PENGANTAR PRATIK PENGAUDAITAN

ASSIGNMENT 14
“COMPLETING THE AUDIT ASSIGNMENT (WUP 13-15)”

Disusun oleh :

Helen Puja Melania 0419115350

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PROGRAM STUDI S1 AKUNTANSI

FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS AIRLANGGA
BANYUWANGI
2021

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12. Identify information you believe should be included in notes to the financial
statements. Draft the notes. You can use last year’s as a guide.

Jawaban :
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Apollo Shoes, Inc.

1. Summary of Significant Accounting Policies

Business activity: The Company develops and markets technologically

superior podiatric athletic products under various trademarks, including
SIREN, SPOTLIGHT, and SPEAKERSHOE.

Marketable Securities: Investments are valued using the market value

method for investments of less than 20%, and by the equity method for
investments greater than 20% but less than 50%.

Cash equivalents: Cash equivalents are defined as highly liquid investments with
original maturities of three months or less at date of purchase.

Inventory valuation: Inventories are stated at the lower of First-in, First-out

(FIFO) or market.

Property & Equipment, Depreciation: Property and equipment are stated

at cost. The Company uses the straight-line method of depreciation for all
additions to property, plant, and equipment.

Net Sales: Sales for 2017 and 2016 are presented net of sales returns and
allowances of $11.1 million, and $4.5 million, respectively, and net of
warranty expenses of $1.2 million, and $1.1 million, respectively.

Net income per common share: Net income per common share is
computed based on the weighted average number of common and common
equivalent shares outstanding for the period.

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Reclassification: Certain amounts have been reclassified to conform to the 2017
presentation.

2. Significant Customers

Approximately 53%, and 15% of sales are to one customer for years ended
December 31, 2017 and 2016, respectively. See note 13.

3. Accounts Receivable

Accounts Receivable consists of the following at December 31:

in thousands 2017 Trade Receivables

$51,515
Less Allowance for Doubtful Accounts ($1,239)
Net Accounts Receivable $50,276

There was no bad expense for the year ended December 31, 2017 . There was
one write off for the year in the amount of $23,810.

4. Inventories

Inventories consist of the following at December 31:

in thousands 2017
Siren $13,226
Speaker $33,748
Spotlight $20,750
$67,724
Less Reserve for Inventory Obsolescence ($10,836)
Ending Inventory $56,888

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5. Property and Equipment

In early 2017 , the Company purchased equipment totaling $1,295,360 to

facilitate internal production of Apollo products. As of January 2018, that
equipment is not yet in operation. In mid-2017 , the Company purchased a
new computer system totaling $1,200,000, including related installation and
consulting services.

Property is stated at cost net of accumulated depreciation. Property and Equipment at

December 31 was as follows:

in thousands 2017
Land $117
Buildings and Land Improvements $624
Machinery, Equipment, and Office Furniture $2,929
Total Land, Plant, and Equipment $3,6
70
Less Accumulated Depreciation ($68
3)
Net Land, Plant, and Equipment $2,9
87

6. Investments and Other Assets

In 2015, the Company invested approximately $0.6 million in a stock for a

35% share in the SHOCK-PROOF SOCKS Company. SHOCK-PROOF
SOCKS did not recognize any income and did not pay any dividends in 2015
or 2016. In 2017 , SHOCK-PROOF SOCKS recognized $3,130,610 in
income, but did not pay any dividends. Accordingly, Apollo recognized
$1,096 thousand in equity earnings. In 2017 , Apollo purchased 20,000
shares of Synergizer Battery Company totaling $330,375. In addition, the
Company decided to write off the legal fees incurred to register the patent for
the PHONESHOE. The asset was originally going to be amortized over 17
years, but the Company decided to write off the remaining $53,840 during

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2017 . Also included in other assets is (i) $1,250,000 in a note receivable
from an employee due in 2054.

7. Debt

At December 31, 2017 , the Company had $44,403,000 outstanding in short-

term borrowings under a $50,000,000 unsecured revolving credit line with a
local financial institution. The line of credit is secured with the Company’s
inventory. The interest rate as of year-end was 9.16%. The due date on this
line of credit is 2018 (revolving).
This line of credit is evaluated annually on June 30th by the lending institution.

