Filed pursuant to Rule 424(b)(3)
File No. 333-115395
MARKLAND TECHNOLOGIES, INC.
PROSPECTUS SUPPLEMENT NO. 2 DATED SEPTEMBER 13, 2004
TO
THE PROSPECTUS DATED JUNE 21, 2004,
AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME
THIS PROSPECTUS SUPPLEMENT DATED SEPTEMBER 13, 2004 ("SUPPLEMENT NO.
2") SUPPLEMENTS THE INFORMATION WE PROVIDED IN OUR PROSPECTUS DATED JUNE 21,
2004, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME (THE "PROSPECTUS" ),
RELATING TO THE RESALE, FROM TIME TO TIME OF UP TO 31,156,015 SHARES OF OUR
COMMON STOCK BY THE SELLING STOCKHOLDERS NAMED THEREIN. SUPPLEMENT NO. 2 IS
BEING DELIVERED TO YOU ALONG WITH THE PROSPECTUS. SUPPLEMENT NO. 2 SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS AND IS QUALIFIED BY REFERENCE TO THE
PROSPECTUS EXCEPT TO THE EXTENT THAT THE INFORMATION IN SUPPLEMENT NO. 2
SUPERSEDES THE INFORMATION CONTAINED IN THE PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CAREFULLY REVIEW THE PROSPECTUS IN CONJUNCTION WITH SUPPLEMENT NO. 2
BEFORE MAKING AN INVESTMENT DECISION.
____________________
ACQUISITION OF EOIR
As previously reported in our Prospectus and our current report on Form
8-K dated June 29, 2004 and filed on June 30, 2004 (the "Initial 8-K"), on June
29, 2004, we acquired all of the outstanding stock of E-OIR Technologies, Inc.
("EOIR") for $8 million in cash and $11 million in principal amount of five year
notes secured by the assets and stock of EOIR.
We filed a current report on Form 8-K/A dated September 13, 2004 (File
# 000-28863) (the "Form 8-K/A") to amend the Initial 8-K to include the
Financial Statements of EOIR and the Pro Forma Financial Information relating to
Markland's acquisition of EOIR. THE FORM 8-K/A IS ATTACHED HERETO AND
INCORPORATED BY REFERENCE.
___________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS SEPTEMBER 13, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest September 13, 2004 (June 30, 2004)
event reported) ----------------------------------
MARKLAND TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA
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(State or Other Jurisdiction of Incorporation)
000-28863 84-1331134
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(Commission File Number) (IRS Employer Identification No.)
#207
54 DANBURY ROAD
RIDGEFIELD, CT 06877 06877
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(203) 894-9700
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
n/a
- --------------------------------------------------------------------------------
(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))
TABLE OF CONTENTS
-----------------
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
- --------------------------------------------
(a) FINANCIAL STATEMENTS OF EOIR
----------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 4
FINANCIAL STATEMENTS
Audited Balance Sheets as of December 31, 2002 and December 31, 2003 5
Unaudited Balance Sheet as of March 31, 2004 5
Audited Statements of Income for the Years Ended December 31, 2002 and 7
December 31, 2003
Unaudited Statement of Income for the Three Months Ended March 31, 2004 7
Audited Statements of Retained Earnings for the Years Ended December 31, 2002 8
and December 31, 2003
Unaudited Statements of Retained Earnings for the Three Months Ended March 8
31, 2004
Audited Statements of Cash Flows for the Years Ended December 31, 2002 and 9
December 31, 2003
Unaudited Statement of Cash Flows for the Three Months Ended March 31, 2004 9
NOTES TO THE FINANCIAL STATEMENTS 10
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION 20
-----------------------------------------
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2004 21
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended June 30, 2003 23
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended March 31, 2004 24
Notes to the Unaudited Pro Forma Consolidated Financial Statements 25
SIGNATURES 27
- ----------
EXHIBIT 23.1
- ------------
-2-
ITEM 9.01 FINANCIAL STATEMENT AND EXHIBITS
As previously reported on a Current Report on Form 8-K dated June 29,
2004 (filed on June 30, 2004) (the "Initial 8-K"), on Markland Technologies,
Inc. ("Markland") acquired all of the outstanding stock of E-OIR Technologies,
Inc. ("EOIR") for $8 million in cash and $11 million in principal amount of five
year notes secured by the assets and stock of EOIR.
