
Technest common stock, and warrants exercisable for 30,341,954 shares of common
stock (in each case before the Reverse Split). If combined, on February 14,
2005, Markland and Mr. Tarini would beneficially own an aggregate of
approximately 94% of the outstanding Technest common stock. The Markland
Investment in Technest was negotiated by senior management of Markland,
including Mr. Tarini. The Markland Investment was approved by a unanimous vote
of the Board of Directors of Markland including, Mr. Mackin and Mr. Ducey,
neither of whom has an interest in the transaction.
Mr. Tarini is on the Board of Directors of Markland and Technest. He is also the
Chief Executive Officer of Markland and Technest. Mr. Mackin is the President of
Markland and Technest. Mr. Periera is the Chief Financial Officer of Markland
and Technest.
THE INVESTOR FINANCING
GENERAL
The Investor Financing was effected pursuant to the terms of a Securities
Purchase Agreement, dated February 14, 2005 (the "Investor Securities Purchase
Agreement"), between the Investors and Technest. Technest raised $5,000,000
through this financing. The proceeds of this financing were used to fund the
acquisition of Genex, pay transactions costs and fund working capital. Although
Markland is not a party to the Investor Securities Purchase Agreement, Markland
has agreed to issue shares of its common stock upon conversion of Technest
Series B Preferred Stock sold under this agreement and to register the resale of
such common stock by the Investors. A copy of this agreement has been filed as
Exhibit 2.1 to this current report on Form 8-K and is incorporated herein by
reference.
On February 14, 2005, immediately after the acquisition by Markland of a
controlling interest in Technest, the Investors consisting of Southridge
Partners LP, Southshore Capital Fund Limited, Verdi Consulting, Inc.,
ipPartners, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
Strategic Holding Fund, Ltd. and Deer Creek Fund, LP (collectively, the
"Investors") paid $5,000,000 in cash for 1,149,425 shares of Technest Series B
Preferred Stock, five-year warrants to purchase up to 242,735,571 shares of
Technest common stock for an exercise price of $.0307 per share (before the
Reverse Split), and 1,149,425 shares of Technest Series C Preferred Stock
convertible into 242,735,571 shares of Technest's common stock (before the
Reverse Split). After the Reverse Split, the warrants will be exercisable for
1,149,425 shares of Technest common stock and the Series C Preferred Stock will
be convertible into 1,149,425 shares of Technest common stock. These securities
were sold in units for a price of $4.35 per unit each.
Each unit consists of one share of Series B Preferred Stock; one share of Series
C Preferred Stock and a warrant to purchase up to 211.18 shares of Technest's
common stock. Copies of the certificates of designation of the Series B and C
Preferred Stock and the form of warrants have been filed as Exhibits 4.7 and 4.8
to this current report on Form 8-K and are incorporated by reference herein.
The issuance and sale of the securities were not registered under the Securities
Act, but were made in reliance upon the exemptions from the registration
requirements of the Securities Act set forth in Section 4(2) thereof and Rule
506 of Regulation D promulgated thereunder, insofar as such securities were
issued only to "accredited investors" within the meaning of Rule 501 of
Regulation D.
The Series B Preferred Stock will be convertible into Markland common stock upon
the earlier to occur of (a) February 14, 2006 or (b) a date which is the first
trading day after the date on which Markland common stock has a closing bid
price of $2.50 or more for five consecutive trading days. The number of shares
to be issued will be determined by dividing the quotient of (a) $5,000,000
divided by the lower of (i) $0.60 and (ii) the market price (as defined in the
Merger Agreement) by (b) 1,149,425. Market Price means the average closing bid
for the 20 previous trading days. Upon conversion, the aggregate number of
9
Markland common shares held by the holders of Series B Preferred Stock and its
affiliates may not exceed 4.999% of the outstanding shares of Markland common
stock. The holder may demand a waiver of this limitation but such waiver will
not be effective for 65 days after the request, is limited to the holder itself
and only allows the holder to hold up to 9.999% of the outstanding Markland
common stock. Shares of the Series B Preferred Stock have a liquidation
preference of $2.175 per share, may only vote on changes to the rights,
privileges and priority of the Series B Preferred Stock, do not accrue
dividends, are not redeemable and are convertible into Markland common stock.
The Series C Preferred Stock is convertible at the option of the stockholder at
any time. The number of shares of Technest common stock into which each share of
Series C Preferred Stock is convertible is determined by dividing $2.175 by the
Series C Conversion Price. The Series C Conversion Price is $.0102993 (before
the Reverse Split). After the Reverse Split the Series C Conversion Price will
be $2.175. Upon conversion, the aggregate number of shares of Technest common
stock held by the holder of Series C Preferred Stock and its affiliates may not
exceed 4.999% of the outstanding Technest common stock. The holder may demand a
waiver of this limitation but such waiver will not be effective for 65 days
after the request, is limited to the holder itself and only allows the holder to
hold up to 9.999% of the outstanding Technest common stock. Shares of the Series
C Preferred Stock have a liquidation preference of approximately $2.175 per
share, may only vote on changes to the rights, privileges and priority of the
Series C Preferred Stock, receive dividends on an as converted basis whenever
dividends are made to the Technest common stock holders, are not redeemable by
Technest and are convertible into Technest common stock.
