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Financial Statement Template Financial Statement Template Document Transcript

  • Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers Financial Report December 31, 2004 McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities.
  • Contents Independent Auditor’s Report 1 Financial Statements Statements of financial position 2 Statements of activities 3 Statements of cash flows 4 Notes to financial statements 5 - 12
  • Independent Auditor’s Report To the Board of Trustees Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers Minneapolis, Minnesota We have audited the accompanying statements of financial position of Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers (Augsburg Fortress), as of December 31, 2004 and 2003, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of Augsburg Fortress’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Augsburg Fortress as of December 31, 2004 and 2003, and the results of its activities and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Minneapolis, Minnesota March 24, 2005 McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities. 1
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Statements of Financial Position December 31, 2004 and 2003 Assets 2004 2003 Current Assets Cash and cash equivalents $ 966,866 $ 1,025,492 Accounts receivable, less allowance for doubtful accounts and sales returns of $456,636 and $482,658, respectively 5,013,389 4,718,298 Note receivable, current portion (Note 2) 20,000 20,000 Inventory (Note 2) 8,229,587 8,479,258 Prepaid expenses and deposits 449,066 496,142 Royalty advances, current portion 135,775 175,628 Total current assets 14,814,683 14,914,818 Investments and Other Assets Investments (Note 3) 7,697,915 7,067,165 Royalty advances, less current portion 407,326 526,881 Note receivable, less current portion (Note 2) 85,000 105,000 8,190,241 7,699,046 Leasehold Improvements and Equipment, net (Note 2) 3,174,865 3,574,940 $ 26,179,789 $ 26,188,804 Liabilities and Net Assets Current Liabilities Line of credit (Note 4) $ 2,051,834 $ 1,726,000 Accounts payable 5,842,510 4,141,102 Accrued expenses 2,096,549 2,019,658 Subscriptions paid in advance 2,232,814 2,191,971 Total current liabilities 12,223,707 10,078,731 Accrued Pension Expense (Note 5) 5,332,040 3,903,851 Additional Minimum Pension Liability (Note 5) 6,513,814 4,539,295 Accrued Postretirement Benefits (Note 5) 1,638,448 1,643,194 Deferred Rent 339,992 321,014 Deferred Grant Revenue 46,800 - Total liabilities 26,094,801 20,486,085 Commitments and Contingencies (Note 6) Unrestricted Net Assets Board-designated (Note 3) - 5,999,679 Undesignated 84,988 (296,960) Total unrestricted net assets 84,988 5,702,719 $ 26,179,789 $ 26,188,804 See Notes to Financial Statem ents. 2
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Statements of Activities Years Ended December 31, 2004 and 2003 2004 2003 Net revenues $ 43,251,138 $ 45,625,623 Cost of sales 21,128,444 22,500,880 Gross margin 22,122,694 23,124,743 Operating expenses: Program-related expenses 21,250,246 21,070,751 Administrative expenses 4,760,315 5,749,445 Costs related to discontinuation of product line (Note 7) 278,959 - 26,289,520 26,820,196 Operating loss (4,166,826) (3,695,453) Other income (expense): Net realized and unrealized gains on investments 372,874 1,006,208 Interest and dividends, net of investment management fees of $24,465 and $58,284, respectively 114,297 83,160 Abandonment of software development - (891,664) Other, net (67,749) (36,053) Total other income (expense) 419,422 161,651 Net loss (3,747,404) (3,533,802) Foreign currency translation adjustments 104,192 342,144 Minimum pension liability addition (Note 5) (1,974,519) (387,481) Decrease in unrestricted net assets (5,617,731) (3,579,139) Unrestricted net assets at beginning of year 5,702,719 9,281,858 Unrestricted net assets at end of year $ 84,988 $ 5,702,719 See Notes to Financial Statements. 3
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Statements of Cash Flows Years Ended December 31, 2004 and 2003 2004 2003 Cash Flows From Operating Activities Decrease in unrestricted net assets $ (5,617,731) $ (3,579,139) Adjustm ents to reconcile decrease in unrestricted net assets to net cash provided by operating activities: Depreciation 1,317,213 1,602,928 M inim um pension liability addition 1,974,519 387,481 Loss on sale of equipm ent 2,570 12,668 Net realized and unrealized gains on investm ents (372,874) (1,006,208) Abandonm ent of software developm ent - 891,664 Changes in: Accounts receivable (295,091) (195,170) Inventory 249,671 496,754 Other current assets and royalty advances 166,631 (103,282) Accounts payable 1,701,408 514,158 Accrued expenses and deferred revenues 1,605,965 1,023,116 Subscriptions paid in advance 40,843 276,116 Net cash