At December 31, 2017, the Company had $12,000,000 debt due January 1, 2015.
The interest rate is 8.15%.

Total debt outstanding at December 31, 2017 is $56,403,000.

8. Commitments

The Company’s lease on a second facility and equipment terminated in June

2017 . At that time, all operations were moved to the central headquarters.
Rent expense charged to operations for the years ended December 31, 2017
and 2016 was $1.2 million and $2.6 million, respectively.

9. Income Taxes

The income taxes for 2017 were computed at an effective tax rate of 40.0%, 34.0%
in federal income taxes, and 6.0% in state income taxes.

10. Litigation

On January 5, 2018, a class action lawsuit alleging gross negligence and violation of
implied warranty of merchantability was filed against Apollo Shoes, Inc. for

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$12,000,000. According to Apollo’s attorney, the plaintiff will have serious
problems establishing Apollo’s liability. However, if the plaintiff is
successful, the damages awarded could be substantial. The Company plans
to vigorously defend itself in this action, but it is reasonably possible that the
loss could reach $10,000,000 after legal fees are considered.

On September 12, 2016, Apollo settled a lawsuit brought against the

Company by a competitor for patent infringement. The Company denied any
wrongdoing, but felt the settlement, in the amount of $11,695,000
($19,172,000, net of tax benefit of $7,477,000), would be preferable to a long
litigation process.

11. Related Party Transactions

Apollo purchased a new computer system for $1,000,000 in July 2017 . The
Company paid Josephine Mandeville, a member of the Board of Directors
and the Audit Committee, $200,000 for system analysis consulting with
regard to this purchase of computer equipment.

Apollo buys all of their shoes pre-made from the Anglonesia Rehabilitation
and Reprogramming Institute in Anglonesia. Theodore Horstmann, a
member of the Board of Directors and the Audit Committee, is the Minister
of Commerce of Anglonesia. The Company purchased equipment totaling
almost $1.3 million in early 2017 to facilitate internal production of Apollo
shoes. Apollo received a large shipment of shoes totaling over $8.4 million
from the Institute on December 31, 2017 . As of January 2018, the
production equipment had not yet been put into operation.

The company issued a $1,250,000 loan to Larry Lancaster’s secretary with a 1%

annual interest rate. The note and interest are due in full on June 30, 2017.

12. Employee Benefit Plans

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The Company sponsors a defined-contribution retirement plan covering
substantially all of its employees. Contributions are determined at the
discretion of the Board of Directors. Aggregate contributions made by the
Company to the plans and charged to operations in 2017 , 2016, and 2015
were $3.3 million, $3 million, and $3 million, respectively.

13. Concentrations of Credit Risk

Financial instruments which potentially subject the Company to credit risk

consist principally of trade receivables and interest-bearing investments. The
Company performs ongoing credit evaluations of all of its customers and
generally does not require collateral. The Company places substantially all
of its interest-bearing investments with several major financial institutions.
Corporate policy limits the amount of credit exposure to any one financial
institution.

The Company sells over half of its product to one retail distributor with sales
operations located throughout North America, Europe, and Asia Pacific.
That retail distributor filed for involuntary bankruptcy in November 2017 .
The distributor informed Apollo of the bankruptcy shortly thereafter. A
shipment of shoes totaling over $5.7 million was sent to this distributor
without a purchase order on December 28, 2017 . The distributor denies ever
ordering the shoes. However, Apollo’s management feels that this
distributor will come out of the bankruptcy and be able to pay Apollo the
over $20 million in receivables it owes, including the late December
shipment of $5.7 million.
The $5.7 million sale has been included in revenues.

14. Insurance

As of December 31, 2017 , the Company does not have vehicle liability insurance.
The
Company’s previous policy for such coverage terminated on December 31, 2017.

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13. Draft any management letter comments on anything you believe Apollo
Shoes can do better from an operational economy and/or efficiency
perspective, or methods of strengthening their internal controls.

