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HomeMy WebLinkAbout2018 SEP Reviewed Financial Statements CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) C O N T E N T S P A G E Independent Accountant's Review Report - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 Consolidated Balance Sheet - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 Consolidated Statement of Operations - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3 Consolidated Statement of Changes in Stockholder’s Equity - - - - - - - - - - - - - - - - - - - - - - - - - - 4 Consolidated Statement of Cash Flows - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5 Notes to Consolidated Financial Statements - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6-12 HILL, BARTH & KING LLC | 1000 SE MONTEREY COMMONS BLVD., SUITE 101 STUART FLORIDA 34996 | TEL 772-287-4480 FAX 772-288-0371 | HBKCPA.COM - 1 - March 30, 2019 Board of Directors Southeastern Printing Company, Inc. and Subsidiary Stuart, Florida Independent Accountant's Review Report We have reviewed the accompanying consolidated financial statements of Southeastern Printing Company, Inc. and Subsidiary, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the year then ended, and related notes to the consolidated financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the consolidated financial statements as a whole. Accordingly, we do not express such an opinion. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement whether due to fraud or error. Accountant's Responsibility Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the consolidated financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion. Accountant's Conclusion Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America. Certified Public Accountants CONSOLIDATED BALANCE SHEET SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) See accompanying notes to consolidated financial statements - 2 - CURRENT ASSETS Cash and cash equivalents 435,417$ Receivables - NOTE C 5,665,617 Inventories - NOTE D 1,447,519 Prepaid expenses 240,815 TOTAL CURRENT ASSETS 7,789,368 PROPERTY AND EQUIPMENT - NOTE E 7,275,181 OTHER ASSETS - NOTE G 307,594 DERIVATIVE UNDER INTEREST RATE SWAP - NOTE L 19,080 15,391,223$ LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable 1,545,442$ Accrued expenses 1,069,547 Customer deposits 548,699 Current portion of long-term debt - NOTE I 410,904 TOTAL CURRENT LIABILITIES 3,574,592 LONG-TERM DEBT - NOTE I 3,285,394 STOCKHOLDER'S EQUITY - NOTE J Common stock - $.10 par value: Authorized 10,000 shares; issued and outstanding 1,232 shares 123 Additional paid-in capital 3,214,539 Retained earnings 5,297,495 Accumulated other comprehensive income 19,080 TOTAL STOCKHOLDER'S EQUITY 8,531,237 15,391,223$ CONSOLIDATED STATEMENT OF OPERATIONS SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY Year ended December 31, 2018 (See Independent Accountant's Review Report) See accompanying notes to consolidated financial statements - 3 - OPERATING INCOME Net sales 34,373,307$ Other operating income: Freight recovery 1,392,676 Waste recovery 282,400 36,048,383 Cost of goods sold: Materials, outside services and freight 13,576,720 VALUE ADDED 22,471,663 Other fixed and variable cost of goods sold 14,574,201 GROSS PROFIT 7,897,462 OPERATING EXPENSES Selling expenses 4,332,221 Administrative expenses 1,882,826 TOTAL OPERATING EXPENSES 6,215,047 INCOME FROM OPERATIONS 1,682,415 OTHER INCOME (DEDUCTIONS) Gain on disposal of property and equipment 96,885 Miscellaneous (268,529) Interest expense (182,412) (354,056) NET INCOME 1,328,359 OTHER COMPREHENSIVE INCOME Increase in fair value of interest rate swap 34,878 COMPREHENSIVE INCOME 1,363,237$ CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY Year ended December 31, 2018 (See Independent Accountant's Review Report) See accompanying notes to consolidated financial statements - 4 - COMMON STOCK No changes 123$ ADDITIONAL PAID-IN CAPITAL No changes 3,214,539 RETAINED EARNINGS Beginning of year 3,969,136 Net income 1,328,359 End of year 5,297,495 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Beginning of year (15,798) Changes 34,878 End of year 19,080 TOTAL STOCKHOLDER'S EQUITY AT END OF YEAR 8,531,237$ CONSOLIDATED STATEMENT OF CASH FLOWS SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY Year ended December 31, 2018 (See Independent Accountant's Review Report) See accompanying notes to consolidated financial statements - 5 - CASH FLOWS FROM OPERATING ACTIVITIES Net income 1,328,359$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,089,081 Gain on disposal of property and equipment (96,885) Provision for doubtful accounts 26,041 (Increase) decrease in assets: Accounts receivable (520,679) Inventories (291,478) Prepaid expenses 16,622 Other assets (55,261) Increase (decrease) in liabilities: Accounts payable (693,640) Accrued expenses and deferred gain 852 Customer deposits 133,735 NET CASH PROVIDED BY OPERATING ACTIVITIES 936,747 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 639,000 Purchase of property and equipment (1,865,671) Repayments on notes receivable 75,000 NET CASH USED IN INVESTING ACTIVITIES (1,151,671) CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt (412,575) NET CASH USED IN FINANCING ACTIVITIES (412,575) NET DECREASE IN CASH AND CASH EQUIVALENTS (627,499) CASH AND CASH EQUIVALENTS Beginning of year 1,062,916 End of year 435,417$ SUPPLEMENTAL DISCLOSURE Cash paid for interest 182,412$ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 6 - NOTE A - NATURE OF OPERATIONS Established in 1924, Southeastern is a “time tested” purveyor of imagery, reproducing client designed images on glossy paper and other fine substrates. Southeastern has won more industry related awards than any other commercial printing company in the history of Florida. As the printing industry has evolved, so has Southeastern