provided by operating activities 773,124 321,086 Cash Flows From Investing Activities Purchase of investm ents (44,367,356) (92,606,184) Proceeds from sale of investments 44,109,480 92,532,305 Paym ents for purchase of equipment (919,708) (352,020) Paym ents received on note receivable 20,000 20,000 Net cash used in investing activities (1,157,584) (405,899) Cash Flows From Financing Activities Net proceeds from short-term line of credit 325,834 823,000 Net cash provided by financing activities 325,834 823,000 Increase (decrease) in cash and cash equivalents (58,626) 738,187 Cash and Cash Equivalents at Beginning of Year 1,025,492 287,305 Cash and Cash Equivalents at End of Year $ 966,866 $ 1,025,492 Supplem ental Disclosures of Cash Flow Information Interest paid $ 79,345 $ 36,680 See Notes to Financial Statem ents. 4
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 1. Nature of Business and Significant Accounting Policies Nature of business: The operations of the Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers (Augsburg Fortress), consist of publishing, production and distribution of church- related materials. Augsburg Fortress is the publishing house of the Evangelical Lutheran Church in America. Funded solely through sales revenue, Augsburg Fortress is called to provide products and services that communicate the Gospel, enhance faith and enrich the life of the Church from a Lutheran perspective. Summary of significant accounting policies: Canadian operations: Revenues, expenses and cash flows of the Canadian operations have been translated into United States currency using weighted-average exchange rates which approximate rates in effect at the time transactions occurred. Exchange rates in effect at year-end were used to translate asset and liability balances. Differences between the annual weighted-average and year-end rates have been accounted for as cumulative translation adjustments and included as a change in unrestricted net assets. Accumulated foreign currency translation adjustments increased unrestricted net assets by $199,015 and $94,823 at December 31, 2004 and 2003, respectively. Cash equivalents: Augsburg Fortress considers highly liquid investments, except Board-designated investments, with an original maturity of three months or less at the date of acquisition to be cash equivalents. Cash equivalents at December 31, 2004 and 2003, consist primarily of money market funds and short-term commercial paper. Augsburg Fortress maintains its cash in bank accounts which, at times, may exceed federally insured limits. Augsburg Fortress has not experienced any losses in such accounts. Revenue recognition and accounts receivable: Augsburg Fortress recognizes revenue upon shipment and estimates returns if the right of return exists. The allowance for returns as of December 31, 2004 and 2003, was $239,709 and $290,943, respectively. This allowance is recorded as a reduction of accounts receivable. Augsburg Fortress recognizes shipping and handling revenues as part of revenue, and shipping and handling expenses as part of cost of revenues on the statements of activities. Augsburg Fortress provides credit to its customers determined on a customer-by-customer basis. Trade receivables are carried at original invoice amount less an estimate made for the doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts after reviewing individual customer accounts as well as considering both historical and expected credit loss experience. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Inventory: Inventory is stated at the lower of cost or market using the first-in, first-out method. Leasehold improvements and equipment: Leasehold improvements and equipment are recorded at cost. Depreciation is based on the straight-line method over the estimated lives of the assets, as follows: Years Leasehold improvements Life of lease Furniture, fixtures and equipment 3 to 10 Computer equipment and systems 3 to 5 5
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 1. Nature of Business and Significant Accounting Policies (Continued) Royalty advances: Royalty advances, which are recorded as an asset when paid, are expensed when earned by the creative partners. Amounts classified as current assets on the statements of financial position are estimates of amounts expected to be earned within the next 12 months. Amounts expected to be earned after 12 months are classified as other assets. Royalty expense is recognized based on sales by title and included in accrued expenses to the extent the expense exceeds outstanding royalty advances. Payment is made to the creative partners based on their royalty contracts, generally on a semiannual basis. Investments: Investments in securities are reported at fair value, which is based on quoted market prices. The net changes in market prices and the