This Form 8-K/A is being filed to amend the Initial 8-K to include the
Financial Statements of EOIR and the Pro Forma Financial Information relating to
Markland's acquisition of EOIR referred to below. Such information should be
read in conjunction with the Initial 8-K.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The following report, financial statements and notes thereto are filed herewith:
o report of Wolf & Company, P.C., independent registered public
accounting firm
o audited balance sheets as of December 31, 2002 and December 31,
2003
o unaudited balance sheet as of March 31, 2004
o audited statements of income for the years ended December 31, 2002
and December 31, 2003
o unaudited statement of income for the three months ended March 31,
2004
o audited statements of retained earnings for the years ended
December 31, 2002 and December 31, 2003
o unaudited statement of retained earnings for the three months
ended March 31, 2004
o audited statements of cash flows for the years ended December 31,
2002 and December 31, 2003
o unaudited statement of cash flows for the three months ended March
31, 2004
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is filed herewith:
o unaudited pro forma consolidated balance sheet as of March 31,
2004
o unaudited pro forma consolidated statement of operations for the
year ended June 30, 2003
o unaudited pro forma consolidated statement of operations for the
nine months ended March 31, 2004
o notes to the unaudited pro forma consolidated financial statements
(c) THE FOLLOWING MATERIAL IS FILED AS AN EXHIBIT HERETO:
23.1 Consent of Wolf & Company, P.C.
-3-
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
E-OIR Technologies, Inc.
Spotsylvania, Virginia
We have audited the accompanying balance sheets of E-OIR Technologies, Inc. as
of December 31, 2003 and 2002, and the related statements of income, retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 E-OIR Technologies, Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
As described in Note 1, these financial statements represent the operations of
the Company that were acquired by Markland Technologies, Inc. on June 29, 2004
and do not include the Company's wholly-owned subsidiary, RMS Enterprises, LLC,
which was distributed to the Company's stockholders prior to the acquisition.
\s\ Wolf & Company, P.C.
Boston, Massachusetts
September 9, 2004
-4-
E-OIR TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002 AND MARCH 31, 2004 (UNAUDITED)
DECEMBER 31,
MARCH 31, ---------------------------
2004 2003 2002
------------ ------------ ------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 484,035 $ 547,830 $ 1,095,314
Accounts receivable 5,856,227 6,497,452 2,982,533
Other receivable -- 1,557 54,200
Prepaid expenses 70,930 68,507 61,662
Other current assets -- 19,268 29,962
------------ ------------ ------------
TOTAL CURRENT ASSETS 6,411,192 7,134,614 4,223,671
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Computers and equipment $ 1,482,777 $ 1,435,342 $ 1,323,874
Furniture and fixtures 190,660 186,837 180,669
Vehicles 140,090 140,090 116,926
Software 131,214 128,965 115,930
Structures 274,569 274,569 274,569
------------ ------------ ------------
2,219,310 2,165,803 2,011,968
Less accumulated depreciation and amortization (1,486,800) (1,408,917) (1,089,281)
------------ ------------ ------------
732,510 756,886 922,687
------------ ------------ ------------
OTHER ASSETS
Unbilled receivable 60,000 60,000 60,000
------------ ------------ ------------
$ 7,203,702 $ 7,951,500 $ 5,206,358
============ ============ ============
See report of independent registered public accounting firm and notes to financial statements.
-5-
E-OIR TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002 AND MARCH 31, 2004 (UNAUDITED)
DECEMBER 31,
MARCH 31, ------------------------
2004 2003 2002
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
CURRENT LIABILITIES
Accrued expenses and payroll taxes $1,001,796 $ 863,273 $ 959,561
Accounts payable 3,978,220 5,418,594 1,679,006
Unearned revenue 296,227 312,682 540,313
Current maturities on long-term debt 285,834 287,037 412,331
Other current liabilities 53 16,827 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 5,562,130 6,898,413 3,591,211
----------- ----------- -----------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 216,087 286,932 451,631
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share;
15,000 shares authorized, 12,000
shares issued and outstanding 12,000 12,000 12,000
Retained earnings 1,413,485 754,155 1,151,516
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,425,485 766,155 1,163,516
----------- ----------- -----------
$7,203,702 $7,951,500 $5,206,358
=========== =========== ===========
See report of independent registered public accounting firm and notes to financial statements.
-6-
E-OIR TECHNOLOGIES, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
2004 2003 2002
------------- ------------- -------------
(UNAUDITED)
Revenues $ 12,308,321 $ 42,680,858 $ 30,570,936
------------- ------------- -------------
Direct costs:
Salaries 1,841,211 6,202,424 5,701,613
Team members and subcontractors 5,969,225 22,367,388 10,533,123
Travel 98,568 453,422 390,983
Materials 1,894,099 4,830,447 6,912,369
Other 94 3,453 33,478
------------- ------------- -------------
TOTAL DIRECT COSTS 9,803,197 33,857,134 23,571,566
------------- ------------- -------------
GROSS PROFIT 2,505,124 8,823,724 6,999,370
------------- ------------- -------------
Operating expenses:
Indirect salaries and employee benefits 1,061,244 3,650,809 3,505,468
Materials and supplies 9,861 44,297 60,997
Utilities 23,985 83,160 83,998
Taxes 212,637 670,667 612,663
Travel 16,260 112,445 128,226
Insurance 33,886 110,282 89,946
Consultants 10,027 35,311 16,306
Legal 2,125 35,662 197
Accounting fees 13,447 44,180 13,700
Training 10,289 22,253 19,055
Maintenance 3,507 28,873 30,024
Advertising 8,689 70,614 46,128
Rent 37,113 136,179 121,052
Relocation 2,057 1,456 18,036
Miscellaneous 13,829 82,344 79,397
Computer network support 60,211 174,353 164,454
Depreciation and amortization 78,626 319,636 199,151
------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,597,793 5,622,521 5,188,798
------------- ------------- -------------
OPERATING INCOME 907,331 3,201,203 1,810,572
------------- ------------- -------------
Other income and (expenses):
Interest income 5,943 12,541 21,133
Interest expense (5,695) (30,239) (22,291)
Other expense (1,595) (18,159) (17,585)
------------- ------------- -------------
TOTAL OTHER (EXPENSE), NET (1,347) (35,857) (18,743)
------------- ------------- -------------
NET INCOME $ 905,984 $ 3,165,346 $ 1,791,829
============= ============= =============
See report of independent registered public accounting firm and notes to financial statements.