Jawaban :

Apollo Shoes Inc

Management Letter
6 March 2015

Internal Control Over Financial Reporting

We also audited the effectiveness of the Company’s internal control over

financial reporting as of December 31, 2017, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal
control over financial reporting. Our responsibility is to express an opinion
on the effectiveness of the Company’s internal control over financial
reporting based on our audit. We conducted our audit of internal control over
financial reporting 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
effective internal control over financial reporting was maintained in all
material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such
other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

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 A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting

may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in

internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weaknesses have been identified, but were not included in
management’s assessment. The Company did not maintain effective internal
control over financial reporting relating to revenue and expense recognition.
Although the Company corrected for many of the material misstatements we
found, the Company did not adjust its financial statements for two material
misstatements noted in our report on the Company’s audited financial
statements.

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The material weaknesses were considered in determining the nature, timing
and extent of audit tests applied in our audit of the consolidated financial
statements as of and for the year ended December 31, 2017, of the Company.
In our opinion, because of the effect of the material weaknesses identified
above on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial
reporting as of December 31, 2017, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

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14. Draft an audit report to go with the financial statements you drafted (put it
in the A-series workpapers
APOLLO SHOES, INC.
Going Concern Memo
31 December 2017
Keputusan untuk mengeluarkan pengungkapan going concern adalah sangat
serius sebab berbagai alasan. Sebagai auditor, kami memiliki tanggung jawab
untuk memberikan jaminan yang wajar kepada pemangku kepentingan klien
kami bahwa pernyataan yang dibuat oleh manajemen dalam laporan keuangan
perusahaan adalah sah. Dalam menerbitkan pengungkapan going concern, kami
dapat kehilangan klien karena perusahaan mengalami likuidasi atau klien
bertahan dan tidak likuidasi. Jika pengungkapan going concern tidak sah, terlebih
lagi, kami mengambil risiko litigasi tambahan dari pemegang saham perusahaan
atas hilangnya nilai pemegang saham yang disebabkan di pasar saham ketika
keraguan serius tentang going concern perusahaan menjadi jelas. Jika kami gagal
mengeluarkan pernyataan tentang going concern, kami berisiko menghadapi
litigasi lebih lanjut karena gagal menjalankan kehati-hatian profesional dalam
melakukan audit kami. Dalam kasus ini, kami mempertaruhkan reputasi Kantor
Akuntan Publik kami sebagai penyedia layanan jaminan yang andal. Ada
sejumlah faktor yang membuat kami memiliki keraguan substansial tentang
kemampuan Perusahaan untuk terus bertahan :
1. Perusahaan memiliki sejumlah besar hutang jangka pendek yang tanpa arus
kas masuk yang signifikan, tidak mungkin untuk dibayar pada saat jatuh
tempo.
2. Karyawan Perusahaan, pada tanggal ini, melakukan pemogokan.
3. Perusahaan telah kehilangan pelanggan utamanya, yang mencakup lebih dari
50% penjualan tahun berjalan.
4. Kami memiliki keraguan yang signifikan mengenai apakah Perusahaan dapat
menagih piutang atau menjual persediaannya untuk menghasilkan arus kas
yang positif.

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 Karena masalah ini, penting untuk mengungkapkan keraguan substansial kami
mengenai kemampuan Perusahaan untuk terus berkelanjutan dalam laporan audit
kami.

APOLLO SHOES, INC.

Subsequent Events Memo
31 December 2017

a. Peristiwa kemudian harus diungkapkan karena laporan keuangan diterbitkan setelah

