EXHIBIT 99.1
Independent Auditor’s Report
To the Stockholder
CMAC, Inc.
We have audited the accompanying balance sheets of CMAC, Inc. (a Georgia corporation), as of December 31, 2010 and 2009 and the related statements of income, stockholders’ equity, 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 auditing standards generally accepted in the 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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.
As more fully described in Note 1, due to the stock purchase on December 31, 2010, the Company’s tax status changed to a C corporation. In our opinion, accounting principles generally accepted in the United States require that deferred taxes be reported in the financial statements. Management has chosen not to report deferred taxes. The effects of this departure from accounting principles generally accepted in the United States on the financial position, results of operations, and cash flows of CMAC, Inc. have not been determined.
In our opinion, except for the effects of not recording deferred income taxes as described in the preceding paragraph, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of CMAC, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
WINDHAM BRANNON, P.C.
Atlanta, Georgia
February 25, 2011
| CMAC, Inc. | |
| | | | | | | |
| Balance Sheets | |
| | | | | | | |
| December 31, | | 2010 | | | 2009 | |
| Assets | | | | | | |
| Current | | | | | | |
| Cash | | $ | 185,865 | | | $ | 86,551 | |
| Accounts receivable, net of allowance for doubtful | | | | | | | | |
| accounts of $30,000 as of 12/31/10 and $20,000 as of 12/31/09 | | | 1,621,845 | | | | 938,813 | |
| Prepaid expenses | | | 20,336 | | | | 35,286 | |
| Total current assets | | | 1,828,046 | | | | 1,060,650 | |
| Property and equipment | | | 80,304 | | | | 121,686 | |
| Other assets | | | 42,618 | | | | 41,710 | |
| | | $ | 1,950,968 | | | $ | 1,224,046 | |
| Liabilities and stockholders' equity (deficit) | | | | | | | | |
| Current | | | | | | | | |
| Line of credit | | $ | - | | | $ | 287,122 | |
| Loans from stockholders | | | - | | | | 331,539 | |
| Accounts payable | | | 681,330 | | | | 1,007,781 | |
| Sales tax payable | | | 28,104 | | | | 140,349 | |
| Due to related party | | | 1,182,096 | | | | - | |
| Current portion of capital lease payable | | | - | | | | 6,153 | |
| Current portion of deferred rent payable | | | 5,230 | | | | 4,685 | |
| Accrued expenses | | | 244,538 | | | | 101,736 | |
| Total current liabilities | | | 2,141,298 | | | | 1,879,365 | |
| Deferred rent payable, net of current portion | | | 33,548 | | | | 37,310 | |
| Stockholders' equity (deficit) | | | (223,878 | ) | | | (692,629 | ) |
| | | $ | 1,950,968 | | | $ | 1,224,046 | |
See accompanying notes to financial statements.
| | CMAC, Inc. | |
| | | | | | | |
| Statements of Income | |
| | | | | | | |
| Years ended December 31, | | 2010 | | | 2009 | |
| Sales | | $ | 10,247,930 | | | $ | 6,898,633 | |
| Cost of goods sold | | | 7,396,895 | | | | 4,923,664 | |
| Gross margin | | | 2,851,035 | | | | 1,974,969 | |
| Selling, general and administrative expenses | | | 2,137,890 | | | | 1,898,405 | |
| Operating income | | | 713,145 | | | | 76,564 | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (98,259 | ) | | | (61,494 | ) |
| Interest income | | | 20,923 | | | | 16,980 | |
| Gain (loss) on disposal of property and equipment | | | 10,721 | | | | (12,301 | ) |
| Stock compensation expense | | | (247,000 | ) | | | - | |
| Management fees | | | 114,500 | | | | - | |
| Other income | | | 8,935 | | | | 9,469 | |
| | | | (190,180 | ) | | | (47,344 | ) |
| Net income | | $ | 522,965 | | | $ | 29,220 | |
See accompanying notes to financial statements.