by expanding value-added services to best serve our clients. These services include building on-line store fronts where clients can organize their artwork, order and manage their inventory, and track logistics with ease. Our mailing and fulfillment department employs the most advanced methods for postal processing. Additional specialties include grand format printing and branded promotional products. Established in 1921, FDC Print, LLC has been reproducing graphic communications for almost a century. With a focus on quality and superior customer service, FDC Print, LLC remains as one of the premier printing companies in South Florida. FDC Print, LLC offers offset and digital printing, wide format printing, mailing and fulfillment services, warehousing, online Storefronts, and branded promotional products. In March 2017, Franklin Dodd officially changed its name to Southeastern Printing. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Southeastern Printing Company, Inc. and its wholly-owned subsidiary, FDC Print, LLC. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents: The Company considers highly liquid debt instruments purchased with original maturity dates of three months or less to be cash equivalents. Trade Accounts Receivable: Trade accounts receivable are presented in the balance sheet net of an allowance for doubtful accounts. The potential risk is limited to the amount recorded in the financial statements. Receivables are written off when they are determined to be uncollectible. The allowance for doubtful accounts is based on specific identification of the amounts that are considered uncollectible. Inventories: Inventories are generally stated at lower of cost or net realizable value using the first-in, first-out method, but certain items are determined by specific identification. The Company also capitalizes certain indirect costs associated with work-in-process to properly match revenue and expense in the same period. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 7 - NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment: The Company capitalizes property and equipment acquisitions with a useful life of three years or more and an original cost of $5,000 or more. Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the following estimated useful lives: Lives Building and improvements 10 - 40 Years Machinery, equipment and vehicles 3 - 10 Years Advertising Costs: The Company expenses the production costs of advertising as incurred. Advertising expense for the year ended December 31, 2018 was $55,971. Income Taxes: The Company, with the consent of its stockholder, has elected to have its income taxed as an S corporation under Section 1362 of the Internal Revenue Code. As such, the Company does not pay corporate income taxes and is not allowed net operating tax loss carrybacks or carryovers as deductions. Instead, the stockholder includes his proportionate share of the Company's taxable income or loss in his individual income tax return. Derivative Instruments: The Company uses derivatives to manage risks related to interest rate movements. Interest rate swap contracts designated and qualifying as cash flow hedges are reported at fair value. The gain or loss on the effective portion of the hedge initially is included as a component of other comprehensive loss and is subsequently reclassified into earnings when interest on the related debt is paid. The Company’s interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable- rate debt to a fixed rate. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events: Management evaluated all activity of the Company through March 30, 2019, the date the consolidated financial statements were available to be issued, and concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements or notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 8 - NOTE C - RECEIVABLES Following is a summary of receivables as of December 31, 2018: Trade accounts receivable 5,342,340$ Other receivables 302,428 Related party receivable - affiliates 110,303 5,755,071 Less allowance for doubtful accounts 89,454 5,665,617$ NOTE D - INVENTORIES Following is a summary of inventories as of December 31, 2018: Raw materials 290,189$ Work-in-process 965,756 Finished goods 191,574 1,447,519$ NOTE E - PROPERTY AND EQUIPMENT Following is a summary of property and equipment as of December 31, 2018: Land 135,659$ Buildings and improvements 1,578,205 Machinery and equipment 8,889,841 Computer equipment and software 941,819 Furniture and fixtures 309,121 Vehicles 95,069 Construction in progress 1,197,839 13,147,553 Less accumulated depreciation and amortization 5,872,372 7,275,181$ Depreciation expense totaled $1,081,994 at December 31, 2018. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 9 - NOTE F - CONCENTRATIONS OF CREDIT RISK The Company maintains its cash balances in two financial institutions. These balances are insured by the Federal Deposit Insurance Corporation subject to various limits and conditions. At December 31, 2018, the uninsured amounts held at these financial institutions totaled $356,269. The Company made purchases from two vendors totaling approximately $5,857,000 in 2018, which comprises more than 10% of total purchases for the year ended December 31, 2018. As of December 31, 2018, the Company had accounts payable to these vendors totaling approximately $555,000. NOTE G - OTHER ASSETS Following is a summary of other assets as of December 31, 2018: Deposits 102,060$ Employee advance 218 Goodwill 107,875 Customer list, net of accumulated amortizaton of $8,859 97,441 307,594$ During 2017, the Company acquired intellectual property from the purchase of a customer list from Dutton Press, Inc. in the amount of $106,300. The customer list is subject to periodic amortization over the estimated useful life of 15 years. Amortization expense totaled $7,087 at December 