tanggal neraca sebenarnya. Pengguna laporan keuangan berhak memiliki dokumen
(laporan keuangan dan catatan atas laporan keuangan) yang terbaru sejak (hampir)
waktu mereka menerima dan menggunakannya. Oleh karena itu, "peristiwa
kemudian" relevan bagi pengguna ketika mereka menerima laporan keuangan setelah
tanggal neraca.
b. Prosedur Peristiwa Kemudian
• Membaca dan membandingkan laporan keuangan interim.
• Bertanya kepada pejabat dan direktur tentang pernyataan sementara dan hal-
hal penting lainnya.
• Membaca risalah rapat pemegang saham, direktur, dan komite penting lainnya.
• Mendapatkan surat pengacara.
• Mendapatkan representasi klien tertulis.
• Membuat pertanyaan lain dan melakukan pekerjaan lain yang dianggap perlu.
c. Item untuk peristiwa kemudian
1) Pemogokan dan mungkin pengaruhnya terhadap perusahaan
perlu diungkapkan.
2) Mengacu pada audit Apollo Shoes, Inc. pengacara Apollo telah mengonfirmasi
bahwa gugatan class action telah diajukan terhadap Apollo pada tanggal 5
Januari 2015. Gugatan tersebut berisi menuduh kelalaian besar dan pelanggaran
jaminan tersirat untuk dapat diperjualbelikan. Pengacara Apollo juga
menyatakan bahwa meskipun dia yakin bahwa penggugat akan memiliki
masalah dalam menetapkan tanggung jawab Apollo Shoes, ganti rugi yang
diberikan dalam kemenangan penggugat bisa sangat besar. Dia juga

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 memperkirakan bahwa kerugian Apollo Shoes bisa mencapai $ 10.000.000
setelah biaya hukum dipertimbangkan. Gugatan ini harus diungkapkan dalam
catatan yang menyertai laporan keuangan, dan mungkin ditekankan dalam
paragraf tambahan yang dilampirkan pada laporan audit.

A-2

Apollo Shoes, Inc.

Shoetown, ME

Kami yang bertanda-tangan di bawah ini :

1. Nama : Larry Lancaster
Alamat Kantor : Apollo Shoes, Inc.
100 Shoe Plaza
Shoetown, ME 00001
Jabatan : Chairma, President And
CEO
2. Nama : Eric P. Unum
Alamat Kantor : Apollo Shoes, Inc.
100 Shoe Plaza
Shoetown, ME 00001
Jabatan : Vice-President of Finance
Menyatakan Bahwa :

Kami mengakui tanggung jawab kami atas penyajian laporan keuangan yang wajar
sesuai dengan prinsip akuntansi yang berlaku umum.
Kami mengonfirmasi, sejauh pengetahuan dan keyakinan kami, representasi berikut:
1. Laporan keuangan sebagaimana dimaksud di atas laporan keuangan posisi
keuangan, hasil operasi, dan arus kas, disajikan secara wajar sesuai dengan
prinsip akuntansi yang berlaku umum.
2. Kami telah menyediakan untuk Anda semua terkait :
a. Catatan keuangan dan data terkait.
b. Risalah rapat pemegang saham, direksi, dan komite direksi, atau ringkasan
dari rapat terakhir yang belum dibuat risalahnya.

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3) Tidak ada komunikasi dari badan pengatur tentang ketidakpatuhan atau
kekurangan dalam praktik pelaporan keuangan.
4) Tidak ada transaksi material yang belum tercatat dengan baik dalam catatan
akuntansi yang mendasari laporan keuangan.
5) Belum ada—
a. Kecurangan yang melibatkan manajemen atau karyawan yang memiliki
peran signifikan dalam pengendalian internal.
b. Kecurangan yang melibatkan pihak lain yang dapat berdampak material
terhadap laporan keuangan.
6) Perusahaan tidak memiliki rencana atau niat yang secara material dapat
mempengaruhi nilai tercatat atau klasifikasi aset dan liabilitas.
7) Berikut ini telah dicatat atau diungkapkan dengan benar dalam laporan
keuangan:
a. Transaksi pihak terkait, termasuk penjualan, pembelian, pinjaman,
transfer, pengaturan sewa guna usaha, dan jaminan, dan jumlah piutang
dari atau hutang kepada pihak berelasi.
b. Jaminan, baik tertulis atau lisan, yang menjadi tanggung jawab
perusahaan.
c. Estimasi signifikan dan konsentrasi material yang diketahui manajemen
yang harus diungkapkan sesuai dengan Pernyataan Posisi 94-6 AICPA, ''
Pengungkapan Risiko dan Ketidakpastian Signifikan. ''
8) Tidak ada-
a. Pelanggaran atau kemungkinan pelanggaran hukum atau peraturan yang
pengaruhnya harus dipertimbangkan untuk diungkapkan dalam laporan
keuangan atau sebagai dasar untuk mencatat kemungkinan kerugian.
b. Klaim atau penilaian yang tidak ditegaskan yang telah disarankan
pengacara kami kepada kami kemungkinan besar dinyatakan dan harus
diungkapkan sesuai dengan Pernyataan Financial Accounting Standards
Board (FASB) No. 5, '' Akuntansi untuk Kontinjensi. ''
c. Liabilitas atau kontinjensi keuntungan atau kerugian lainnya yang harus
diakui atau diungkapkan oleh Pernyataan FASB No. 5.
9) Perusahaan memiliki kepemilikan yang memuaskan atas semua aset yang
dimilikinya, dan tidak ada hak gadai atau sitaan atas aset tersebut dan tidak ada
aset yang dijadikan jaminan.

