Lykes Excelleration Surety 7 22 09

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Current Issues in Construction and Surety Bonding presented July 22, 2009 for Lykes Insurance in Fort Myers

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Lykes Excelleration Surety 7 22 09

  1. 1. Current Issues in Construction and Surety Bonding Excelleration 2009 Lykes Insurance Learning Series July 22, 2009
  2. 2. Today’s Presenter • John Reed, CPA*, CITP 239.226.9903, jreed@larsonallen.com Principal, Construction and Real Estate Group LarsonAllen LLP, Fort Myers www.larsonallen.com/Construction_and_Real_Estate/ Certified Specialist in Estate Planning, Certified Information Technology Professional, *CPA licensed in Florida Practice exclusive to construction and real estate clients
  3. 3. Here Today • Peter A Thomson, CPA, AFSB 813.470.5031, pthomson@lykesinsurance.com Director of the Construction Services Division, Lykes Insurance, Tampa www.lykesinsurance.com Associate in Fidelity and Surety Bonds 30 years working in construction surety bonding
  4. 4. Also Here Today • John Suarez 813.464.2020, johnsuarez@westfieldgrp.com Bond Manager, Surety Operations Westfield Insurance, Tampa www.westfieldinsurance.com
  5. 5. Today’s Agenda-Current Issues in Construction and Surety Bonding • Today’s Construction and Surety Markets – How do I survive? – Can I get bonding? – Additional pressures on subcontractors – Disadvantage Business Entity status and how it applies to public work. What is the certification process? • How does a Surety look at your information? – Working capital with surety adjustments – Liabilities to equity – Job schedules – Required financial statement disclosures • SBA bonding changes in the American Recovery and Reinvestment Act of 2009 (stimulus package) • Surety information checklist
  6. 6. Survival in Today’s Construction Market • Forecast revenue and direct costs using existing backlog • Then budget overhead • Pay attention to employee productivity – When work is slow it is human nature for time on a job to expand – Look for a key performance indicator - examples ◊ Billings per employee ◊ Yards poured ◊ Blocks or sheets installed • Evaluate equipment capacity and utilization – Own versus rent – Evaluate debt restructuring options • Pay even more attention to cash flow – Accelerate collection process – Pursue retention receivable more aggressively – Engage project managers with customer relationships in the collection process
  7. 7. How to Survive in Today’s Construction Market • Evaluate the financial strength of project owners and source of project funding • Tax deferrals are really important now – A tax deferral is an acceleration of expense or a delay in recognizing revenue for tax purposes – Consider Methods ◊ Regular accounting method – contracts that start and end in the same year ◊ Residential contract method – homes that start and finish in different years ◊ Multifamily method – 4 or more dwelling units that start and finish in different years ◊ Regular long term method – all other contracts that start and end in different years – File Look Back Form 8697 (Required for many contractors) – Small Company 5 Year Carry Back – Extension of Bonus Depreciation and $250,000 Section 179
  8. 8. Trends in Today’s Construction and Surety Markets • Bonding market is down but bonding is available for well capitalized companies • There is increasing surety, bank and general contractor pressure on subcontractors to upgrade financial statements from reviews to audits, and from compilations to reviews • Subcontractors being asked to bond more work • Government work bid preference given to minority contractors
  9. 9. Florida DOT Work • Most of the stimulus bill impact on the Florida construction industry comes from road construction • All contractors/vendors/consultants wanting to do business with the state must register here http://dms.myflorida.com/mfmp • All contractors/vendors/consultants wanting to do business with the FDOT – Contractors need to be prequalified for jobs over $250,000 http://www.dot.state.fl.us/cc-admin/PreQual_Info/prequalified.shtm – Must have audited financial statements issued within last 4 months – Will need to use Bid Express in bidding process www.bidx.com