Technest has agreed to issue additional shares of its common stock to the
Investors if the units do not have a market value of $6.50 at the end of one
year. For each unit an Investor continues to hold on February 14, 2006, Technest
will issue to the Investor a number of shares of common stock calculated in
accordance with the following formula:
(Units Held on Reset Date) x [(Adjustment Price) - Combined Market Price)]
--------------------------------------------------------------------------
THNS Market Price
"ADJUSTMENT PRICE" shall mean $6.525 (subject to appropriate adjustment
in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares)
"COMBINED MARKET PRICE" shall mean the THNS Market Price added to the
MRKL Market Price.
"MRKL MARKET PRICE" shall mean the average of the closing bid prices of
the Markland common stock during the period beginning ten (10) trading
days prior to the reset date and ending ten (10) trading days after the
reset date as reported by the OTC Bulletin Board or any similar
organization or agency of national recognition succeeding to its
functions of reporting prices for the Markland common stock.
"THNS MARKET PRICE" shall mean the average of the closing bid prices of
the Common Stock during the period beginning ten (10) Trading Days
prior to the Reset Date and ending ten (10) Trading Days after the
Reset Date as reported by the OTC Bulletin Board or any similar
organization or agency of national recognition succeeding to its
functions of reporting prices for the Common Stock.
REGISTRATION OBLIGATIONS
REGISTRATION OBLIGATIONS OF MARKLAND. The Investors and Markland entered into a
Registration Rights Agreement, dated February 14, 2005, pursuant to which
Markland has agreed to register 17,000,000 shares of Markland common stock
issuable to the holders of the Series B Preferred Stock of Technest, and common
stock issuable as liquidated damages for breach of certain covenants contained
in the agreement. A copy of this agreement has been filed as Exhibit 4.1 to this
current report and is incorporated by reference herein.
Under the terms of this Agreement, Markland has agreed to file a registration
statement on Form SB-2 on or before seventy-five (75) days following the closing
date of the transaction; use its best efforts to cause the registration
statement to be declared effective as promptly as possible thereafter but not
later than one hundred thirty-five days following the closing date; and keep the
registration statement effective until twenty-four (24) months following the
date on the effective day of such registration statement.
10
The offering will terminate once the registered shares have been sold or may be
sold pursuant to Rule 144(k) of the Securities Act without volume restrictions.
Failure to comply with the terms of this agreement will trigger liquidated
damages equal to two percent (2%) of the purchase price paid by each holder in
connection with the Investors' Investments for each month (and pro rata for any
portion of a month prior to the cure of such breach) that Markland fails to meet
the relevant filing date, the relevant effective date, or for such failure to
keep the registration statement effective. Markland may also pay such liquidated
damages by issuing shares of common stock valued at ninety (90%) percent of the
average of the trailing five (5) trading days' closing prices before the payment
that are the subject of a then-effective registration statement.
If, during the effectiveness period, the number of shares of common stock
issuable in lieu of the payment of partial liquidated damages exceeds the number
of such shares then-registered in a registration statement, Markland will be
required to file a new registration statement, as soon as reasonably practicable
but no later than forty-five (45) days following the date on which Markland
knows or reasonably should have known that such registration statement is
required.
Registration Obligations of Technest.
- -------------------------------------
The Investors and Technest entered into a Registration Rights Agreement on
February 14, 2005. Pursuant to this agreement, Technest agreed to file with the
SEC a Registration Statement covering the resale of all of the common stock
issuable upon conversion of the Series C Preferred Stock, (b) all of the common
stock issuable upon exercise of the common stock purchase warrants, and (c)
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 the agreement. Technest agreed to use its best
efforts to cause the Registration Statement to be declared effective as promptly
as possible thereafter, and to keep the Registration Statement effective until
twenty-four (24) months following the date on which the shelf registration
becomes effective, unless the shares of common stock covered by the registration
statement have been sold or may be sold pursuant to Rule 144(k) of the
Securities Act without volume restrictions. Technest will be required to amend
this Registration Statement or file an additional Registration Statement as soon
as reasonably practicable if the number of shares of common stock issuable in
lieu of the payment of partial liquidated damages exceeds the number of such
shares then registered in a Registration Statement.