31, 2018. Amortization expense for each of the next five years is $7,087 each year. NOTE H - OPERATING LEASES The Company leases equipment and facilities under operating leases extending to December 2024. In addition, the Company leases various equipment as needed. Monthly payments range from $200 to $31,900. Rental expense charged to operations totaled $883,210 for the year ended December 31, 2018. See Note J for related party lease. Following is a summary of future minimum rental payments under operating leases that have initial or remaining non-cancellable terms in excess of one year as of December 31, 2018: 2019 1,045,784$ 2020 974,656 2021 772,174 2022 627,264 2023 505,032 Thereafter 382,800 4,307,710$ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 10 - NOTE I - LONG-TERM DEBT Following is a summary of long-term debt at December 31, 2018: Installment Note Payable, $786 per month including interest at 4.89% through July 2019, collateralized by a vehicle 5,284$ JPMorgan Chase Bank - Note Payable, $4,040 monthly principal payments plus interest equal to LIBOR plus 2.45% for 119 months with a balloon payment payment due November 29, 2026, collateralized by real estate and other specific assets of the Company 1,905,300 Peoples Capital Loan - Note Payable, $29,762 monthly prinicpal payments plus interest equal to LIBOR plus 2.40% through December 2023, collateralized by specific assets of the Company 1,785,714 3,696,298 Less principal due within one year 410,904 TOTAL LONG-TERM DEBT 3,285,394$ The Company's debt agreements contain certain financial covenants that require specific debt service coverage and leverage, and financial guarantees. In addition, the notes have restrictions on indebtedness, business combinations and other related items. As of December 31, 2018, the Company is in compliance with all covenants. Principal due on long-term debt for the five years following December 31, 2018 and thereafter is as follows: 2019 410,904$ 2020 408,038 2021 410,383 2022 412,798 2023 415,570 Thereafter 1,638,605 TOTAL 3,696,298$ The JPMorgan Chase Bank note bears interest at LIBOR plus 2.45%. However, the Company entered into an interest rate swap contract that effectively converts the interest rate on the note to 2.35% plus 2.45%. Under the swap contract, the Company pays interest at 2.45% and receives interest at LIBOR. The notional amount under the swap decreases as principal payments are made on the note so that the notional amount equals the principal outstanding under the note. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 11 - NOTE I - LONG-TERM DEBT (CONTINUED) The swap is designed to hedge the risk of changes in interest payments on the note caused by changes in LIBOR. The swap was issued at market terms so that it had no fair value at its inception. The carrying amount of the swap has been adjusted to its fair value at the end of the year, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swap. The asset is classified as noncurrent since management does not intend to settle it during 2019. Since the critical terms of the swap and the note are the same, the swap is assumed to be completely effective as a hedge, and none of the change in its fair value is included in net income. Accordingly, all of the adjustment of the swap's carrying amount is reported as other comprehensive income. NOTE J - CONTROLLING INTEREST AND RELATED PARTY TRANSACTIONS Controlling Interest: All of the outstanding common stock is owned by one individual. Related Party Transactions: The Company has trade payables to its affiliate, SEP Communications, LLC (SEPC) totaling $18,879 at December 31, 2018 and has trade receivables due from SEPC totaling $88,794 at December 31, 2018. The Company leases a facility that is owned by its affiliate, 8th Street, LLC. Under a written lease agreement, the Company paid rent to its affiliate totaling $320,700 in 2018. The Company has a related party receivable due from 8th Street, LLC totaling $26,296 at December 31, 2018. See Note C for related party notes receivable. NOTE K - DEFINED CONTRIBUTION PLAN The Company sponsors a 401(k) plan for eligible employees with its affiliate SEP Communications, LLC. The plan covers all full time employees after 90 days of service and reaching the age of twenty-one. Under the terms of the plan, employees are eligible to defer up to 100% of their compensation not to exceed the IRS Code Section limits. For eligible employees, the plan provides for safe harbor matching contributions by the Company equal to 100% of employee salary deferrals that do not exceed 3% of employee compensation plus 50% of salary deferrals between 3% and 5% of compensation. The plan also provides for discretionary contributions by the Company up to 4% of employee compensation. The 401(k) matching expense totaled $121,449 for the year ended December 31, 2018. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOUTHEASTERN PRINTING COMPANY, INC. AND SUBSIDIARY December 31, 2018 (See Independent Accountant's Review Report) - 12 - NOTE L - FAIR VALUE MEASUREMENTS The Company’s derivative asset, or swap agreement, is valued based on the current rates offered to the Company for debt of the same remaining maturities and fall within Level 2 in the fair value hierarchy with a balance of $19,080 as of December 31, 2018. NOTE M - LINE OF CREDIT The Company has a line of credit with a domestic commercial bank for $1,500,000, which matures on November 29, 2019. The line of credit bears interest at the LIBOR plus 2.00% and/or the CB Floating Rate (4.46% and 5.50%, respectively, at December 31, 2018) and is secured by assets of the Company. No balance was outstanding at December 31, 2018. Borrowings under the line are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combination and other related items. The financial covenants have not been met and the banks have waived such noncompliance.