  10. 10. Disadvantaged Business Entities • Disadvantaged Business Entities are generally minority or woman owned businesses. There is also a disadvantaged business category for disabled veterans. Preferential contract treatment is often given to disadvantaged businesses during government bid processes • There are two different certification processes – Federal Disadvantaged Business Entity Certification (administered by the Florida DOT on Federally funded contracts). – Florida Certified Business Enterprise (administered by the State of Florida Department of Management Services, Office of Supplier Diversity)
  11. 11. Federal Disadvantaged Business Enterprise Status • Federal Disadvantaged Business Enterprise – Florida Unified Certification Program (UCP-DBE) – Mandatory program for all federally funded contracts. FDOT has an overall goal of 8.1% that is expected to be committed to certified DBEs – To qualify, must be 51% owned and controlled by a socially and economically disadvantaged individual(s) who are US citizens or lawfully permanent resident, Small Business Administration’s size standard (which varies by trade from $7M to $33.5M) and does not exceed $22.41M in average gross receipts for the preceding three years. http://www.dot.state.fl.us/equalopportunityoffice/dbeprogram.shtm – 15 UCP Certifying Agencies https://www3.dot.state.fl.us/EqualOpportunityOffice/biznet%20ucp/ucppartners.asp
  12. 12. Florida Certified Business Enterprise Status • State of Florida Certified Business Enterprise – Certification widely accepted in the private sector, cities, counties, hospitals, and other quasi governmental entities (no Federal funding) – To qualify, must have net worth of $5M or less, 200 or fewer full time permanent employees, 51% percent owned, managed and controlled by: African-American, Hispanic-American, Asian- American, Native-American, American Woman, or Service- Disabled Veteran (minimum 10% disability) who are US citizens and residents of Florida – http://dms.myflorida.com/other_programs/office_of_supplier_diversity_osd/certification/
  13. 13. Disadvantaged Business Entities • While we have experience with our clients obtaining DBE status, we aren’t experts in the DBE process. • We’re seeing with our clients that strategies to achieve DBE certification are often similar to strategies developed for the transition of business ownership – “Newco/2nd Corp Strategy” – Ownership Transition by Gift – Ownership Transition by GRAT
  14. 14. Sample GRAT Calculation •Fact pattern – S corporation contractor worth approximately $3,000,000. Net income $250,000. Tax on S corporation income handled through owner withholding. •Contractor wishes to make key employee a 10% to 15% owner. •Normal shareholder agreements put in place. •Uses a Zero-Out GRAT as the transfer vehicle.
  15. 15. Sample GRAT Results •Shareholder contributes 35% of company in non- voting shares to GRAT in February 2009 in exchange for an annuity of $166,788 per year for 5 years (5 year annuity payment at 2%). •New owner’s distributions (35% of $175,000) paid to old owner as partial funding of annuity. Difference between annuity value and distributions received paid in shares of stock (shares returned). •At end of 5 year period, new owner retains 13% ownership in company. •Zero gift, so no gift tax paid or exclusion used
  16. 16. Zero-Out GRAT Calculation
  17. 17. How Does a Surety Look At Your Information • Financial stability is one of the most important factors in obtaining surety credit. • While most clients focus their attention on their income statement, the most important section of their financial statement to a surety is the balance sheet.
  18. 18. Surety Indicators of Financial Stability • Working capital (excess of current assets over current liabilities). Adjusted by surety to take out related party receivables, some portion of inventory, and other non performing assets. Bonding program usually based on some multiple of that number. Sometimes expressed as Current Ratio or Quick Ratio. (In the example statements $4,855,000 current assets minus $4,058,000 current liabilities results in $797,000 of working capital) • Liabilities to Equity (total liabilities compared to stockholder equity). Often expressed as a ratio (liabilities are X times equity). A lower multiple would mean less reliance on debt to fund operations, and generally result in a larger bond line. (In our example statements the $4,565,000 total liabilities is 2.1 times $2,135,000 total stockholders’ equity)
  19. 19. Key Financial Ratios for Sureties • An example of a working capital calculation by a Surety.