-7-
E-OIR TECHNOLOGIES, INC.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
2004 2003 2002
------------ ------------ ------------
(UNAUDITED)
Balance, beginning of period $ 754,155 $ 1,151,516 $ 1,294,088
Net income 905,984 3,165,346 1,791,829
Distributions, including advances to
unconsolidated subsidiary (246,654) (3,562,707) (1,934,401)
------------ ------------ ------------
Balance, end of period $ 1,413,485 $ 754,155 $ 1,151,516
============ ============ ============
See report of independent registered public accounting firm and notes to
financial statements.
-8-
E-OIR TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
2004 2003 2002
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 905,984 $ 3,165,346 $ 1,791,829
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 78,626 319,636 199,151
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 642,782 (3,408,076) (66,354)
Prepaid expenses (2,423) (6,845) (41,458)
Other assets 19,268 10,694 (11,119)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1,301,851) 3,143,300 (365,143)
Other current liabilities (16,774) 16,827 --
Unearned revenue (16,455) (227,631) 540,313
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 309,157 3,013,251 2,047,219
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (54,250) (208,035) (668,541)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (54,250) (208,035) (668,541)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 141,584 944,233
Principle payments on long-term debt (72,048) (431,577) (135,444)
Distributions, including advances to unconsolidated subsidiaries (246,654) (3,062,707) (1,934,401)
------------ ------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES (318,702) (3,352,700) (1,125,612)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (63,795) (547,484) 253,066
Cash and Cash Equivalents:
Beginning 547,830 1,095,314 842,248
------------ ------------ ------------
Ending $ 484,035 $ 547,830 $ 1,095,314
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 5,695 $ 30,239 $ 22,291
============ ============ ============
NONCASH INVESTING AND FINANCING TRANSACTIONS:
Distributions payable $ -- $ 500,000 $ --
============ ============ ============
See report of independent registered public accounting firm and notes to financial statements.
-9-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION:
E-OIR Technologies, Inc. (the "Company") was incorporated on June
1, 1981 under the laws of the State of Virginia. The Company
provides research and engineering services to a variety of
Defense and Intelligence Community customers. The Company's
technical services include design and fabrication of sensor
systems for military and intelligence community applications.
These efforts involve systems engineering, system integration,
prototyping, field collections as well as data analysis and
processing. Substantially all of the Company's revenues are
derived from approximately twenty Government contracts with ten
different U.S. Government agencies.
Effective June 29, 2004, Markland Technologies, Inc., a
publicly-traded Florida corporation ("Markland"), acquired 100%
of the Company's outstanding common stock in conjunction with a
Stock Purchase Agreement dated June 29, 2004 ("the Acquisition").
Markland agreed to pay the stockholders of the Company
$19,000,000, consisting of $8,000,000 in cash and promissory
notes of $11,000,000. Additionally, Markland issued certain
members of the Company's management team options to purchase
approximately $4,000,000 of Markland common stock. As a result of
this transaction, the Company became a wholly owned subsidiary of
Markland effective June 29, 2004.
Prior to the effective date of the Acquisition, the Company was a
100% owner of RMS Enterprises, LLC ("RMS"). RMS is involved in
the hospitality industry and owns two hotels and a restaurant in
the Fredericksburg, Virginia area. Immediately prior to the
Acquisition, the stock of RMS was distributed to the former
owners of the Company and was therefore not acquired by Markland.
Since RMS was not acquired by Markland, its operations are
completely separate from and unrelated to those of the Company,
and no costs or expenses relating to RMS have been incurred by
the Company, RMS has been excluded from these financial
statements. The Company had advanced amounts to RMS as follows:
December 31,
March 31, -------------------------
2004 2003 2002
----------- ----------- -----------
Cumulative advances to RMS $5,288,696 $5,046,642 $2,483,937
=========== =========== ===========
-10-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
For purposes of these financial statements, all amounts advanced
to RMS have been treated as distributions to stockholders in the
year in which they were advanced.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes all
cash accounts which are not subject to withdrawal restrictions or
penalties.