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10) Perusahaan telah mematuhi semua aspek perjanjian kontraktual yang akan
berdampak material terhadap laporan keuangan jika terjadi ketidakpatuhan.
11) Sepanjang pengetahuan dan keyakinan kami, tidak ada peristiwa yang terjadi
setelah tanggal neraca dan melalui tanggal surat ini yang memerlukan
penyesuaian atau pengungkapan dalam laporan keuangan tersebut.

16 Februari 2015

Larry Lancaster, _____________________________

Chairman, President, and CEO

Eric P. Unum, __________________________

Vice-President of Finance

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 APOLLO SHOES, INC.

LAPORAN POSISI KEUANGAN CONSOLIDATED STATEMENTS

OF
KONSOLIDASIAN FINANCIAL POSITION
31 DESEMBER AS OF DECEMBER 31

2017 2016
Note
Aset Assets
Kas $ 3.874.624,50 $ 3.245.062,00 Cash
Piutang Usaha (Net of Allowances ) 3 $ 50.276.250,23 $ 15.148.082,83 Accounts Receivable (Net of Allowances
)
Persediaan 4 $ 56.888.721,24 $ 15.813.205,24 Inventory
Beban dibayar dimuka $ 2.535.748,79 $ 950.721,20 Prepaid Expenses
Aset Lancar $ 113.575.344,76 $ 35.157.071,27 Current Assets

Properti, Pabrik, dan Peralatan 5 $ 3.670.003,050 $ 1.174.123,02 Property, Plant, and Equipment
Dikurangi Akumulasi Penyusutan $ (682.260,800) $ (164.000,00) Less Accumulated Depreciation
$ 2.987.742,250 $ 1.010.123,02
Investasi 6 $ 1.250.000,00 $ 572.691,08 Investments
Aset lain-lain 6 $ 1.998.780,390 $ 53.840,59 Other Assets

Total Aset $ 119.811.867,40 $ 36.793.725,96 Total Assets

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 APOLLO SHOES, INC.

LAPORAN POSISI KEUANGAN CONSOLIDATED STATEMENTS OF

KONSOLIDASIAN FINANCIAL POSITION
31 DESEMBER AS OF DECEMBER 31

Not 2017 2016

e

Liabilitas dan Ekuitas Pemegang Saham Liabilities and Shareholders’ Equity

Utang Usaha dan Beban masih harus dibayar $ 19.764.183,66 $ 4.675.242,25 Accounts Payable and Accrued Expenses

Liabilitas Jangka Pendek 7 $ 56.403.000,00 $ 10.000.000,00 Short-Term Liabilities

Liabilitas Jangka Pendek $ 76.167.183,66 $ 14.675.242,250 Current Liabilities
Liabilitas Jangka Panjang 7 $ - $ - Long-Term Debt
Total Liabilitas $ 76.167.183,66 $ 14.675.242,250 Total Liabilities

Saham $ 8.105.000,00 $ 8.105.000,00 Common Stock

Tambahan modal disetor $ 7.423.000,00 $ 7.423.000,00 Additional Paid-in Capital
Saldo Laba $ 28.116.683,740 $ 6.590.483,71 Retained Earnings
Total Ekuitas Pemegang Saham $ 43.644.683,74 $ 22.118.483,710 Total Shareholders' Equity

Total Liabilitas dan Ekuitas Pemegang $ 119.811.867,40 $ 36.793.725,96 Total Liabilities and Shareholders'
Saham Equity

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 APOLLO SHOES, INC.