  20. 20. Job Schedules Should Be Included In a Contractor’s Financial Statement • Include separate schedules of open and closed jobs. This should be a complete listing of all contract activity. • All direct and indirect costs (such as equipment depreciation, fuel, payroll taxes, workers compensation insurance, etc.) should be job costed and included in the schedules. If your accounting software can’t do that these costs must be allocated (and you should look for new software). • There should be a summary schedule (example page 21) that MUST equal the total revenue and direct costs on the income statement (example page 4). There should be no unallocated costs or revenues.
  21. 21. Note Disclosures That Should Be Included In a Contractor’s Financial Statement • Summary of accounting policies (example note 1, pages 8-11) • Accounts receivable breakdown for open and closed jobs and receivable retention held (example note 2 page 11) • Summary of over and under billings (example note 4 page 15) • Backlog note (example note 5 page 15) • Income taxes (C Corp example note 9 page 18) (For S Corps or LLCs see additional example handout that would be included as part of note 1) • Related party transactions (example note 12 page 19). • Commitments and Contingencies (if any) (example note 13 page 20) • Consolidation of “Variable Interest Entities”
  22. 22. Financial Ratios a Surety Likes To See • Working capital (adjusted for underbillings, prepaids, slow inventory and slow receivables) at least 5% to 10% of revenue • Liabilities to Equity of 2 to 1 or less • Equity 10% to 15% of revenues • Cash at least 20% of equity • Cash to overbillings of at least 1.25 to 1 • NO net Underbillings • Contract fade of less than 1% of annual revenues (really, Sureties want to see contract gain) • Backlog gross profit in excess of 50% of G&A • Bonded subs
  23. 23. Suggestions To Improve Your Surety Relationship • Your bond agent should specialize in bonds. • The fastest way to improve bonding capacity is to inject capital into the business as equity. This increases working capital and equity simultaneously. • Restructure debt from credit lines to fixed term (has the effect of reducing current liabilities and increases working capital) • Start thinking about business transition
  24. 24. How the American Recovery and Reinvestment Act of 2009 Impacted Bonding • The Act enhanced the Small Business Administrations construction bonding program. Generally this is a program of last resort and most bond agents and agencies don’t participate because of the amount of paperwork and time required to implement. http://www.sba.gov/aboutsba/sbaprograms/osg/index.html – Changed the definition of a small business by increasing the size of contractors considered a small businesses to $22.41M average annual revenue – Increased the size of contracts that can be bonded to $5M • Another option for contractors only able to bond through the SBA is a “Funds Control” escrow arrangement. Typically the escrow agent fees to handle the payments are 1% to 2% of the contract amount.
  25. 25. Surety Information Checklist • 3 years of independent audited/reviewed Financial Statement (current year issued within 90-120 days of year end) • Interim Financial Statements • Aging of AR and AP • Analysis of overhead costs (supplemental information) • Equipment schedules • P&L Statements • Outline of bank agreements and loan covenants • Up to date job cost reports • Comprehensive business plan, forecast or strategy • Continuity plan, buy sell agreements (indicating funded or unfunded) • Resumes of key employees and management • Contractor’s questionnaire • Insurance certificate • Letters of recommendation from owners, subs or suppliers • Personal and corporate indemnity • Personal financial statements
  26. 26. LarsonAllen LLP • Appendix – Information about LarsonAllen and LarsonAllen’s Construction and Real Estate Group
  27. 27. LarsonAllen Construction and Real Estate Group Nationally Oriented CPA & Business Consulting Firm Established in 1953 by Rholan Larson & John Allen History & Focus on Privately-Owned, Owner- Operated Businesses Primary Advisor Relationship – “Total Client Service” Managed by the “LEADERS” culture Ranked in the top 20 CPA firms in the U.S.; approximately 1,400 employees; 27 offices and client service centers in 9 states
  28. 28. LarsonAllen Locations Upper Midwest Minneapolis, St. Cloud, Austin, Alexandria and Brainerd, Minnesota Eau Claire, Wisconsin Midwest St. Louis, Missouri Dallas, Texas East Philadelphia, Pennsylvania Washington DC Boston, Massachusetts Southeast Charlotte, North Carolina Fort Myers, Naples, Orlando and Tampa, Florida Southwest Phoenix, Arizona In addition, there are ten client service centers.