REVENUE RECOGNITION
Revenues from time and materials contracts are recognized as
costs are incurred.
Revenues from firm fixed price contracts are recognized on the
percentage-of-completion method, either measured based on the
proportion of costs recorded to date on the contract to total
estimated contract costs or measured based on the proportion of
labor hours expended to date on the contract to total estimated
contract labor hours, as specified in the contract.
Provisions for estimated losses on all contracts are made in the
period in which such losses become known. Changes in job
performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions, and
final contract settlements may result in revision to cost and
income and are recognized in the period in which the revisions
are determined.
The Company participates in teaming agreements where they are the
primary contractor and they participate with other organizations
to provide services to the Federal government. The Company has
managerial and oversight responsibility for team members as well
as the responsibility for the ultimate acceptability of
performance under the contract. The Company includes as revenues
the amounts that they bill under the teaming arrangements and
include as direct costs amounts that are reimbursable or paid to
team members. The amounts earned under teaming agreements with
other organizations and included in the Company's revenues were
$11,829,186 and $6,236,141 for the years ended December 31, 2003
and 2002, respectively, and $1,380,215 for the three months ended
March 31, 2004.
Unearned revenue represents cash collections in excess of revenue
earned on firm fixed price contracts. Unearned revenue is
determined as follows at December 31,:
2003 2002
------------ ------------
Unearned revenue, beginning of period $ 540,313 $ --
Billings 808,035 1,034,000
Costs and profit (1,035,666) (493,687)
------------ ------------
Unearned revenue, ending of period $ 312,682 $ 540,313
============ ============
-11-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
Accounts receivable represent the amount invoiced by the Company
under contracts. An allowance for doubtful accounts is determined
based on management's best estimate of probable losses inherent
in the accounts receivable balance. Management assesses the
allowance based on known trouble accounts, historical experience
and other currently available evidence. The Company's receivables
are due entirely from government contracts. The Company has not
experienced any losses in accounts receivable and has provided no
allowance at March 31, 2004, December 31, 2003 and December 31,
2002. If management determines amounts to be uncollectible, they
will be charged to operations when that determination is made.
Unbilled receivables represent a contract withholding which the
Company expects to collect at the conclusion of the contract.
DEPRECIATION AND AMORTIZATION
Property and equipment are depreciated using straight-line
methods over the estimated useful lives of assets as follows:
Computers and equipment 3 years
Furniture and fixtures 5-7 years
Vehicles 5 years
Software 3 years
Structures Shorter of lease term or
useful life
ACCRUED COMPENSATED ABSENCES
Full-time employees receive annual leave based upon length of
employment. Annual leave is paid to employees upon termination of
employment and has been accrued in the financial statements.
INCOME TAXES
The Company, with the consent of its stockholders, elected to
have its earnings taxed under Subchapter S of Chapter 1 of the
Internal Revenue Code of 1986, as amended. Accordingly, for both
Federal and state tax purposes, the Company's net income is taxed
to the stockholders on their individual tax returns. Therefore,
no provision for income taxes is recognized in the financial
statements. On the effective date of the Acquisition (see above),
the Company forfeited its status as a Subchapter S corporation.
-12-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary
cash investments and trade receivables. The Company places their
temporary cash investments at financial institutions. However, a
portion of temporary cash investments exceed FDIC insured levels.
Substantially all contract revenue is generated from contracts
with Federal government agencies. Consequently, substantially all
accounts receivable are due from Federal government agencies
either directly or through other government contractors. One
contract with the U.S. Army represented 86% and 87% of total
revenue for years ended December 31, 2003 and 2002, respectively,
and 86% and 57% of account receivables at December 31, 2003 and
2002, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change
in the near term relate to the revenue recognized under
percentage completion method firm fixed price contracts,
allowance for doubtful accounts and the estimated useful lives of
property and equipment.
SHIPPING COSTS
Delivery and shipping costs are included in contract revenue and
direct costs in the accompanying statements of income.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as
incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets.
This statement is effective for fiscal years beginning after
December 15, 2001. The adoption of this statement did not have
any material impact on the Company's financial position or
results of operations.
-13-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. The adoption of
SFAS No. 146 did not have a material effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an
Amendment of FASB Statement No. 123." This Statement provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends disclosure
requirements to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The FASB has prescribed a tabular
format and location for the disclosures. No stock-based employee
compensation cost is reflected in operations, as there are no
options or other forms of stock-based compensation 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.
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 adoption of FIN 46 did not
have any effect on the Company's financial statements, as the
Company does not have any variable interest entities.
-14-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity." This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability. Many of those instruments were previously
classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
statement did not have any impact on our financial position or
results of operations.
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 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. No impairment charges
were recorded in the years ended December 31, 2003 and 2002 and
the three month ended March 31, 2004.