| | | | | | CMAC, Inc. | |
| | | | | | | | | | | | | | | | |
| | | | | | Statements of Stockholders' Equity | |
| | | | | | | |
| | | Common stock; no par; 20,000,000 voting and 1,000,000 non-voting shares authorized | | | Retained | | | | |
| | | Voting | | | Non-voting | | | (deficit) | | | | |
| | | shares | | | shares | | | Amount | | | earnings | | | Total | |
| | | | | | | | | | | | | | | | |
| Balance December 31, 2008 | | | 4,000,000 | | | | - | | | $ | 41,417 | | | $ | (452,088 | ) | | $ | (410,671 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 29,220 | | | | 29,220 | |
| | | | | | | | | | | | | | | | | | | | | |
| Distributions | | | - | | | | - | | | | - | | | | (311,178 | ) | | | (311,178 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2009 | | | 4,000,000 | | | | - | | | | 41,417 | | | | (734,046 | ) | | | (692,629 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 522,965 | | | | 522,965 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stock issued | | | - | | | | 340,426 | | | | 247,000 | | | | - | | | | 247,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Distributions | | | - | | | | - | | | | - | | | | (301,214 | ) | | | (301,214 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2010 | | | 4,000,000 | | | | 340,426 | | | $ | 288,417 | | | | (512,295 | ) | | $ | (223,878 | ) |
| | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
| CMAC, Inc. | |
| | | | | | | |
| Statements of Cash Flows | |
| | | | | | | |
| Years ended December 31, | | 2010 | | | 2009 | |
| Cash flows from operating activities | | | | | | |
| Cash received from customers | | $ | 9,554,897 | | | $ | 7,657,424 | |
| Cash paid to suppliers and employees | | | (9,515,595 | ) | | | (6,848,497 | ) |
| Interest paid | | | (98,259 | ) | | | (61,494 | ) |
| Interest received | | | 20,923 | | | | 16,980 | |
| Other cash receipts | | | 123,435 | | | | 9,469 | |
| Net cash (used) provided by operating activities | | | 85,401 | | | | 773,882 | |
| Cash flows from investing activities | | | (161,595 | ) | | | 773,882 | |
| Proceeds from sales of property and equipment | | | 12,800 | | | | - | |
| Purchases of property and equipment | | | (7,956 | ) | | | (34,726 | ) |
| Net cash provided (used) by investing activities | | | 4,844 | | | | (34,726 | ) |
| Cash flows from financing activities | | | | | | | | |
| Net repayments on line of credit | | | (287,122 | ) | | | (401,718 | ) |
| Advances from related party | | | 1,182,096 | | | | - | |
| Repayment of capital lease obligations | | | (6,152 | ) | | | (12,301 | ) |
| Additions on stockholder notes payable | | | - | | | | 96,538 | |
| Repayment of stockholder notes payable | | | (331,539 | ) | | | (45,000 | ) |
| Distributions to stockholders | | | (301,214 | ) | | | (311,178 | ) |
| Net cash provided (used) by financing activities | | | 256,069 | | | | (673,659 | ) |
| Net increase in cash | | | 99,314 | | | | 65,497 | |
| Cash at beginning of year | | | 86,551 | | | | 21,054 | |
| Cash at end of year | | $ | 185,865 | | | $ | 86,551 | |
See accompanying notes to financial statements.
| CMAC, Inc. | |
| | | | | | | |
| Statements of Cash Flows (Continued) | |
| | | | | | | |
| Years ended December 31, | | 2010 | | | 2009 | |
| | | | | | | |
| Reconciliation of net income to net cash (used) provided | | | | | | |
| by operating activities | | | | | | |
| Net income | | $ | 522,965 | | | $ | 29,220 | |
| Adjustments to reconcile net income (loss) to net cash | | | | | | | | |
| provided by operations: | | | | | | | | |
| Depreciation and amortization | | | 47,258 | | | | 67,079 | |
| (Gain) loss on sale of property and equipment | | | (10,721 | ) | | | 12,301 | |
| Stock compensation expense | | | 247,000 | | | | - | |
| Change in allowance for doubtful accounts | | | 10,000 | | | | 20,000 | |
| Change in deferred rent payable | | | (3,217 | ) | | | 41,995 | |
| (Increase) decrease in: | | | | | | | | |
| Accounts receivable | | | (693,033 | ) | | | 758,791 | |
| Prepaid expenses | | | 14,950 | | | | (16,331 | ) |
| Other assets | | | (909 | ) | | | (16,098 | ) |
| Increase (decrease) in: | | | | | | | | |
| Accounts payable | | | (326,451 | ) | | | (138,700 | ) |
| Sales tax payable | | | (112,246 | ) | | | 30,514 | |
| Accrued expenses | | | 142,803 | | | | (14,889 | ) |
| Net cash provided (used) by operations | | $ | (161,599 | ) | | $ | 773,882 | |
| | | | | | | | | |
| Noncash investing and financing activities | | | | | | | | |
| Reclass and valuation adjustment of accounts receivable | | | | | | | | |
| to other assets | | $ | - | | | $ | 13,589 | |
| | | | | | | | | |
See accompanying notes to financial statements.
