EXHIBIT 99.2
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
AND
SCIENCE & TECHNOLOGY RESEARCH, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated balance sheet aggregates the
balance sheet of Markland Technologies, Inc. and Subsidiaries ("Markland") as of
September 30, 2003 and the balance sheet of Science & Technology Research, Inc.
("STR") as of September 30, 2003, accounting for the transaction as a business
combination pursuant to statement of Financial Accounting Standards No. 141 and
using the assumptions described in the following notes, giving effect to
Markland's acquisition of STR (see note 1 to pro forma consolidated financial
statements), as if the transaction had occurred as of September 30, 2003.
The following unaudited pro forma consolidated statement of operations combine
the results of operations of Markland for the year ended June 30, 2003 and the
pro forma results of operations of STR for the twelve months ended September 30,
2003 as if the transaction had occurred as of the beginning of the period. The
pro forma results of operations for STR for the twelve months ended September
30, 2003 reflects the results of operations of STR for the nine months ended
September 30, 2003, added to one fourth of the results of its operations for the
year ended December 31, 2002.
The pro forma consolidated financial statements should be read in conjunction
with the separate historical financials statements of Markland, and the
historical financial statements of STR appearing elsewhere herein. These pro
forma financial statements are not necessarily indicative of the consolidated
financial position, had the acquisition occurred on the date indicated above, or
the consolidated results of operations which might have existed for the periods
indicated or the results of operations as they may be in the future. For the
purposes of preparing its consolidated financial statements, Markland will
establish a new basis for the STR's assets and liabilities based upon the fair
value thereof, including the costs of the acquisition. The unaudited pro forma
condensed consolidated balance sheet and the statements of operations reflects
Markland's best estimates of this allocation; however, the final allocation may
differ from the pro forma amounts.
1
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Balance Sheet
September 30, 2003
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
------ Markland
Technologies Science &
Inc. and Technology Pro forma
Subsidiaries Research, Inc. Adjustments Pro forma
------------- ------------- ------------- -------------
(unaudited) (unaudited)
CURRENT ASSETS
- --------------
Cash $ 27,574 $ 215,830 (1) $ 1,189,000 $ 432,404
(1) (900,000)
(1) (100,000)
Accounts receivable 342,312 438,795 -- 781,107
Prepaid insurance and other current assets 11,028 129,032 -- 140,060
------------- ------------- ------------- -------------
Total Current Assets 380,914 783,657 189,000 1,353,571
------------- ------------- ------------- -------------
OTHER ASSETS
- ------------
Intangible assets 2,599,998 -- (1) 6,006,808 8,606,806
Property and Equipment - net -- 53,467 -- 53,467
------------- ------------- ------------- -------------
Total Other Assets 2,599,998 53,467 6,006,808 8,660,273
------------- ------------- ------------- -------------
TOTAL ASSETS $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 1,257,907 $ 131,351 $ -- $ 1,389,258
Accrued expenses and other current liabilities 141,191 237,581 -- 378,772
Note payable 13,600 -- (1) 296,875 310,475
------------- ------------- ------------- -------------
Total Current Liabilities 1,412,698 368,932 296,875 2,078,505
------------- ------------- ------------- -------------
LONG-TERM DEBT (1) 78,125
437,499 -- (1) 1,189,000 1,704,624
------------- ------------- ------------- -------------
Total Liabilities 1,850,197 368,932 1,564,000 3,783,129
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDERS' EQUITY
- --------------------
Series A redeemable convertible preferred stock 300,000 -- -- 300,000
Series C 5% Cumulative redeemable convertible
preferred sto1k 1 -- -- 1
Series D redeemable convertible preferred stock 2 -- -- 2
Common stock 498 120 (1) (120)
(1) 154 652
Additional paid in capital 15,478,366 79,880 (1) 5,099,846
(1) (79,880) 20,578,212
Unearned compensation (3,963,481) -- (3,963,481)
Retained Earnings (accumulated deficit) (10,684,671) 388,192 (1) (388,192) (10,684,671)
------------- ------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,130,715 468,192 4,631,808 6,230,715
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,980,912 $ 837,124 $ 6,195,808 $ 10,013,844
============= ============= ============= =============
2
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Markland Science &
Technologies Technology Pro forma
Inc. and Research, Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 658,651 $ 6,054,167 $ -- $ 6,712,818
COST OF REVENUES 445,218 5,235,812 -- 5,681,030
------------ ------------ ------------ ------------
GROSS PROFIT 213,433 818,355 -- 1,031,788
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 1,186,379 173,932 -- 1,360,311
Research and development 522,657 224,803 -- 747,460
Compensatory element of stock issuance for selling,
general and administrative fees 2,051,822 -- -- 2,051,822
Amortization of intangible assets 66,668 -- -- 66,668
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,827,526 398,735 -- 4,226,261
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (3,614,093) 419,620 -- (3,194,473)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 226,751 11,608 (2) 142,680 381,039
Other expense (income), net (5,250) (43) -- (5,293)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (INCOME), NET 221,501 11,565 142,680 375,746
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,835,594) 408,055 (142,680) (3,570,219)
Income taxes -- 175,460 (3) (175,460) 0
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,835,594) 232,595 32,780 (3,570,219)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 -- -- 501,755