-15-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2. LONG-TERM DEBT
The Company's long-term debt consists of the following as of
December 31, 2003 and 2002:
2003 2002
--------- ---------
Wachovia Bank, secured by a SUV, dated
November, 2001 with monthly payments of
$877 including interest of 6.1% $ 28,012 $ 36,515
Chrysler Finance Company, secured by a van,
dated April, 2000 with monthly payments
of $405 including interest of 4.9% 1,562 6,224
First Market Bank, secured by research equipment,
dated October, 2002 with monthly payments of
$3,715 including interest of LIBOR plus 2.75%
(3.87% and 4.13%, respectively) 162,335 206,915
Virginia Community Bank, construction loan for
leasehold improvements, dated September 20, 2002
with monthly payments of interest only of 6% -- 171,253
First Market Bank, dated July, 2002 with monthly
payments of $15,278 plus interest of LIBOR plus
2.75%, (3.87% and 4.13%, respectively) 277,030 443,055
First Market Bank, secured by leasehold improvements,
dated March 19, 2003 with monthly payments of
$3,514 including interest of 5.05% 85,376 --
American Honda Finance, secured by automobile,
dated March 24, 2003 with monthly payments of
$406 including interest of 4.70% 19,654 --
--------- ---------
$573,969 $863,962
========= =========
Future debt maturities are as follows for the years ending:
December 31
2004 $ 287,037
2005 195,838
2006 57,467
2007 33,469
2008 158
------------
Total $ 573,969
============
-16-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
All required principle and interest payments on the above
long-term debt were made in the three months ended March 31,
2004. As of March 31, 2004, the current and non-current portion
of long-term debt were $285,834 and $216,087, respectively.
Interest expense was $30,239, $22,291 and $5,695 for the years
ended December 31, 2003 and 2002 and the three months ended March
31, 2004, respectively.
NOTE 3. LINE OF CREDIT
A $500,000 line of credit was established with Virginia Community
Bank in October 1999. It is secured by current accounts
receivable with variable interest at the prime lending rate. No
balance is outstanding at March 31, 2004, December 31, 2003 or
December 31, 2002. The line of credit was extended subsequent to
year end, increased to $600,000 and expires in April, 2005.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company rents certain office space from a company owned by a
minority stockholder of the Company. Rent expense related to
these leases was $24,301, $25,748 and $5,949 for the years ended
December 31, 2003 and 2002 and the three months ended March 31,
2004, respectively.
The Company recorded as distributions amounts expended on behalf
of RMS Enterprises, LLC in the amount of $159,821, none and
$42,052 for the years ended December 31, 2003 and 2002 and the
three month ended March 31, 2004, respectively. The Company has
guaranteed certain debt of RMS (see Note 6).
NOTE 5. LEASE COMMITMENTS
The Company leases office spaces for its headquarters, storage,
and two other locations. The lease on the office space at
headquarters is on a month-to-month basis. Minimum monthly rental
payments for the headquarters are $1,983 with adjustments due to
changes in real estate tax levies.
The lease on the Fredericksburg office space requires payments of
$1,530 per month and expires in December 2004.
The Occoquan office is leased for 3 years through September 2005.
Monthly payments for 2003 were $7,452 and are $7,678 thereafter.
Storage space in Stafford is leased on a month-to-month basis
requiring payments of $126 monthly.
-17-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
Minimum annual rentals are as follows for the years ending
December 31,:
2004 $150,735
2005 99,165
---------
Total $249,900
=========
Rent expense for the years ended December 31, 2003 and 2002 and
the three months ended March 31, 2004 was $136,179, $121,052 and
$36,993, respectively.
NOTE 6. CONTINGENCIES
The Company's billings on time and material contracts are based
on provisional general & administrative and overhead rates which
are subject to audit by the contracting government agency. Audits
have been completed for all fiscal years through 2001. The
Company's experience with these audits has generally been
favorable.
The Company has guaranteed certain debt outstanding to RMS
Enterprises, LLC. RMS obtained bank financing totaling $1,543,000
on June 27, 2003, which is due in full at its maturity on
November 30, 2004. For no consideration, the Company agreed to
guarantee the bank debt on behalf of RMS to enable it to obtain a
sufficient level of financing and to obtain a favorable interest
rate. The Company may be required to perform on the guarantee
only in the event of nonpayment of the debt by RMS. The Company
has recourse only to the general credit of RMS should the Company
be required to perform under the guarantee. The majority
stockholder of the Company has also provided the bank a guarantee
of this debt.
Subsequent to year end, in April 2004, the Company guaranteed
certain additional debt to RMS totaling $5,400,000. In August,
2004, the bank fully released Markland of this guarantee.
NOTE 7. PROFIT SHARING PLAN
The Company has adopted a 401(k) plan for the benefit of certain
employees. Essentially all employees are eligible to participate.