CMAC, Inc.
Notes to Financial Statements
| 1. | Nature of Operations and Summary of Significant Accounting Policies |
| | CMAC, Inc. (the Company) provides logistics and systems integration services in supply chain, third party logistics, production/manufacturing, warehouse/distribution and transportation management. |
| | On December 23, 2010, the Company and its stockholders entered into a Stock Purchase Agreement with DecisionPoint Systems, Inc. (DecisionPoint) whereby the stockholders would sell all of their shares to DecisionPoint. The transaction closed on |
| | December 31, 2010 and the Company became a wholly-owned subsidiary of DecisionPoint on that date. The accompanying financial statements do not include changes in the carrying amounts of assets and liabilities that may result from the application of acquisition accounting by DecisionPoint. |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts receivable
Management reviews the collectability of its accounts receivable by analyzing each customer’s balance and credit history. Accounts receivable are charged off when, in management’s judgment, the likelihood of collection is remote. Accounts receivable are considered delinquent when payment is not received within the terms of the invoice, which is generally 30 days.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
CMAC, Inc.
Notes to Financial Statements (Continued)
Nature of Operations and Summary of Significant Accounting Policies (Continued)
Property and equipment (Continued)
| | | Life-Years |
| | | |
| Furniture and equipment | | 5-7 |
| Vehicles | | 5 |
| Software | | 3 |
| | | |
Assets under capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets at the inception of the leases. Assets under capital lease are amortized using the straight line method over their estimated useful life of five years.
Income taxes
Until December 31, 2010, the Company and its stockholders had elected, under the provisions of Subchapter S of the Internal Revenue Code (IRC), to have the corporate earnings and losses passed through to the stockholders and reported on their individual income tax returns. Accordingly, the financial statements of the Company did not reflect any federal and state income tax expense or benefit. With the sale of the Company’s stock to DecisionPoint a C corporation, the Company’s S corporation election was automatically terminated and, effective December 31, 2010, the Company became a C corporation under the IRC for income tax reporting purposes.
A C corporation is required by generally accepted accounting principles to report deferred income tax assets and liabilities for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Income tax expense is the income tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities. Management has not determined, and the accompanying financial statements do not include, the deferred income tax assets or liabilities which should be recognized as a result of the change in tax status, nor income tax expense for the one day in 2010 for which the Company was a C corporation.
Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities and may change upon examination.
CMAC, Inc.
Notes to Financial Statements (Continued)
| 1. | Nature of Operations and Summary of Significant Accounting Policies (Continued) |
Revenue recognition
The Company recognizes revenue when services are performed or when products are shipped.
Presentation of sales tax
The Company operates in states and jurisdictions that impose a sales tax on sales to non-exempt customers. The Company collects sales tax from customers and remits it to the state and jurisdiction in which the sale occurred. The Company’s accounting policy is to exclude the tax collected and remitted from revenues and cost of sales.
Shipping and handling
Shipping and handling fee revenue is included in net sales, and shipping and handling costs incurred are primarily included in cost of sales.
Subsequent Events
Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through February 24, 2011, which is the date the financial statements were available to be issued.
| | | 2010 | | | 2009 | |
| | | | | | | |
| Furniture and equipment | | $ | 170,311 | | | $ | 163,644 | |
| Vehicles | | | - | | | | 191,593 | |
| Software | | | 57,072 | | | | 57,072 | |
| | | | 227,383 | | | | 412,309 | |
| | | | | | | | | |
| Accumulated depreciation and amortization | | | (147,079 | ) | | | (290,623 | ) |
| | | $ | 80,304 | | | $ | 121,686 | |
Depreciation and amortization expense totaled $47,258 for 2010 and $67,079 for 2009. Vehicles as of December 31, 2009 included two trucks totaling $56,598 recorded under capital leases. Accumulated amortization on these assets was $51,254 as of December 31, 2009.
CMAC, Inc.
Notes to Financial Statements (Continued)
Hardware sales made up 61% of 2010 revenue and 59% of 2009 revenue. One hardware sales vendor accounted for 72% and 59% of December 31, 2010 and 2009 accounts payable and 88% and 76% of 2010 and 2009 hardware purchases. Management considers purchases and accounts payable greater than 25% from one vendor to be a concentration.