Failure to comply with the terms of this agreement will trigger liquidated
damages equal to two percent (2%) of the purchase price paid by each holder in
connection with the Investors' Investments for each month (and pro rata for any
portion of a month prior to the cure of such breach) that Markland fails to meet
the relevant filing date, the relevant effective date, or for such failure to
keep the registration statement effective. Markland may also pay such liquidated
damages by issuing shares of common stock valued at ninety (90%) percent of the
average of the trailing five (5) trading days' closing prices before the payment
that are the subject of a then-effective registration statement.
MATERIAL RELATIONSHIPS
With the exception of Deer Creek Fund LP, ipPartners Inc., and Southshore
Capital Fund Limited, all of the Investors (i) have been named selling
stockholders in Markland's registration statement on Form SB-2 declared
effective by the SEC on December 2, 2004 and (i) are either shareholders,
officers and/or Directors or Markland. ipPartners, Inc. is a corporation
majority owned and controlled by Mr. Tarini, Markland's Chief Executive Officer
and Chairman. The Investor Financing was negotiated on behalf of Markland by
senior management of Markland, including Mr. Tarini. The Markland Investment was
approved by a unanimous vote of the Board of Directors of Markland including,
Mr. Mackin and Mr. Ducey, neither of whom has an interest in the transaction.
BROKERS
Greenfield Capital Partners LLC is a registered broker-dealer retained by
Technest in connection with the Transactions. For its services, Greenfield
Capital Partners LLC. will receive a fee of approximately $650,000. A copy of
this Agreement has been filed as an exhibit to this report and is incorporated
by reference herein.
11
THE GENEX ACQUISITION
GENERAL
The acquisition of Genex was effected pursuant to an Agreement and Plan of
Merger dated February 14, 2005 (the "Merger Agreement"), by and among Markland,
Technest, MTECH Acquisition, Inc. ("MTECH"), a wholly-owned subsidiary of
Technest, Genex and Jason Geng, the sole stockholder of Genex. A copy of the
Merger Agreement is attached as Exhibit2.3 to this current report on Form 8-K
and incorporated by reference herein.
In accordance with the terms of the Merger Agreement, on February 14, 2005,
MTECH, a wholly-owned subsidiary of Technest, merged with and into Genex, with
Genex surviving the merger as a wholly-owned subsidiary of Technest. As a result
of the merger, all of the outstanding shares of the capital stock of Genex were
automatically converted into the right to receive in the aggregate (i) $3
million; (ii) 10,168,764 shares of Markland's common stock (the shares of
Markland common stock issued to Technest in the Markland Investment); and (iii)
if earned, contingent payments in the form of additional shares of Technest
common stock. In addition, Mr. Geng received a six month unsecured promissory
note in the principal amount of $276,317 that pays interest at the rate of 6%
per annum. Jason. Geng's share consideration will be adjusted to reflect changes
in the closing bid price of Markland common stock in the 10 trading days
following February 14, 2005, subject to limitations set forth in the Merger
Agreement.
If, following completion of the Transactions, Genex meets specified revenue
goals at the end of each of the first three years following February 14, 2005,
Technest will pay to Mr. Geng contingent consideration of additional shares of
Technest common stock equal to the fair market value of 30% of the difference in
Genex's gross revenue during year proceeding the payment and its gross revenue
in 2004. Any shares of Technest common stock issued pursuant to this provision
of the Merger Agreement will be issued in reliance upon the exemption from the
registration requirements of the Securities Act by Section 4(2) of the
Securities Act.
In the event that the Intraoral Technologies (as such term is defined in the
Merger Agreement) owned by Genex prior to February 14, 2005 are commercialized,
Jason Geng shall be entitled to fifty percent (50%) of all profits generated
from the Intraoral Technologies for a period of five years following February
14, 2005. Notwithstanding the foregoing, any revenue resulting from the
Intraoral Technologies shall be excluded from the calculation of the earn out
described in the foregoing paragraph.
Markland, Technest and MTECH, on one hand, and Jason Geng, on the other hand
have agreed to indemnify each other for breaches of representations, warranties
and failures to perform covenants. Indemnity is available pursuant to the
indemnity escrow agreement for any claim by Markland or Technest above $100,000.
Jason Geng's liability is limited to the amount in the indemnity escrow fund,
set at closing as $2 million of Markland common stock taken from the
consideration paid to Jason Geng also on closing. Jason Geng has agreed to
indemnify the Technest entities for all losses associated with disputes relating
to the title of Genex shares, taxes, ERISA, environmental and intellectual
property claims for amounts up to the full consideration for the merger. Jason
Geng also agreed to pay Genex for any amount a governmental entity refuses to
pay in relation to the DCAA audit currently being conducted. Jason Geng would be
reimbursed for any such payment by a release of Markland common stock from the
indemnity escrow fund with a fair market value equal to the amount paid to
Genex.