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 -- -- 4,107,500
PREFERRED STOCK DIVIDEND - Series C 152,716 -- -- 152,716
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(8,597,565) $ 232,595 $ 32,780 (8,332,190)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (1.72) $ (1.27)
============ ============
Weighted Average Number of Common Shares Outstanding, as
Adjusted for September, 2003 reverse stock split 5,002,724 1,539,779 6,542,503
============ ============ ============
3
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Markland Science &
Technologies Technology Pro forma
Inc. and Research, Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES $ 306,724 $ 503,654 $ -- $ 810,378
COST OF REVENUES 256,956 436,769 -- 693,725
------------ ------------ ------------ ------------
GROSS PROFIT 49,768 66,885 -- 116,653
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 497,812 44,731 -- 542,543
Research and development -- 67,924 -- 67,924
Compensatory element of stock issuance for selling,
general and administrative fees 401,980 -- -- 401,980
Amortization of intangible assets 33,334 -- -- 33,334
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 933,126 112,655 -- 1,045,781
------------ ------------ ------------ ------------
OPERATING LOSS FROM CONTINUING
OPERATIONS (883,358) (45,770) -- (929,128)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 28,578 1,995 (2) 35,670 66,243
Other expense (income), net -- (6) -- (6)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (INCOME), NET 28,578 1,989 35,670 65,237
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (911,936) (47,759) (35,670) (995,365)
Income taxes -- (20,059)(3) 20,059 --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (911,936) (27,700) (55,729) (995,365)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 90,000 -- -- 90,000
PREFERRED STOCK DIVIDEND - Series C 65,689 -- -- 65,689
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS APPLICABLE
TO COMMON STOCKHOLDERS $(1,067,625) $ (27,700) $ (55,729) (1,151,054)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.23) $ (1.18)
============ ============
Weighted Average Number of Common Shares Outstanding, as
Adjusted for September, 2003 reverse stock split 4,746,887 1,539,779 6,286,666
============ ============ ============
4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING
Effective October 1, 2003, Markland completed the acquisition of 100% of the
common stock of STR, by its subsidiary, Security Technology, Inc., a Delaware
Corporation ("STI"), through a merger of STI with newly formed STR Acquisition
Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's
Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy
deploys the "man-portable" point detection system to detect all classic nerve
and blister agents as well as other chemical warfare agent (CWA) vapors.
The purchase price totaled $6,475,000 and consisted of $900,000 in cash, which
was paid in October 2003, 1,539,779 shares of Markland common stock valued at
$5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The
promissory note bears no interest. Holders of the shares of common stock were
granted piggy-back registration rights. The promissory note is collateralized by
all of the assets of STR and 40% of the Common Stock of STR held by the
Markland. The promissory note is payable on or about as follows:
March 25, 2004 $ 93,750
May 24, 2004 125,000
July 23, 2004 78,125
October 26, 2004 78,125
---------
$375,000
=========
5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACQUISITION OF STR AND RELATED FUNDING, (Continued)
A summary of the allocation of the aggregate consideration for the merger to the
fair value of the assets acquired and liabilities assumed is as follows:
Fair value of net assets acquired:
Current assets $ 783,657
Property and equipment 53,467
Liabilities assumed:
Accounts payable & accrued expenses (368,932)
------------
Fair value of identifiable net assets 468,192
Intangibles (a) 6,006,808
------------
Total Purchase Price $ 6,475,000
============
Funding of Purchase Price
Cash $ 900,000
Promissory note 375,000
Common Stock 5,100,000
Cash for acquisition costs 100,000
------------
Total Purchase Price $ 6,475,000
============
(a) Markland has currently hired an independent firm to perform an
independent valuation of the above transaction. Since the outside
valuation of the intangible assets was not completed as of the date of
this filing, the pro forma financial statements assumed that all of the
excess of the purchase price over the net tangible assets was allocated
to Goodwill and accordingly, no amortization expense was included in
the pro forma statements of operations. Depending on the outcome of the
outside valuation and using an estimate of a five-year economic life
for any amounts allocated to the amortizable intangible assets, future
amortization expense could range from $0 to approximately $1,200,000
per year.
The Company funded the cash portion of the acquisition from a loan provided by
Bayview Capital, LLC, ("Bayview"). Robert Tarini, Markland's Chairman is
affiliated with Bayview. The amount of the loan provided by Bayview was
$1,189,000. The loan is collateralized by all of the assets of Markland, is due
on October 27, 2005 and bears interest at a rate of 12% per annum.
6
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - PRO FORMA INTEREST EXPENSE AND INCOME TAXES
The Pro forma interest expense for the year ended September 30, 2003 and three
months ended September 30, 2003, assuming the $1,189,000 loan was outstanding
for this period amounts to $142,680 and $85,670, respectively.
NOTE 3 - PRO FORMA INCOME TAXES
STR's income tax expense for the year ended September 30, 2003 of $175,460 was
eliminated as it is assumed that a consolidated tax return would have been filed
utilizing the 2003 net operating loss of Markland against the taxable income of
STR. STR's income tax benefit for the three months ended September 30, 2003 of
$20,059 was eliminated.
7