  29. 29. Construction & Real Estate Group Construction and Real Estate industry commitment – Focus on industry knowledge and practice development Dedicated construction group staff of 100 professionals Firm-wide Specialized A&A and tax training for all staff and principals Construction industry association memberships and active involvement Serving construction and real estate clients ranging from startups to companies with revenues greater than $1 billion covering a wide variety & type of contractors and real estate entities.
  30. 30. Florida Construction and Real Estate Principals Naples Sue Christopher (Lead Florida Principal), schristopher@larsonallen.com, 239.280.3562 Stan Schneider, swschneider@larsonallen.com, 239.280.3566 Michael Kosinski, mkosinski@larsonallen.com, 239.280.3517 Orlando Les Eiserman, leiserman@larsonallen.com, 407.802.1203 Tampa Jack Rybicki, jrybicki@larsonallen.com, 813.384.2701 Fort Myers John Reed, jreed@larsonallen.com, 239.226.9903
  31. 31. Noticeably Different Cost Segregation Services Construction Operations Consulting Information System Selection and Implementation Business Planning and Corporate Structure Management Training – Project Managers, Estimators, etc. Reporting Relationships Performance Measurement and Assessment Dispute Resolution Support Advisory/Devil’s Advocate Services Expert Witness Claims Documentation and Assistance
  32. 32. SAMPLE CONTRACTORS, INC. Statement of Forecasted Operations For The Year Ending December 31, 2009 Forecasted 1st Through 4th Quarters As of December 2, 2008 Forecasted Forcasted Forecasted Forecasted Percent of 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2009 Total Sales Revenues from construction contracts $ 3,137,250 $ 4,012,750 $ 4,884,500 $ 1,492,000 $ 13,526,500 100.0% Cost of revenues Subcontractors and material 2,755,808 3,513,053 4,277,185 1,279,460 11,825,505 87.4% Labor 145,043 184,898 225,115 67,340 622,395 4.6% Equipment - - - - - 0.0% Other costs - - - - - 0.0% Total cost of revenues 2,900,850 3,697,950 4,502,300 1,346,800 12,447,900 92.0% Gross Profit 236,400 314,800 382,200 145,200 1,078,600 8.0% Operating expenses Business development and promotion 6,000 6,000 6,000 6,000 24,000 0.2% Bad debts 15,000 15,000 15,000 15,000 60,000 0.4% Depreciation and amortization 10,250 10,250 10,250 10,250 41,000 0.3% Donations 375 375 375 375 1,500 0.0% Dues and subscription 1,125 1,125 1,125 1,125 4,500 0.0% Insurance expense 12,750 12,750 12,750 12,750 51,000 0.4% Licenses and taxes 250 250 250 250 1,000 0.0% Miscellaneous expenses 500 500 500 500 2,000 0.0% Rent 19,750 19,750 19,750 19,750 79,000 0.6% Office & postage 6,250 6,250 6,250 6,250 25,000 0.2% Office salaries 84,000 84,000 84,000 84,000 336,000 2.5% Payroll taxes 15,750 15,750 15,750 15,750 63,000 0.5% Professional fees 15,000 5,000 5,000 5,000 30,000 0.2% Repairs & maintenance 2,500 2,500 2,500 2,500 10,000 0.1% Travel and entertainment 1,250 1,250 1,250 1,250 5,000 0.0% Utilities and telephone 6,000 6,000 6,000 6,000 24,000 0.2% Total operating expenses 196,750 