Beginning in 2003, the Company also contributes to the plan under
a safe harbor plan requiring a 3% contribution for all eligible
participants. In addition, the Company may
-18-
E-OIR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
contribute a 2% elective match. The Company contributed 5.00% and
5.74% of gross wages, excluding bonuses on an annual basis, to
those who have been employed for more than one year and remain
employed on the last day of the year during the years ended
December 31, 2003 and 2002, respectively. Contributions and other
costs of the plan in 2003 and 2002 aggregated $392,869 and
$284,436, respectively, and $129,711 in the three months ended
March 31, 2004.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to year end, the Company signed lease agreements
totaling approximately $7,901 per month. Two of these agreements
expire December 2004. The third agreement continues until July
2007.
Subsequent to year end, 100% of the Company's outstanding common
stock was acquired by Markland. Immediately prior to the
Acquisition, the Company distributed the stock of its wholly
owned subsidiary, RMS Enterprises, LLC, to it stockholders (see
Note 1).
-19-
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
AND
E-OIR TECHNOLOGIES, 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
March 31, 2004 and the balance sheet of E-OIR Technologies, Inc. ("EOIR") as of
March 31, 2004, 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 EOIR (see note 1 to pro forma consolidated financial statements),
as if the transaction had occurred as of March 31, 2004.
The following unaudited pro forma consolidated statement of operations combine
the results of operations of Markland for the nine months ended March 31, 2004
and the year ended June 30, 2003 with the results of operations of EOIR for the
nine months ended March 31, 2004 and for the twelve months ended June 30, 2003
as if the transaction had occurred as of the beginning of the period. Prior to
its acquisition by Markland, EOIR had a calendar year end.
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 EOIR 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 EOIR'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.
-20-
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Balance Sheet
March 31, 2004
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
------ Markland
Technologies E-OIR
Inc. and Technologies Pro forma
Subsidiaries Inc. Adjustments Pro forma
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
CURRENT ASSETS
- --------------
Cash $ 445,777 $ 484,035 (1) $ (8,000,000) $ 3,703,672
-- -- (1) 2,000,000 --
-- -- (1) 8,773,860 --
Accounts receivable 1,628,058 5,856,227 -- 7,484,285
Inventoried costs 67,615 -- -- 67,615
Other current assets 73,446 130,930 -- 204,376
------------- ------------- ------------- -------------
Total Current Assets 2,214,896 6,471,192 2,773,860 11,459,948
------------- ------------- ------------- -------------
OTHER ASSETS
- ------------
Property and Equipment - net 44,467 732,510 -- 776,977
Intangible assets 8,073,473 -- (1) 17,574,515 25,647,988
------------- ------------- ------------- -------------
Total Other Assets 8,117,940 732,510 17,574,515 26,424,965
------------- ------------- ------------- -------------
TOTAL ASSETS $ 10,332,836 $ 7,203,702 $ 20,348,375 37,884,913
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 985,649 $ 3,978,220 $ -- $ 4,963,869
Accrued expenses and other current liabilities 440,898 1,001,849 (2) 1,214,621 2,657,368
Secured Convertible Promissory Note 479,169 -- -- 479,169
Notes payable 744,838 285,834 (1) 2,200,000 3,230,672
Income taxes payable 151,800 -- -- 151,800
Unearned revenue -- 296,227 -- 296,227
------------- ------------- ------------- -------------
Total Current Liabilities 2,802,354 5,562,130 3,414,621 11,779,105
------------- ------------- ------------- -------------
LONG-TERM DEBT -- 216,087 (1) 8,800,000 9,016,087
------------- ------------- ------------- -------------
Total Liabilities 2,802,354 5,778,217 12,214,621 20,795,192
------------- ------------- ------------- -------------
-21-
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro forma Consolidated Balance Sheet
March 31, 2004
- ---------------------------------------------------------------------------------------------------------------------
Markland
Technologies E-OIR
Inc. and Technologies Pro forma
Subsidiaries Inc. Adjustments Pro forma
------------- ------------- ------------- -------------
(unaudited) (unaudited)
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDERS' EQUITY
- --------------------
Series A redeemable convertible preferred stock 300,000 -- -- 300,000
Series C 5% Cumulative redeemable convertible
preferred stock 1 -- -- 1
Series D redeemable convertible preferred stock 2 -- (1) -- 2
Common stock 1,132 12,000 (1) (12,000) 2,425
-- -- (1) 1,293 --
Additional paid in capital 24,706,912 1,413,485 (1) 8,772,567 35,479,479
(1) 2,000,000 --
(1) (1,413,485)
(1) 3,947,000 3,947,000
Unearned compensation (2,828,034) -- (1) (3,947,000) (6,775,034)
Retained Earnings (accumulated deficit) (14,649,531) -- (2) (1,214,621) (15,864,152)
------------- ------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 7,530,482 1,425,485 9,348,375 17,089,721
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,332,836 $ 7,203,702 $ 20,348,375 $ 37,884,913
============= ============= ============= =============
-22-