realized gains and losses on investments sold are reflected in the statements of activities as net realized and unrealized losses on securities. Long-lived assets: Augsburg Fortress periodically evaluates the recoverability of long-lived assets to determine potential impairment. If estimated undiscounted future cash flows of its long-lived assets are not sufficient to recover the carrying value, long-lived assets are adjusted to their estimated fair values. Estimated fair value is based on the estimated discounted future cash flows of the long-lived assets. During 2003, it was determined that a software being developed for internal use would not serve the needs of Augsburg Fortress. Development was ceased and the cumulative costs incurred of $891,664, which had previously been recorded as construction in progress, were expensed. Unrestricted net assets: As discussed in Note 3, the Board of Trustees at times will designate certain amounts for future strategic objectives. Remaining unrestricted net assets, if any, arising from the operations of Augsburg Fortress are undesignated. Product development costs: Augsburg Fortress expenses product development costs, including in-house editing, in the period incurred as operating expenses. This method of accounting for development costs conforms with industry practice used by most publishers and recognizes the uncertainty of the recoverability of development costs incurred. Marketing expenses: Marketing expenses, including catalog expenses, are recognized in the statements of activities in the period in which the expenses are incurred. Deferred rent: Rent expense is recorded on a straight-line basis over the life of the lease. Deferred rent results from the difference between actual lease payments made and recorded rent expense. Functional expenses: Expenses are specifically identified with, or allocated to, program-related and administrative functions. Expense allocations are generally computed based on the number of employees performing program or administrative functions. Income tax status: Augsburg Fortress is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and applicable Minnesota statutes. 6
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 1. Nature of Business and Significant Accounting Policies (Continued) 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 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. Reclassifications: Certain amounts in the 2003 statement of financial position have been reclassified to be consistent with the presentation in 2004. These reclassifications had no impact on changes in net assets as previously presented. Note 2. Statement of Financial Position Information Note receivable: The note receivable represents amounts receivable from the sale of the Rio Peidras facility in 2002. The payment terms were renegotiated during 2003, and the note, which accrues interest on outstanding principal at the rate of 5 percent, is due in the following installments: 2005 $ 20,000 2006 20,000 2007 20,000 2008 20,000 2009 25,000 T otal $ 105,000 Inventory: Inventory at December 31, 2004 and 2003, is summarized as follows: 2004 2003 Finished goods $ 10,106,575 $ 10,626,475 Work in process 177,271 371,143 Raw materials 245,000 309,232 10,528,846 11,306,850 Less reserve for obsolescence (2,299,259) (2,827,592) $ 8,229,587 $ 8,479,258 7
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 2. Statement of Financial Position Information (Continued) Leasehold improvements and equipment: Leasehold improvements and equipment at December 31, 2004 and 2003, are summarized as follows: 2004 2003 Leasehold improvements $ 1,258,608 $ 1,266,975 Furniture, fixtures and equipment 3,393,861 3,390,315 Computer equipment and systems 13,969,851 13,182,202 Construction in progress 8,600 2,465 18,630,920 17,841,957 Less accumulated depreciation (15,456,055) (14,267,017) $ 3,174,865 $ 3,574,940 Note 3. Investments The following is a summary of investments at December 31: 2004 2003 Equities $ - $ 4,158,715 Domestic equity mutual funds 4,233,038 - International equity mutual funds 262,886 - U.S. government and agency bonds - 838,448 Money market funds 72,172 1,503,375 Collateralized securities - 90,234 Corporate bonds - 171,846 Corporate bond funds 2,417,159 - Mixed mutual fund 259,271 - Certificates of deposit 453,389 304,547 $ 7,697,915 $ 7,067,165 During 2004, Augsburg Fortress moved a majority of their investments to Thrivent Investment Management. As of December 31, 2004,Thrivent Investment Management acts as both investment advisor and custodian for all investment accounts other than the certificates of deposit. In 1997, the Board of Trustees of Augsburg Fortress established a Capital Reserve Fund of $5,250,000 from proceeds on the sale of the Minneapolis property. These funds and interest earned, limited to reinvestment at the rate of the U.S. Government Consumer Price Index (CPI), were designated by Augsburg Fortress’s Board of Trustees for the future strategic capital needs of Augsburg Fortress. At December 31, 2003, $5,999,679 was classified as Board-designated investments in the statements of financial position. During 2004, the Board of Trustees removed the designation of this fund. All investments are undesignated at December 31, 2004. 8