186,750 186,750 186,750 757,000 5.6% Income from operations 39,650 128,050 195,450 (41,550) 321,600 2.4% Other income / (expense) Interest expense (25,000) (25,000) (25,000) (25,000) (100,000) -0.7% Gain on sale of assets - - - - 0.0% Interest income and other gains and losses - - - - - 0.0% Total other income/(expense) (25,000) (25,000) (25,000) (25,000) (100,000) -0.7% Net Income / (Loss) $ 14,650 $ 103,050 $ 170,450 $ (66,550) $ 221,600 1.6% Cash Flows Net Income / (Loss) $ 14,650 $ 103,050 $ 170,450 $ (66,550) $ 221,600 Add back depreciation and amortization 10,250 10,250 10,250 10,250 41,000 Net (increase) decrease in accounts receivable - - - - - Net increase (decrease) in accounts payable - - - - - Debt paydown (5,000) (5,000) (5,000) (5,000) (20,000) Net Cash Flow $ 19,900 $ 108,300 $ 175,700 $ (61,300) $ 242,600 For Internal Use Only
  33. 33. SAMPLE CONTRACTORS, INC. Schedule I - Forecasted Job Completion As of December 2, 2008 Job Number Job Name Contract Amt Estimated Cost Gross Profit GP % 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2008 2009 2009 2009 2009 101 Job 101 500,000 450,000 50,000 10.0% 98% 100% 100% 100% 100% 102 Job 102 100,000 85,000 15,000 15.0% 79% 100% 100% 100% 100% 103 Job 103 1,000,000 900,000 100,000 10.0% 50% 92% 100% 100% 100% 104 Job 104 2,000,000 1,850,000 150,000 7.5% 98% 100% 100% 100% 100% 105 Job 105 1,000,000 975,000 25,000 2.5% 92% 100% 100% 100% 100% 106 Job 106 100,000 90,000 10,000 10.0% 100% 100% 100% 100% 100% 107 Job 107 100,000 90,000 10,000 10.0% 15% 50% 92% 100% 100% 108 Job 108 100,000 90,000 10,000 10.0% 5% 29% 60% 98% 100% 109 Job 109 100,000 90,000 10,000 10.0% 41% 79% 100% 100% 100% 110 Job 110 100,000 90,000 10,000 10.0% 50% 92% 100% 100% 100% 111 Job 111 100,000 90,000 10,000 10.0% 41% 79% 100% 100% 100% 112 Job 112 100,000 90,000 10,000 10.0% 92% 100% 100% 100% 100% 113 Job 113 100,000 90,000 10,000 10.0% 50% 92% 100% 100% 100% 114 Job 114 2,100,000 1,975,000 125,000 6.0% 5% 29% 60% 98% 100%
  34. 34. SAMPLE CONTRACTING COMPANY, INC. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION (REVIEWED) YEARS ENDED DECEMBER 31, 2007 AND 2006
  35. 35. SAMPLE CONTRACTING COMPANY, INC. TABLE OF CONTENTS YEARS ENDED DECEMBER 31, 2007 AND 2006 ACCOUNTANTS’ REVIEW REPORT 1 FINANCIAL STATEMENTS BALANCE SHEETS 2 STATEMENTS OF INCOME 4 STATEMENTS OF STOCKHOLDERS’ EQUITY 5 STATEMENTS OF CASH FLOWS 6 NOTES TO FINANCIAL STATEMENTS 8 SUPPLEMENTARY INFORMATION SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2007 21 SCHEDULE OF CONTRACTS COMPLETED DURING 2007 22 SCHEDULE OF CONTRACTS IN PROGRESS AT DECEMBER 31, 2007 23 SCHEDULE OF CONTRACT COSTS AND GENERAL AND ADMINISTRATIVE EXPENSE 24