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2003
- -------------------------------------------------------------------------------------------------------------------------
Markland E-OIR
Technologies Technologies Pro forma
Inc. and Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ----------- -------------
REVENUES $ 658,651 $ 33,656,066 $ -- $ 34,314,717
COST OF REVENUES 445,218 26,254,401 -- 26,699,619
------------- ------------- ----------- -------------
GROSS PROFIT 213,433 7,401,665 -- 7,615,098
------------- ------------- ----------- -------------
OPERATING EXPENSES
Selling, general and administrative 1,186,379 5,173,339 -- 6,359,718
Research and development 522,657 -- -- 522,657
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
Depreciation and amortization -- 280,864 -- 280,864
------------- ------------- ----------- -------------
TOTAL OPERATING EXPENSES 3,827,526 5,454,203 -- 9,281,729
------------- ------------- ----------- -------------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (3,614,093) 1,947,462 -- (1,666,631)
------------- ------------- ----------- -------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 226,751 35,743 (2) 678,456 940,950
Other expense (income), net (5,250) (18,031) -- (23,281)
------------- ------------- ----------- -------------
TOTAL OTHER EXPENSES (INCOME), NET 221,501 17,712 678,456 917,669
------------- ------------- ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,835,594) 1,929,750 (678,456) (2,584,300)
Income taxes -- -- (3) -- 0
------------- ------------- ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,835,594) 1,929,750 (678,456) (2,584,300)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series C 501,755 -- -- 501,755
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS - Series D 4,107,500 -- 400,000 (1) 4,507,500
PREFERRED STOCK DIVIDEND - Series C 152,716 -- -- 152,716
------------- ------------- ------------ -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (8,597,565) $ 1,929,750 $(1,078,456) $ (7,746,271)
============= ============= ============ =============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (1.72) $ (0.42)
============= =============
Weighted Average Number of Common Shares Outstanding, as
Adjusted for September, 2003 reverse stock split 5,002,724 13,282,083 18,284,807
============= ============ =============
-23-
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2004
- -------------------------------------------------------------------------------------------------------------------------
Markland E-OIR
Technologies Technologies Pro forma
Inc. and Inc. Adjustments Pro forma
Subsidiaries (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ----------- -------------
REVENUES $ 5,382,341 $ 36,060,706 $ -- $ 41,443,047
COST OF REVENUES 4,486,512 28,904,511 -- 33,391,023
------------- ------------- ----------- -------------
GROSS PROFIT 895,829 7,156,195 -- 8,052,024
------------- ------------- ----------- -------------
OPERATING EXPENSES
Selling, general and administrative 2,337,298 4,273,446 -- 6,610,744
Research and development 49,139 -- -- 49,139
Compensatory element of stock issuance for selling,
general and administrative fees 2,543,561 -- -- 2,543,561
Amortization of intangible assets 566,667 -- -- 566,667
Depreciation and amortization 9,000 234,808 243,808
------------- ------------- ----------- -------------
TOTAL OPERATING EXPENSES 5,505,665 4,508,254 -- 10,013,919
------------- ------------- ----------- -------------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (4,609,836) 2,647,941 -- (1,961,895)
------------- ------------- ----------- -------------
OTHER EXPENSES (INCOME), NET:
Interest expenses 266,960 19,275 536,165 822,400
Other expense (income), net -- (11,099) -- (11,099)
------------- ------------- ----------- -------------
TOTAL OTHER EXPENSES (INCOME), NET 266,960 8,176 536,165 811,301
------------- ------------- ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (4,876,796) 2,639,765 (536,165) (2,773,196)
Income taxes -- -- (3) -- --
------------- ------------- ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (4,876,796) 2,639,765 (536,165) (2,273,196)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 1,180,500 -- -- 1,180,500
PREFERRED STOCK DIVIDEND - Series C 186,322 -- -- 186,322
------------- ------------- ----------- -------------
LOSS FROM CONTINUING OPERATIONS APPLICABLE
TO COMMON STOCKHOLDERS $ (6,243,618) $ 2,639,765 $ (536,165) $ (4,140,018)
============= ============= =========== =============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.97) $ (0.21)
============= =============
Weighted Average Number of Common Shares Outstanding 6,438,758 13,282,083 19,720,841
============= =========== =============
-24-
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACQUISITION OF EOIR AND RELATED FUNDING
On June 29, 2004, Markland Technologies, Inc. ("Markland") acquired all of the
outstanding stock of E-OIR Technologies, Inc. ("EOIR") for $8 million in cash
and $11 million in principal amount of five year notes secured by the assets and
stock of EOIR. EOIR is a provider of technology and services to the US Army
Night Vision Laboratories and has expertise in wide area remote sensing using
both electro-optic and infrared technologies. Markland intends to continue to
use the assets of EOIR for this purpose. 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 $3,500,000 per year.