LAPORAN LABA RUGI KONSOLIDASIAN CONSOLIDATED STATEMENTS OF

INCOME
UNTUK TAHUN YANG BERAKHIR 31
FOR THE YEAR ENDED DECEMBER 31
DESEMBER

2017 2016

Penjualan Bersih (Note 2) $ 230.455.103,52 $ 240.575.053,76 Net Sales (Note 2)

Beban Pokok Penjualan $ 146.455.340,61 $ 141.569.221,61 Cost of Sales

Laba Kotor $ 83.999.762,91 $ 99.005.832,15 Gross Profit

Beban Penjualan, Umum, dan Administrasi $ 44.967.145,18 $ 71.997.771,97 Selling, General and Administrative
Expenses
Beban Bunga (Note 7) $ 3.011.657,40 $ 875.000,00 Interest Expense (Note 7)
Beban lain-lain (pendapatan) $ (1.227.594,97) $ (204.302,81) Other Expense (Income)

laba dari Operasi $ 22.386.555,30 $ 16.066.362,990 Earnings from Continuing

Operations
Operasi yang Dihentikan, setelah dikurangi manfaat Discontinued Operations, Net of tax benefit

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pajak
Item Extraordinary, setelah Manfaat Pajak (Note 10) $ (11.695.000,00) Extraordinary Item, Net of tax benefit (Note
10)

Laba Bersih $ 22.386.555,30 $ 4.371.362,99 Net Income

Laba dari Operasi Sebelum Pajak $ 37.248.555,30 $ 26.337.362,990 Earnings from Continuing Operations Before
Taxes

Beban Pajak Pendapatan (Note 9) $ 14.862.000,00 $ 10.271.000,00 Income Tax Expense (Note 9)

Laba Per Saham Earnings Per Common Share

Dari Operasi $ 2.76 $1.98 From Continuing Operations

Lain-lain ($1.44) Other

Laba Bersih $ 2.76 $0.54 Net Income

Saham Rata-rata dari Saham yang Beredar $ 8,105 $ 8,105 Weighted shares of common stock
outstanding

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 Par Value Additional Retained
Shares ($1 per Paid-in Capital Earnings Other Total
share)

$
CONSOLIDATED $ $
8,105 $ 7,423 $ 2,220
STATEMENTS OF 8,105 17,748
-
SHAREHOLDERS' EQUITY
APOLLO SHOES, INC. $ 4,371 $
in thousands 4,371
0 $ - $
-
$
-
Balance, December 31, 2015
$
Net Income $ $
8,105 $ 7,423 $ 6,591
Exercise of Stock Options 8,105 22,119
-
Other
Balance, December 31, 2016 $ 22,386 $
22,386
Net Income 0 $ $
Exercise of Stock Options - -
Other $ (0,860) $
Balance, December 31, 2017 (0,860)

$
$ $
8,105 $ 7,423 $ 6,591
8,105 43,645
-

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 STATEMENTS OF CASH FLOWS
APOLLO SHOES, INC.
For The Year Ended December 31
in thousands

2017 2016
Cash Flows from Operating Activities
Net Income $ 22,386 $ 4,371

Adjustments to Reconcile Net Income to Net Cash Provided

Depreciation and Amortization $ 0,519 $
0,133
Invenstment Income $ (1,096)
Changes in Operating Assets and Liabilities
Decrease (Increase) in Current Assets
Accounts Receivable $ (35,128) $
(12,410)
Inventory $ (41,075) $
(1,990)
Prepaid Expenses $ (1,585) $
(0,599)
Increase (Decrease) in Current Liabilities
Accounts Payable and Accrued Expenses $ 14,228 $
1,119
Total Adjustments $ (64,137) $ (13,747)
Net Cash Provided by Operating Activities $ (41,751) $ (9,376)