REGISTRATION OBLIGATIONS
REGISTRATION OBLIGATIONS OF MARKLAND. Markland entered into a Registration
Rights Agreement with Jason Geng, the sole stockholder of Genex, on February 14,
2005, in connection with its issuance to Mr. Geng of shares of Markland common
stock in connection with the acquisition of Genex. A copy of this agreement has
been filed as Exhibit 4.5 to this current report and is incorporated by
reference herein.
Markland has agreed to file a registration statement for the shares of Markland
common stock paid to Jason Geng on or before June 1, 2005, plus one day for each
day when a registration statement is not effective and available for the resale
of common stock issued to the investors in the Securities Purchase Agreement,
dated September 21, 2004. Markland has agreed to use commercially reasonable
efforts to cause the registration statement to be declared effective by August
1, 2005. Pursuant to the agreement, Markland must also use commercially
reasonable efforts to keep the registration statement effective until the date
on which Mr. Geng no longer owns any of the registrable securities, unless the
shares of common stock have been sold or may be sold pursuant to Rule 144 of the
Securities Act without volume restrictions.
12
REGISTRATION OBLIGATIONS OF TECHNEST. Technest entered into a Registration
Rights Agreement with Jason Geng, on February 14, 2005. A copy of this agreement
has been filed as Exhibit 4.4 to this current report and is incorporated by
reference herein.
Pursuant to this agreement, Technest agreed to file with the SEC a registration
statement covering the resale of all of the Technest common stock Technest is
ultimately required to issue to Jason. Geng as additional consideration for the
sale of his Genex common stock if Genex recognizes gross revenues in excess of a
certain dollar amount in each of the three years following Technest's
acquisition of Genex, within forty-five (45) days following each of the three
yearly determinations of whether earnout payments are due. Technest agreed to
use commercially reasonable efforts to cause each registration statement to be
declared effective within one hundred five (105) days following each such
earnout payment determination. Pursuant to the agreement Technest must also use
commercially reasonable efforts to keep each registration statement effective
until the date on which Jason Geng no longer holds any of the registrable
securities, unless the shares of TEchnest common stock covered by the
registration statement have been sold or may be sold pursuant to Rule 144 of the
Securities Act without volume restrictions.
LOCK UP AGREEMENTS
Technest and Markland entered into a lock-up agreement with Jason Geng pursuant
to which Jason Geng has agreed (a) not to sell or dispose of any of the Markland
common stock issued to Jason Geng under the Merger Agreement through July 31,
2005 without the prior written consent of Markland, provided that Jason. Geng
may sell or transfer such shares to Markland, Technest or his immediate family
members as a bona fide gift, (b) beginning on August 1, 2005, not to sell more
than ten percent (10%) of the aggregate Markland common stock in any given
thirty (30) day period, and (c) not to sell more than twenty-five percent (25%)
of the aggregate Technest common stock that may be issued to him, in any given
thirty (30) day period.
GENG EMPLOYMENT AGREEMENT
In connection with this Transaction, Genex entered in to an employment agreement
with Jason Geng. Under the terms of the agreement, Jason. Geng will be employed
by Genex for a period of three years as the Executive Vice President and Chief
Scientist of Genex. Jason. Geng will receive a salary of $300,000 per year and
will be eligible to participate in any bonus or incentive compensation plans
that may be established by the Board of Directors of Genex, Markland or
Technest. The employment agreement provides that Jason. Geng's salary payments
and health insurance benefits will continue until the earlier of (a) the date
that Jason. Geng has obtained other full-time engagement or (b) twelve (12)
months from the date of termination of the engagement, in the event that Genex
terminates his engagement without cause (as defined in the agreement) prior to
the termination of the agreement or in the event that Jason. Geng terminates his
engagement for good reason (as defined in the Agreement). The agreement also
provides for a continuation, for the lesser of six months or through the end of
the term of the agreement, of Jason. Geng's salary in the event that he becomes
permanently disabled during the term of the agreement.
AGREEMENTS WITH BROKERS
Genex Technologies, Inc. entered into an agreement with Ocean Tomo, LLC, on
October 17, 2003. The agreement was extended for one year in a subsequent letter
from Jason Geng to Ocean Tomo. Under this agreement, Genex has agreed to pay
Ocean Tomo as a finder, and in connection to the acquisition by the Company of
Genex.
OTHER EFFECTS OF THE ACQUISITION OF GENEX ON MARKLAND
SUBSTANTIAL DILUTION OF MARKLAND PUBLIC STOCKHOLDERS
Public shareholders of Markland experienced significant dilution as a result of
these Transactions. Shares issued by Markland on February 14, 2004 represent [
]% of Markland outstanding stock on the date of issuance.
13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
our Common Stock as of February 11, 2005 by:
o each of the individuals listed on the "Summary Compensation
Table" below;
o each of our directors, officers and nominees;
o each person (including any group) who is known by us to own
beneficially 5% or more of our Common Stock; and
o all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options warrants and
any other type of convertible securities held by that person that are currently
exercisable or exercisable within 60 days of February 11, 2005, are deemed
issued and outstanding. These shares, however, are not deemed outstanding for
purposes of computing percentage ownership of each other shareholder. Percentage
of ownership is based on 29,408,900 shares of Common Stock outstanding on
February 11, 2005.