In connection with this acquisition, Markland has also adopted a Stock Incentive
Plan pursuant to which Markland has issued options to purchase 9,345,740 shares
of its common stock to key employees of EOIR who are continuing employment
following the acquisition for an exercise price of $.3775 per share. These
options will vest in five equal annual installments. Markland also granted to
one key employee of EOIR who is continuing employment following the acquisition,
options to purchase an additional number of shares equal to $471,983 divided by
one-half of the market price for the common stock at the date of vesting. These
options will vest in five equal annual installments. Markland has also agreed to
grant options to purchase an additional 5,000,000 shares of common stock to
employees of EOIR in the future. We expect that these options will vest over
five years after the date of grant and will have an exercise price equal to the
fair market value of the common stock on the date of grant.
In connection with this acquisition, Markland also raised $2 million through a
private placement of an additional 3,500 shares of its Series D Preferred Stock
to a single institutional investor. The Series D preferred stock is convertible
at the option of the stockholder at any time. The number of shares of our common
stock into which each share of Series D preferred is convertible is determined
by dividing $1,000 by the discounted bid price. The "discounted" bid price is
the average closing bid price of our common stock during the five business days
immediately preceding the conversion date multiplied by the applicable discount
factor, as set forth below.
- --------------------------------------------------------------------------------
AVERAGE CLOSING BID PRICE (1) DISCOUNT FACTOR
---------------------------------------------------- ---------------
$15.00 or less 80%
more than $15.00, but less than or equal to $30.00 75%
more than $30.00, but less than or equal to $45.00 70%
more than $45.00 65%
--------------------
(1) After an adjustment for a 1-for-60 reverse stock split effective October 27,
2003.
-25-
The Series D preferred stock can be converted only to the extent that the Series
D stockholder will not, as a result of the conversion, hold in excess of 9.999%
of the total outstanding shares of our common stock. For a complete description
of the terms and conditions of the Series D Preferred Stock please refer to
Markland's Form 10-K for the fiscal year ended June 30, 2003.
Between March 31, 2004 and June 30, 2004 the Company completed three private
placements, issuing a total of 13,232,083 shares of common stock plus additional
warrants for total proceeds of $9,679,000 ($8,773,860 net of issuance costs).
On April 2, 2004, the Company issued 3,333,333 shares of common stock and
warrants to purchase 3,333,333 shares of our common stock at $1.00 per share to
three institutional investors for consideration of $2,000,000,($1,750,000 net of
expenses). The Company also issued a warrant to purchase 333,333 share of common
stock.
On April 16, 2004, the Company issued 2,500,000 shares of common stock and
warrants to purchase 2,500,000 shares of common stock at $1.50 per share to ten
institutional investors for consideration of $2,000,000,($1,890,000 net of
expenses). The Company also issued warrants to purchase 25,000 shares of common
stock at $2.00 per share.
On April 20, 2004, the Company issued in the aggregate 300,000 shares to the
three investors in our April 2, 2004 private placement in consideration of their
consent to permit the Company proceed with a private placement that was
subsequently consummated on May 3, 2004. The Company also issued warrants to
purchase 50,000 shares of common stock to counsel for these investors in
connection with this transaction.
On May 3, 2004, the Company issued an aggregate of 7,098,750 shares of common
stock and redeemable warrants to purchase 7,098,750 shares of our common stock
at $1.50 per share to 26 institutional investors and 8 individual investors for
consideration of $5,679,000 ,$5,133,860 net of expenses).
NOTE 2 - PRO FORMA INTEREST EXPENSE
The Pro forma interest expense for the year ended June 30, 2003 and nine months
ended March 31, 2004, assuming the $11,000,000 loan was outstanding for this
period amounts to $678,456 and $536,165, respectively at an interest rate of 6%
compounded monthly.
NOTE 3 -PRO FORMA INCOME TAXES
EOIR's income tax expense for the twelve months ended June 30, 2003 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
EOIR. EOIR's income tax expense for the nine months ended March 31, 2004 was
also eliminated on the same basis.
-26-
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 hereunto duly authorized.
Markland Technologies, Inc.
Date: September 13, 2004
By: /S/ Kenneth P. Ducey, Jr.
---------------------------
Name: Kenneth P. Ducey, Jr.
Title: President and Chief Financial Officer
-27-
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
23.1 Consent of Wolf & Company, P.C.
-28-
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors of Markland Technologies, Inc.:
We hereby consent to the incorporation by reference in the registration
statement (No. 333-115395) on Form SB-2 of Markland Technologies, Inc. of our
report dated September 9, 2004, with respect to the balance sheets as of
December 31, 2003 and 2002 and the related statements of income, retained
earnings and cash flows for the years then ended of E-OIR Technologies, Inc.
("EOIR"), which report appears in this current report on Form 8-K/A. Our report
indicates that the financial statements were prepared to present the operations
of E-OIR Technologies, Inc. acquired by Markland Technologies, Inc. on June 29,
2004 and do not include EOIR's wholly-owned subsidiary, RMS Enterprises, LLC,
which was distributed to EOIR's stockholders prior to the acquisition.
\s\ Wolf & Company, P.C.
Boston, Massachusetts
September 13, 2004