Cash Flows from Investing Activities

Capital Expenditures $ (2,496) $
(0,834)
Loan Employee $ (1,250)
Equity Investment $ (0,330)
Purchase of Other Assets $ 0,054 $
(0,054)

Net Cash Provided by Investing Activities $ (4,022) $

(0,888)

Cash Flows from Financing Activities

Proceeds from the Issuance of Debt $ 46,403 $
10,000
Proceeds from the Issuance of Common Stock
Net Cash Provided by Financing Activities $ 46,403 $

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 10,000
Net Increase (Decrease) in Cash $ 0,630 $
(0,264)
Cash at Beginning of Year $ 3,245 $
3,509

Cash at End of Year $ 3,875 $ 3,245 NOTES TO

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CONSOLIDATED FINANCIAL STATEMENTS APOLLO SHOES, INC.

1. Summary of Significant Accounting Policies

Business activity: The Company develops and markets technologically superior

podiatric athletic products under various trademarks, including SIREN,
SPOTLIGHT, and SPEAKERSHOE.
Marketable Securities: Investments are valued using the market value method for
investments of less than 20%, and by the equity method for investments greater than
20% but less than 50%.
Cash equivalents: Cash equivalents are defined as highly liquid investments with original
maturities of three months or less at date of purchase.
Inventory valuation: Inventories are stated at the lower of First-in, First-out (FIFO) or
market.
Property & Equipment, Depreciation: Property and equipment are stated at cost.
The Company uses the straight-line method of depreciation for all additions to
property, plant, and equipment.
Net Sales: Sales for 2017 and 2016 are presented net of sales returns and allowances
of $11.1 million, and $4.5 million, respectively, and net of warranty expenses of $1.2
million, and $1.1 million, respectively.
Net income per common share: Net income per common share is computed based
on the weighted average number of common and common equivalent shares
outstanding for the period.
Reclassification: Certain amounts have been reclassified to conform to the 2017
presentation.

2. Significant Customers

Approximately 53%, and 15% of sales are to one customer for years ended December 31,
2017 and 2016, respectively. See note 13.

3. Accounts Receivable

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Accounts Receivable consists of the following at December 31:

in thousands 2017 Trade Receivables $51,515

Less Allowance for Doubtful Accounts ($1,239)
Net Accounts Receivable $50,276

There was no bad expense for the year ended December 31, 2017 . There was one write
off for the year in the amount of $23,810.

4. Inventories

Inventories consist of the following at December 31:

in thousands 2017 Siren
$13,226
Speaker $33,748
Spotlight $20,750
$67,724
Less Reserve for Inventory Obsolescence ($10,836)
Ending Inventory $56,888

5. Property and Equipment

In early 2017 , the Company purchased equipment totaling $1,295,360 to facilitate

internal production of Apollo products. As of January 2018, that equipment is not yet
in operation. In mid-2017 , the Company purchased a new computer system totaling
$1,200,000, including related installation and consulting services.

Property is stated at cost net of accumulated depreciation. Property and Equipment at

December 31 was as follows:

in thousands 2017
Land $117
Buildings and Land Improvements $624
Machinery, Equipment, and Office Furniture $2,929

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Total Land, Plant, and Equipment $3,6
70
Less Accumulated Depreciation ($68
3)
Net Land, Plant, and Equipment $2,9
87

6. Investments and Other Assets

In 2015, the Company invested approximately $0.6 million in a stock for a 35% share
in the SHOCK-PROOF SOCKS Company. SHOCK-PROOF SOCKS did not
recognize any income and did not pay any dividends in 2015 or 2016. In 2017 ,
SHOCK-PROOF SOCKS recognized $3,130,610 in income, but did not pay any
dividends. Accordingly, Apollo recognized $1,096 thousand in equity earnings. In
2017 , Apollo purchased 20,000 shares of Synergizer Battery Company totaling
$330,375. In addition, the Company decided to write off the legal fees incurred to
register the patent for the PHONESHOE. The asset was originally going to be
amortized over 17 years, but the Company decided to write off the remaining $53,840
during 2017 . Also included in other assets is (i) $1,250,000 in a note receivable from
an employee due in 2054.