Except as indicated in the footnotes to this table and subject to applicable
community property laws, each shareholder named in the table has sole voting and
investment power with respect to the shares shown as beneficially owned by them.
This table also includes shares owned by a spouse as community property.
14
BENEFICIAL OWNERSHIP OF TECHNEST PRIOR TO FEBRUARY 14, 2004
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
SHARES ISSUABLE SHARES ISSUABLE
PURSUANT TO PURSUANT TO
OPTIONS AND OPTIONS AND
WARRANTS WARRANTS
EXERCISABLE AND EXERCISABLE AND
CONVERTIBLE CONVERTIBLE
SECURITIES SECURITIES
CONVERTIBLE WITHIN CONVERTIBLE WITHIN
60 DAYS OF 60 DAYS OF
NUMBER PERCENT OF FEBRUARY 14, 2005 PERCENT OF FEBRUARY 14, 2005 PERCENT OF
OF SHARES CLASS WITH GIVING CLASS WITHOUT GIVING CLASS
NAME AND ADDRESS OF BENEFICIALLY BENEFICIALLY EFFECT TO <4.99% BENEFICIALLY EFFECT TO <4.99% BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED LIMITATION OWNED LIMITATION OWNED
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
MARK ALLEN, Director 1,250,000 4.25 0 0 0 0
90 Grove Street,
Suite 205
Ridgefield, CT 06877
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
ALL CURRENT DIRECTORS 1,250,000 4.25 0 0 0 0
AND EXECUTIVE
OFFICERS AS A GROUP
(MARK ALLEN)
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
GARTH LLC 5,599,744 19.04 4,956,317.50 30.72 104,924,744 81.50
Citco TTEE Cayman Lt.
Commercial Center
Box 31106 SMB
Grand Cayman, BWI
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
SOUTHSHORE CAPITAL 15,712,661 53.43 0 0 0 0
MANAGEMENT FUND LTD.
Bahamas Financial
Center
Shirley & Charlotte
STS, Box CB-13136
Nassau, Bahamas
Box 30592, Cayside
2nd Floor, Georgetown
Grand Cayman
Cayman Islands, BWI
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
MILLENNIUM FUND ONE, 2,003,422 6.81 0 0 0 0
LTD.
12 Church Street,
Suite 228
Hamilton, Bermuda
HM11
- ----------------------- ------------- ------------- ------------------- ------------ -------------------- ------------
15
BENEFICIAL OWNERSHIP OF TECHNEST AFTER FEBRUARY 14, 2004
(AFTER GIVING EFFECT TO THE TRANSACTIONS)
SHARES ISSUABLE SHARES ISSUABLE
PURSUANT TO PURSUANT TO
OPTIONS AND OPTIONS AND
WARRANTS WARRANTS
EXERCISABLE AND EXERCISABLE AND
CONVERTIBLE CONVERTIBLE
SECURITIES SECURITIES
CONVERTIBLE WITHIN CONVERTIBLE WITHIN
60 DAYS OF 60 DAYS OF
NUMBER PERCENT OF FEBRUARY 14, 2005 PERCENT OF FEBRUARY 14, 2005 PERCENT OF
OF SHARES CLASS WITH GIVING CLASS WITHOUT GIVING CLASS
NAME AND ADDRESS OF BENEFICIALLY BENEFICIALLY EFFECT TO <4.9% BENEFICIALLY EFFECT TO <4.9% BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED LIMITATION OWNED LIMITATION OWNED
---------------- ----- ----- ---------- ----- ---------- -----
MARK ALLEN, Director 1,250,000 4.25 0 0 0 0
90 Grove Street,
Suite 205
Ridgefield, CT 06877
ROBERT TARINI, CEO 0 0 3,028,127 0.68 60,683,908 12.07
and Director
54 Danbury Road #207
Ridgefield,
Connecticut 06877
GINO M. PEREIRA, CFO 0 0 0 0 0 0
54 Danbury Road #207
Ridgefield,
Connecticut
06877
JOSEPH P. MACKIN, 0 0 0 0 0 0
President
190 Grove Street
Suite 205
Ridgefield,
Connecticut
06877
ALL CURRENT DIRECTORS 1,250,000 4.25 4,278,127 0.96 61,933,908 12.31
AND EXECUTIVE
OFFICERS AS A GROUP
(MARK ALLEN)
MARKLAND
TECHNOLOGIES, INC. 412,650,577 93.35 0 0 0 0
90 Grove Street,
Suite 201
Ridgefield, CT 06877
16
CHANGE IN CONTROL OF THE REGISTRANT
WE HAVE CALCULATED SEVERAL IMPORTANT VALUES ILLUSTRATING THE EFFECT THAT THE
TRANSACTIONS WOULD HAVE ON THE OWNERSHIP INTEREST OF THE PUBLIC STOCKHOLDERS OF
TECHNEST. YOU SHOULD BE AWARE THAT THESE PERCENTAGE AMOUNTS ARE SUBJECT TO
CHANGE DEPENDING ON THE NUMBER OF SHARES OF PREFERRED STOCK OR WARRANTS THAT
WILL BE EXERCISED AND THE NUMBER OF SHARES OUTSTANDING.
