EXHIBIT 99.1
SCIENCE & TECHNOLOGY RESEARCH, INC.
FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2003
and the Year Ended December 31, 2002
SCIENCE & TECHNOLOGY RESEARCH, INC.
CONTENTS
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Page
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statements of Operations 3
Statements of Changes in Stockholder's Equity 4
Statements of Cash Flows 5-6
NOTES TO FINANCIAL STATEMENTS 7-15
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
1
SCIENCE & TECHNOLOGY RESEARCH, INC.
BALANCE SHEET
September 30, 2003
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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
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LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 131,351
Income taxes payable 150,000
Accrued expenses and other current liabilities 87,581
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TOTAL LIABILITIES $ 368,932
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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
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TOTAL STOCKHOLDER'S EQUITY 468,192
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TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 837,124
=============
The accompanying notes are an integral part of these financial statements.
2
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
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2003 2002
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NET SALES $ 5,502,455 $ 2,206,849
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CONTRACT COSTS 4,771,784 1,856,113
- -------------- ------------ ------------
GROSS PROFIT 730,671 350,736
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OPERATING EXPENSES
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Research and development expenses 203,775 84,114
General and administrative expenses 134,194 150,923
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TOTAL OPERATING EXPENSES 337,969 235,037
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OPERATING INCOME 392,702 115,699
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OTHER INCOME (EXPENSE)
- ----------------------
Interest income 17 104
Interest expense (5,986) (22,487)
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TOTAL OTHER EXPENSE (5,969) (22,383)
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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.
3
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
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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.
4
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net income $ 217,638 $ 59,829
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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
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TOTAL ADJUSTMENTS 70,010 152,411
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 287,648 212,240
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CASH FLOWS FROM INVESTING ACTIVITIES
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Purchases of property and equipment (26,800) --
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NET CASH USED IN
INVESTING ACTIVITIES $ (26,800) $ --
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The accompanying notes are an integral part of these financial statements.
5
SCIENCE & TECHNOLOGY RESEARCH, INC.
STATEMENTS OF CASH FLOWS, Continued
For the Nine Months Ended September 30, 2003
and Year Ended December 31, 2002
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2003 2002
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CASH FLOWS FROM FINANCING ACTIVITIES
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Repayment of note payable (32,083) (23)
Repayment of advances from affiliates (137,750) (216,365)
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NET CASH USED IN
FINANCING ACTIVITIES (169,833) (216,388)
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NET INCREASE (DECREASE) IN CASH 91,015 (4,148)
CASH - Beginning 124,815 128,963
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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.
6
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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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
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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.
7
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
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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.
8
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
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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
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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.
9
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
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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
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$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.
10
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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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.
11
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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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.
12
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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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.
13
SCIENCE & TECHNOLOGY RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
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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.
14
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.
15