7. Debt
At December 31, 2017 , the Company had $44,403,000 outstanding in short-term
borrowings under a $50,000,000 unsecured revolving credit line with a local financial
institution. The line of credit is secured with the Company’s inventory. The interest
rate as of year-end was 9.16%. The due date on this line of credit is 2018 (revolving).
This line of credit is evaluated annually on June 30th by the lending institution.
At December 31, 2017, the Company had $12,000,000 debt due January 1, 2015. The interest
rate is 8.15%.
Total debt outstanding at December 31, 2017 is $56,403,000.

8. Commitments

The Company’s lease on a second facility and equipment terminated in June 2017 .
At that time, all operations were moved to the central headquarters. Rent expense

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charged to operations for the years ended December 31, 2017 and 2016 was $1.2
million and $2.6 million, respectively.

9. Income Taxes

The income taxes for 2017 were computed at an effective tax rate of 40.0%, 34.0% in federal
income taxes, and 6.0% in state income taxes.

10. Litigation

On January 5, 2018, a class action lawsuit alleging gross negligence and violation of
implied warranty of merchantability was filed against Apollo Shoes, Inc. for
$12,000,000. According to Apollo’s attorney, the plaintiff will have serious problems
establishing Apollo’s liability. However, if the plaintiff is successful, the damages
awarded could be substantial. The Company plans to vigorously defend itself in this
action, but it is reasonably possible that the loss could reach $10,000,000 after legal
fees are considered.

On September 12, 2016, Apollo settled a lawsuit brought against the Company by a
competitor for patent infringement. The Company denied any wrongdoing, but felt
the settlement, in the amount of $11,695,000 ($19,172,000, net of tax benefit of
$7,477,000), would be preferable to a long litigation process.

11. Related Party Transactions

Apollo purchased a new computer system for $1,000,000 in July 2017 . The
Company paid Josephine Mandeville, a member of the Board of Directors and the
Audit Committee, $200,000 for system analysis consulting with regard to this
purchase of computer equipment.

Apollo buys all of their shoes pre-made from the Anglonesia Rehabilitation and
Reprogramming Institute in Anglonesia. Theodore Horstmann, a member of the
Board of Directors and the Audit Committee, is the Minister of Commerce of
Anglonesia. The Company purchased equipment totaling almost $1.3 million in early

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2017 to facilitate internal production of Apollo shoes. Apollo received a large
shipment of shoes totaling over $8.4 million from the Institute on December 31,
2017 . As of January 2018, the production equipment had not yet been put into
operation.

The company issued a $1,250,000 loan to Larry Lancaster’s secretary with a 1% annual
interest rate. The note and interest are due in full on June 30, 2017.

12. Employee Benefit Plans

The Company sponsors a defined-contribution retirement plan covering substantially

all of its employees. Contributions are determined at the discretion of the Board of
Directors. Aggregate contributions made by the Company to the plans and charged to
operations in 2017 , 2016, and 2015 were $3.3 million, $3 million, and $3 million,
respectively.

13. Concentrations of Credit Risk

Financial instruments which potentially subject the Company to credit risk consist
principally of trade receivables and interest-bearing investments. The Company
performs ongoing credit evaluations of all of its customers and generally does not
require collateral. The Company places substantially all of its interest-bearing
investments with several major financial institutions. Corporate policy limits the
amount of credit exposure to any one financial institution.

The Company sells over half of its product to one retail distributor with sales
operations located throughout North America, Europe, and Asia Pacific. That retail
distributor filed for involuntary bankruptcy in November 2017 . The distributor
informed Apollo of the bankruptcy shortly thereafter. A shipment of shoes totaling
over $5.7 million was sent to this distributor without a purchase order on December
28, 2017 . The distributor denies ever ordering the shoes. However, Apollo’s
management feels that this distributor will come out of the bankruptcy and be able to

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pay Apollo the over $20 million in receivables it owes, including the late December
shipment of $5.7 million.
The $5.7 million sale has been included in revenues.

14. Insurance

As of December 31, 2017

, the Company does not have vehicle liability insurance. The Company’s previous policy
for such coverage terminated on December 31, 2017.