Prior to February 14, 2005, Garth LLC and, Southshore Capital Fund Ltd. were the
beneficial owners of approximately 73% of the Technest outstanding capital stock
and were able, by virtue of such stock ownership, to exercise a significant
amount of control over Technest's corporate affairs.
As a result of the Transactions described in this Report, Markland will own
approximately 39% of the common stock of Technest on a fully diluted basis. In
addition, Robert Tarini, the Chief Executive Officer of Markland is the founder
and controlling shareholders of ipPartners, one of the parties to the Investors
Securities Purchase Agreement. As a result of his share ownership, Markland will
have the ability to exercise a significant amount of control over any matter
that requires a vote of our stockholders, including the election of Directors
and certain significant corporate transactions.
Robert Tarini, Chairman of the Board and Chief Executive Officer of Technest, is
also the Chairman of the Board and Chief Executive Officer of Markland, and,
therefore, may be deemed to be the beneficial owner of the shares of our common
stock held by under applicable Securities and Exchange Commission rules.
DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT
OF PRINCIPAL OFFICERS
On February 14, 2005, upon consummation of the transactions, Robert Tarini,
Markland's Chief Executive Officer and Director, was appointed as the Chairman
of the Board of Directors and the Chief Executive Officer of Technest, Gino M.
Pereira, Markland's Chief Financial Officer of Technest, was appointed as the
Chief Financial Officer and Dr. Joseph P. Mackin, Markland's Chief Operating
Officer, was appointed as the President of Technest.
BOARD OF DIRECTORS FOLLOWING CONSUMMATION OF THE TRANSACTIONS
The following table contains information regarding the Company's Directors and
executive officers following consummation of the Transactions. The name, age and
present principal occupation or employment, and material occupations, positions,
offices or employment for the past five years, for each of the Directors and
executive officers of Technest Directors, are set forth below.
NAME AGE POSITION
- ---------------------- -------- ------------------------------------------------
Robert Tarini 45 President and Chairman of the Board of Directors
Joseph P. Mackin 57 President
Gino M. Pereira 48 Chief Financial Officer
Mark Allen 41 Director
ROBERT TARINI has served as Markland's Chief Executive Officer since November
14, 2003 and as Markland's Chairman of the Board of directors since December 9,
2002. In April 2003, Mr. Tarini founded Syqwest Inc., a firm which specializes
in the design and manufacture of acoustic remote sensing devices utilized in
marine and land based applications. In April 2001, Mr. Tarini founded Trylon
Metrics Corp., a developer of acoustic remote sensing technology, and acted as
President of Trylon from April 2001 to present. In May 2001, Mr. Tarini founded
ipPartners Inc. and has served as its President to present. ipPartners Inc.
17
specializes in the development of acoustic remote sensing devices. Since 1999,
Mr. Tarini has served as the chief executive officer of Ocean Data Equipment
Corporation, where he oversaw the design and development of a complete line of
scientific instruments targeted for geophysical and hydrographic research, and
developed a remote sensing technique, which is currently being applied to
detecting illicit materials. From June 1982 to July 1990, Mr. Tarini worked at
Raytheon, where he designed active sonar and sonar trainers for US and foreign
customers which were installed onto every 688 class attack submarine and every
SQQ-89 surface ship combat system, in total, over 100 seafaring vessels.
DR. JOSEPH P. MACKIN has been a member of the Board of Directors of Markland
since July 13, 2004 and has served as Markland's Chief Operating Officer since
December 7, 2004. Dr. Mackin has been with EOIR, one of Markland's wholly-owned
subsidiaries, for 4 years and is currently the President of EOIR. Dr. Mackin is
responsible for strategic technology development and Homeland Security
initiatives as well as a key participant in corporate day-to-day operations at
EOIR. He has served on numerous government panels and committees, and was most
recently appointed as the Lead Sensor Scientist on the prestigious National
Academy of Science study called "ARMY S&T FOR HOMELAND DEFENSE" published in
June 2003. Prior to joining EOIR, Dr. Mackin was an Assistant Sensor Systems
Group Leader at MIT Lincoln Laboratories where, among other things, he served as
the system integration lead for the Smart Sensor Web program. Dr. Mackin holds a
PhD in Physics from the Massachusetts Institute of Technology and a BS in
Engineering from the United States Military Academy at West Point. He is retired
as an officer in the United States Army.