One customer accounted for 44% and 27%. of December 31, 2010 and 2009 accounts receivable. Sales to this customer accounted for 35% of sales for the year ended December 31, 2010. Management considers accounts receivable and sales greater than 25% to one customer to be a concentration.
4. Line of Credit
Effective October 20, 2009, the Company has a receivables financing agreement with a financial institution and a bank that allowed the Company to borrow up to the lesser of $750,000 or 75% of accounts receivable balances not greater than 90 days past invoice date. Interest on borrowings outstanding under the agreement was Prime plus 2.5%, plus service fees of 70 basis points per month of the average daily principal balance of all loans outstanding during the month. On December 31, 2010 DecisionPoint (Notes 1 and 7) paid off the line of credit balance of $520,979 and closed the facility.
Until October 24, 2009 the Company had a line of credit with a financial institution that allowed them to borrow up to the lesser of $1,000,000 or 75% of accounts receivable not greater than 90 days past invoice date. Interest on borrowings outstanding under the agreement was Prime plus 5%. Accounts receivable were pledged as collateral, and two stockholders were guarantors.
The Company leases office facilities, vehicles and office equipment under operating leases. Future minimum rental payments required under the operating leases are:
| | | | |
| | | | |
| 2011 | | $ | 149,522 | |
| 2012 | | | 100,790 | |
| 2013 | | | 102,349 | |
| 2014 | | | 100,497 | |
| Thereafter | | | 33,734 | |
| | | $ | 486,892 | |
Rent expense was $122,558 for 2010 and $145,198 for 2009.
CMAC, Inc.
Notes to Financial Statements (Continued)
The Company has a 401(k) Plan for all full time employees who have completed six months of employment. Employees may contribute up to 100% of their eligible compensation to the Plan, subject to the limits of the Internal Revenue Code. The Company may make discretionary profit sharing contributions. No profit sharing contributions were made for 2010 or 2009.
| 7. | Related Party Transactions |
Interlink Logistics Technologies, Inc. (ILT) and Applied Technical Resources, Inc. (ATR) were related to the Company through common ownership. ILT is a distributor of an automated material replenishment product designed for automotive and lean manufacturing, supply chain and container/freight management. ATR recruits and provides job placement for information technology, supply chain and various engineering disciplines.
The Company assessed ILT management fees of $114,500 and billed consulting fees of $26,500 for 2010. The Company has a receivable from ILT in the amount of $26,500 as of December 31, 2010. There were no transactions with ATR for 2010 or 2009.
Notes payable to two stockholders total $230,000 as of December 31, 2009. The notes are unsecured, due on demand, and effective January 1, 2010 carry interest rates of 24% and 12%. The Company periodically makes advances to and receivesadvances from stockholders. Effective January 1, 2010 outstanding balances carry interest at 12%, are unsecured and due on demand. During 2009 two stockholders advanced the Company $96,539 and the Company repaid $45,000 of the advances. During 2010 the Company repaid the notes payable and advances totaling $331,539 to the two stockholders, plus $52,777 in interest.
In December 2010 the stockholders purchased from the Company four vehicles and some computer equipment for $12,800. The Company recorded a gain of $10,720 on the sales.
On December 31, 2010, DecisionPoint Systems, Inc. closed the Company line of credit by paying the outstanding balance of $520,979 and paid a major vendor $661,117 for amounts due.
CMAC, Inc.
Notes to Financial Statements (Continued)
Recorded cash surrender value totaling $14,855 as of December 31, 2009 and $29,604 as of December 31, 2010 relates to buy/sell life insurance premiums that have been paid by the Company on behalf of certain stockholders on policies owned by the Company. The amounts are included in other assets.
One past due trade receivable, net of a $50,000 valuation allowance, was transferred to other assets as of December 31, 2009. On November 1, 2010 the Company received a consent judgment for the amount due totaling $63,715 (including $16,943 of accrued interest at 15%). Management recorded a valuation allowance of $63,715 against the receivable as of December 31, 2010.
On October 29, 2010 the Board of Directors and the stockholders adopted a resolution to issue 340,426 shares of non-voting common stock to three employees. No consideration was received for the stock and compensation expense of $247,000 was recorded for the fair value of the stock issued. Fair value was determined based on the selling price of the stock in the December 2010 sale to DecisionPoint.
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