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 3. Investments (Continued) The following is a summary of income and gains for investments for the years ended December 31, 2004 and 2003: 2004 2003 Interest and dividend income, net $ 114,297 $ 83,160 Realized gains 259,788 142,119 Unrealized gains 113,086 864,089 $ 487,171 $ 1,089,368 Note 4. Line of Credit At December 31, 2003, Augsburg Fortress had a line-of-credit agreement with a bank, which provided for short-term borrowings up to $3,000,000. On January 21, 2003, Augsburg Fortress amended its line of credit, dedicating $300,000 of the line as collateral for a letter of credit. As of December 31, 2004, a $150,000 letter of credit is required as a result of Augsburg Fortress’s lease on its Minneapolis corporate offices. The line of credit expired in April 2004, and the letter of credit expired on December 31, 2004. Augsburg Fortress had amounts outstanding under the short- term line of credit at December 31, 2003, of $1,726,000. In June 2004, Augsburg Fortress obtained a new line-of-credit agreement with a bank, which provides for short-term borrowings through April 30, 2005, up to $3,000,000 at 2.25 percent above LIBOR (4.65 percent at December 31, 2004). Augsburg Fortress had amounts outstanding under this short-term line of credit at December 31, 2004, of $2,051,834. On December 29, 2004, Augsburg Fortress obtained a new letter of credit for $150,000, which continues to secure its lease on its Minneapolis corporate offices. The letter of credit will expire on December 31, 2005. The short-term line of credit is secured by substantially all assets of Augsburg Fortress and is subject to certain restrictive covenants, such as a minimum tangible net worth. Augsburg Fortress was in violation of certain of these covenants at December 31, 2004. However, the violations were waived by the bank. Note 5. Pension and Other Postretirement Benefits Augsburg Fortress has a defined benefit pension plan, which covers certain employees, and defined postretirement benefit plans that provide medical and life insurance for retirees and eligible dependents. The following table summarizes the benefit obligation, fair value of plan assets, and funded status and accrued benefit liability for the years ended December 31: Pension Benefit Other Benefits 2004 2003 2004 2003 Projected benefit obligation $ (38,087,059) $ (34,697,544) $ (1,247,694) $ (1,232,339) Fair value of plan assets 23,511,491 23,989,415 - - Funded status $ (14,575,568) $ (10,708,129) $ (1,247,694) $ (1,232,339) Amounts recorded in financial statements — debit (credit): Accrued benefit expense $ (5,332,040) $ (3,903,851) $ (1,638,448) $ (1,643,194) Additional minimum pension liability (6,513,814) (4,539,295) - - 9
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 5. Pension and Other Postretirement Benefits (Continued) For the pension plan with accumulated benefit obligation in excess of assets at December 31 of the respective years, aggregate amounts were as follows: 2004 2003 Projected benefit obligation $ 38,087,059 $ 34,697,544 Accumulated benefit obligation 35,357,345 32,432,561 Fair value of plan assets 23,511,491 23,989,415 The amounts of contributions, benefits paid from the defined benefit plans and net periodic benefit cost were as follows: Pension Benefit Other Benefits 2004 2003 2004 2003 Benefit payments $ 1,992,589 $ 1,941,130 $ 88,068 $ 85,143 Net periodic benefit cost 1,428,189 1,376,910 83,322 83,255 Employer contributions - 797,689 88,068 85,143 The assumptions used in the measurement of Augsburg Fortress’s benefit obligations are shown in the following table: Pension Benefit Other Benefits 2004 2003 2004 2003 Weighted-average assumptions as of December 31: Discount rate 5.75% 6.25% 5.75% 6.25% Expected return on plan assets 8.50% 8.50% N/A N/A Rate of compensation increase 3.50% 3.50% N/A N/A Augsburg Fortress’s pension plan weighted-average asset allocations at December 31, 2004 and 2003, by asset category, are as follows: Percentage of Plan Assets as of December 31 2004 2003 Equity securities 41.73 39.35 Debt securities 1.15 2.35 Real estate 0.00 0.00 Other 57.12 58.30 T otal 100.00 100.00 The investment policy plan (that applies only to assets not invested in the Aetna General Account) for the Augsburg Fortress pension plan has target allocations of 30 percent to 40 percent for debt, 45 percent to 70 percent for equity and 0 percent to 15 percent for other. 10