GINO M. PEREIRA has served as Chief Financial Officer of the Company since
February 14, 2005. Mr. Pereira has served as Markland's Chief Financial Officer
since December 7, 2004. Mr. Pereira currently serves on the Board of Directors
of Teletrak Environmental Systems. From 1991 through 2000, Mr. Pereira was
employed by CDC Technologies, Inc., located in Oxford, Connecticut. From 1991
through 1998, Mr. Pereira was CDC Technologies' Executive Vice-President and
Chief Financial Officer. In 1999, Mr. Pereira assumed the role of Chief
Operating Officer of CDC Technologies. Mr. Pereira remained in that role through
2000. In January 2001, Mr. Pereira assumed the position of Chief Operating
Officer of CDC Acquisition Corporation, a subsidiary company of Drew Scientific
Group plc. Mr. Pereira remained in that position until November 2001, when he
became a principal at Interim Management Solutions in Oxford, Connecticut, a
position he still holds. During his tenure at Interim Management Solutions, Mr.
Pereira has acted as an interim or part-time Chief Financial Officer or Chief
Operations Officer for numerous small and emerging companies. In January 2003,
Mr. Pereira also became a Managing Director of Kiwi Securities, Inc., an
independently owned investment banking firm.
MARK ALLEN, was appointed to the Board of Technest in April 2002. Mr. Allen also
serves on the board of directors of Global Matrechs, Inc., a public company with
a class of equity securities registered under Section 12 of the Exchange Act.
Mr. Allen is also the President and founder of True to Form Lighting, a niche
lighting architectural products manufacturer. Mr. Allen's initial career was in
the stock brokerage / investment banking industry where he worked for Shearson
Lehman / American Express, Paine Webber and A.G. Edwards. In the early 1990's he
was Vice President of Corporate Finance and Director of Private Placements of
H.J. Myers & Co., an investment-banking firm, where he managed over 20 public
equity offerings and established the Private Placements Department.
There are no family relationships between any of the Directors or executive
officers.
BOARD COMPOSITION
All Directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. Executive officers are elected
by the Board of Directors and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD
The Company does not currently have an audit committee. The full Board of
Directors serves as the audit committee. The Company has no "audit committee
financial expert" on the Board of Directors because, due to a lack of operating
activities, it is not deemed necessary to have one. The Company also presently
has no compensation or nominating committee, because, due to a lack of operating
activities, it is not deemed necessary to have one.
The Board of Directors has established an executive committee consisting of
Robert Tarini. This committee has responsibility for the day to day management
of the business of Technest.
18
DIRECTOR COMPENSATION
Directors who are employees or officers of the Company are not currently
compensated for their services as directors. The Company reimburses
out-of-pocket expenses.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
None of the Company's Directors or officers or their respective associates or
affiliates is indebted to the Company.
FAMILY RELATIONSHIPS
There are no family relationships, as such term is defined by Regulation S-B
promulgated by the SEC, among the Company's Directors and executive officers.
LEGAL PROCEEDINGS WITH AFFILIATES
As of the date of this current report, there is no material proceeding to which
any Director, officer, affiliate or shareholder of the Company is a party
adverse to the Company.
ITEM 8.01 OTHER EVENTS
REVERSE SPLIT
The Board of Directors of Technest determined that it is in the best interests
of Technest to effect a 1-for-211.18 reverse split of our common stock, with all
fractional shares rounded down to the nearest whole number. As required by
Nevada law, this corporate action, which may be taken by written consent, must
be approved by the holders of a majority of our stock. On February 14, 2005,
holders of a majority of Technest's outstanding shares of common stock approved
the reverse split.
As a result of the stock split, every 211.18 shares of Technest outstanding
common stock will be combined into one share of Technest common stock.
Fractional shares will not be issued in connection with the stock split. All
fractional shares will be rounded down to the nearest whole and will be cashed
out. The stock split will become effective not less than twenty (20) days from
the date on which a definitive schedule 14C containing an information statement
relating to the stock split is mailed to the stockholders.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
It is impracticable for the Company to provide the required financial
statements at this time. The Company will file the required financial statements
by amendment to this report not later than April 30, 2005.
(b) PRO FORMA FINANCIAL INFORMATION
It is impracticable for the Company to provide the required pro forma
financial information at this time. The Company will file the required financial
information by amendment to this report not later than April 30, 2005.
19
(c) EXHIBITS
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
INCORPORATED BY
REFERENCE
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
NUMBER DESCRIPTION FILED WITH FORM FILING DATE EXHIBIT
THIS FORM 8-K NO.
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.1 Securities Purchase Agreement by and among *
Technest Holdings, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.2 Securities Purchase Agreement between *
Markland Technologies, Inc. and Technest
Holdings, Inc., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.3 Agreement and Plan of Merger by and between *
Technest Holdings, Inc., MTECH Acquisition,
Inc., Genex Technologies, Inc. and Jason
Geng, dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.1 Registration Rights Agreement between *
Markland Technologies, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP for
Markland Common Stock, dated February 14,
2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.2 Registration Rights Agreement between *
Technest Holdings, Inc. and Markland
Technologies, Inc., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.3 Registration Rights Agreement between *
Technest Holdings, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP for
Technest Series C Preferred Stock and
Warrants for Technest common stock, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.4 Registration Rights Agreement between *
Technest Holdings, Inc. and Jason Geng for
registration of Earnout Shares, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.5 Registration Rights Agreement between *
Markland Technologies, Inc. and Jason Geng,
dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.6 Form of Technest Common Stock Purchase *
Warrant
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.7 Technest Series B Convertible Preferred *
Stock Certificate of Designations filed
with the Secretary of State of Nevada on
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.8 Technest Series C Convertible Preferred *
Stock Certificate of Designations filed
with the Secretary of State of Nevada on
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
20
4.9 Promissory Note issued to Jason Geng by *
Genex Technologies, Inc., dated February
14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.1 Escrow Agreement between Markland *
Technologies, Inc., Technest Holdings,
Inc., Genex Technologies, Inc., Jason Geng,
and Wilmington Trust Company, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.2 Lock-Up Agreement of Jason Geng, dated *
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.3 Employment Agreement between Genex *
Technologies, Inc. and Jason Geng, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.4 Lock-up Agreement between Technest *
Holdings, Inc. Garth LLC and Southshore
Capital Fund Ltd., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.5 2004 Markland Stock Incentive Plan 8-K June 30, 2004
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.6 Form of Option to be granted under the 2004 *
Markland Stock Incentive Plan
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.7 Agreement between Genex Technologies, Inc. *
and Ocean Tomo
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.8 February 14, 2005 Markland Press Release *
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNEST HOLDINGS, INC.
By: /s/ Robert Tarini
-------------------------------
Robert Tarini
Director
Date: February 14, 2005
21
Exhibit Index
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
INCORPORATED BY
REFERENCE
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
NUMBER DESCRIPTION FILED WITH FORM FILING DATE EXHIBIT
THIS FORM 8-K NO.
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.1 Securities Purchase Agreement by and among *
Technest Holdings, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.2 Securities Purchase Agreement between *
Markland Technologies, Inc. and Technest
Holdings, Inc., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
2.3 Agreement and Plan of Merger by and between *
Technest Holdings, Inc., MTECH Acquisition,
Inc., Genex Technologies, Inc. and Jason
Geng, dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.1 Registration Rights Agreement between *
Markland Technologies, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP for
Markland Common Stock, dated February 14,
2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.2 Registration Rights Agreement between *
Technest Holdings, Inc. and Markland
Technologies, Inc., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.3 Registration Rights Agreement between *
Technest Holdings, Inc. and Southridge
Partners LP, Southshore Capital Fund
Limited, ipPartners, Inc, Verdi Consulting,
Inc., DKR Soundshore Oasis Holding Fund,
Ltd., DKR Soundshore Strategic Holding
Fund, Ltd. and Deer Creek Fund, LP for
Technest Series C Preferred Stock and
Warrants for Technest common stock, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.4 Registration Rights Agreement between *
Technest Holdings, Inc. and Jason Geng for
registration of Earnout Shares, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.5 Registration Rights Agreement between *
Markland Technologies, Inc. and Jason Geng,
dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.6 Form of Technest Common Stock Purchase *
Warrant
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.7 Technest Series B Convertible Preferred *
Stock Certificate of Designations filed
with the Secretary of State of Nevada on
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
4.8 Technest Series C Convertible Preferred *
Stock Certificate of Designations filed
with the Secretary of State of Nevada on
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
20
4.9 Promissory Note issued to Jason Geng by *
Genex Technologies, Inc., dated February
14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.1 Escrow Agreement between Markland *
Technologies, Inc., Technest Holdings,
Inc., Genex Technologies, Inc., Jason Geng,
and Wilmington Trust Company, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.2 Lock-Up Agreement of Jason Geng, dated *
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.3 Employment Agreement between Genex *
Technologies, Inc. and Jason Geng, dated
February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.4 Lock-up Agreement between Technest *
Holdings, Inc. Garth LLC and Southshore
Capital Fund Ltd., dated February 14, 2005
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.5 2004 Markland Stock Incentive Plan 8-K June 30, 2004
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.6 Form of Option to be granted under the 2004 *
Markland Stock Incentive Plan
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.7 Agreement between Genex Technologies, Inc. *
and Ocean Tomo
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------
10.8 February 14, 2005 Markland Press Release *
- ------------- --------------------------------------------- ---------------- -------------- ------------------------ ----------