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 5. Pension and Other Postretirement Benefits (Continued) The expected long-term rate of return on assets is assumed to be 8.5 percent. This assumption represents the rate of return on plan assets, reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the investment portfolio, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. For measurement purposes, no annual rate of increase in the per capita cost of covered health care benefit was assumed for the 2004 and 2003 liability, as employees are responsible for such increases. Also, the number of employees eligible to receive benefits was assumed to decrease gradually each year to a rate of 5.5 percent for 2007 and remain at that level thereafter. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Pension Other Benefit Benefits 2005 $ 1,949,385 $ 86,258 2006 2,020,102 87,452 2007 2,051,237 85,954 2008 2,092,021 87,935 2009 2,171,422 89,781 2010 – 2014 11,767,678 452,071 Augsburg Fortress expects to contribute $500,000 to the pension plan and $86,258 to the other postretirement benefit plans for the year ending December 31, 2005. Subsequent to December 31, 2004, Augsburg Fortress froze the defined benefit pension plan and implemented a defined contribution benefit plan. Certain participants of the defined benefit pension plan will be allowed to remain active in that plan. Augsburg Fortress also contributes to church-sponsored pension plans, covering employees who are members of the clergy or who are covered under other plans. Pension contributions to all of these plans totaled approximately $126,245 and $157,603 in 2004 and 2003, respectively. Contributions to the various plans are generally based on years of service or hours worked by eligible employees. Note 6. Commitments and Contingencies Agreement with vendor: In accordance with an agreement to outsource the fulfillment of its subscription business to RealTime Publication Services, Inc. (RealTime), RealTime performed the order processing, billing, customer maintenance and label issue responsibilities. Amounts payable to RealTime and expensed for these services were based upon actual time and materials, primarily driven by subscription volume. During 2004 and 2003, Augsburg Fortress paid approximately $937,000 and $810,000, respectively, related to these services. This agreement expired December 31, 2004. 11
  • Publishing House of the Evangelical Lutheran Church in America d/b/a Augsburg Fortress Publishers Notes to Financial Statements Note 6. Commitments and Contingencies (Continued) Operating leases: Augsburg Fortress has various operating lease commitments for the corporate office, warehouses, distribution facilities, retail stores and computer equipment. Several of the leases require Augsburg Fortress to pay a portion of the facilities’ real estate taxes and operating costs in addition to minimum rental payments. The leases expire on various dates through 2010. Lease expense, including real estate taxes and operating costs, amounted to approximately $1,881,000 and $1,917,000 in 2004 and 2003, respectively. Augsburg Fortress did not sublease any of its facilities in 2004 or 2003. Approximate minimum future lease payments at December 31, 2004, excluding Augsburg Fortress’s share of real estate taxes and other operating costs for leases currently being utilized, are as follows: Years ending December 31: 2005 $ 1,296,000 2006 1,068,000 2007 1,021,000 2008 818,000 2009 837,000 T hereafter 132,000 $ 5,172,000 As discussed in Note 4, Augsburg Fortress is required to maintain a $150,000 letter of credit under the terms of the lease agreement for the Minneapolis office. Litigation: Augsburg Fortress is party to various claims and lawsuits from time to time. Augsburg Fortress does not believe there will be any adverse consequences as a result of such matters and, as a result, no amounts have been accrued as of December 31, 2004. Note 7. Discontinuation of Castle Craft Product Line During 2004, management decided to close a Philadelphia location and discontinue the Castle Craft product line that was produced in Philadelphia. During 2004, management communicated this decision to employees, entered into severance agreements, and began negotiations with possible buyers. In February 2005, Augsburg Fortress entered into an agreement to sell the assets of its Castle Craft product line, including inventory, fixed assets, and intangibles. At December 31, 2004, the related assets were written down to their selling price, resulting in a loss of $67,984. Augsburg Fortress also incurred expenses related to the discontinuation of this product line (primarily lease termination and severance costs) of $210,975 during 2004. Net revenues from Castle Craft products were $1,527,000 for the year ended December 31, 2004. 12