  36. 36. SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 183,000 $ 245,000 Securities Available-for-Sale 555,000 400,000 Accounts Receivable: Current Billings on Contracts 2,845,000 2,240,000 Retainages on Contracts 380,000 260,000 Other 125,000 40,000 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 550,000 400,000 Inventories 165,000 90,000 Prepaid Expenses 37,000 32,000 Deferred Income Taxes 15,000 12,000 Total Current Assets 4,855,000 3,719,000 PROPERTY AND EQUIPMENT Land 75,000 75,000 Buildings 420,000 420,000 Equipment 1,875,000 1,590,000 Vehicles 280,000 240,000 Office Equipment 145,000 120,000 Total 2,795,000 2,445,000 Less: Accumulated Depreciation 1,435,000 1,110,000 Total Property and Equipment 1,360,000 1,335,000 OTHER ASSETS Notes Receivable - Officers 70,000 50,000 Investment in Joint Venture 75,000 50,000 Securities Held-to-Maturity 260,000 250,000 Cash Value of Life Insurance, Less Policy Loans of $30,000 and $20,000, Respectively 80,000 60,000 Total Other Assets 485,000 410,000 Total Assets $ 6,700,000 $ 5,464,000 See accompanying Notes to Financial Statements. (2)
  37. 37. SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS (CONTINUED) DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note Payable - Bank $ 590,000 $ 800,000 Current Maturities of Long-Term Debt 193,000 117,000 Accounts Payable: Current 1,640,000 1,564,000 Retainage 600,000 500,000 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 450,000 120,000 Accrued Expenses 475,000 350,000 Income Taxes Payable 110,000 10,000 Total Current Liabilities 4,058,000 3,461,000 LONG-TERM LIABILITIES Long-Term Debt (Less Current Maturities) 407,000 303,000 Deferred Income Taxes 100,000 50,000 Total Long-Term Liabilities 507,000 353,000 Total Liabilities 4,565,000 3,814,000 STOCKHOLDERS' EQUITY Common Stock - No Par Value; 100,000 Shares Authorized, 50,200 and 50,000, Respectively, Shares Issued and Outstanding 60,000 50,000 Retained Earnings 2,050,000 1,590,000 Unrealized Gains on Securities 25,000 10,000 Total Stockholders' Equity 2,135,000 1,650,000 Total Liabilities and Stockholders' Equity $ 6,700,000 $ 5,464,000 See accompanying Notes to Financial Statements. (3)
  38. 38. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 AMOUNT PERCENT AMOUNT PERCENT CONTRACT REVENUES EARNED $ 18,500,000 100.0 % $ 12,500,000 100.0 % CONTRACT COSTS 16,280,000 88.0 11,050,000 88.4 CONTRACT GROSS PROFIT 2,220,000 12.0 1,450,000 11.6 GENERAL AND ADMINISTRATIVE EXPENSE 1,340,000 7.2 1,135,000 9.1 INCOME FROM OPERATIONS 880,000 4.8 315,000 2.5 OTHER INCOME (EXPENSE) Income from Joint Venture 35,000 0.2 10,000 0.1 Gain (Loss) on Sale of Equipment 15,000 0.1 (10,000) (0.1) Investment Income 10,000 0.1 - - Interest Expense (145,000) (0.8) (140,000) (1.1) Realized Gain (Loss) on Sale of Securities (20,000) (0.1) (10,000) (0.1) Total Other Income (Expense) (105,000) (0.6) (150,000) (1.2) INCOME BEFORE INCOME TAXES 775,000 4.2 165,000 1.3 PROVISION FOR INCOME TAXES 315,000 1.7 60,000 0.5 NET INCOME $ 460,000 2.5 $ 105,000 0.8 See accompanying Notes to Financial Statements. (4)
  39. 39. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) Unrealized Gains Common Retained (Losses) on Stock Earnings Securities Total BALANCE, JANUARY 1, 2006 $ 50,000 $ 1,485,000 $ 5,000 $ 1,540,000 COMPREHENSIVE INCOME Net Income - 105,000 - Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $1,000 Deferred Income Tax) - - 5,000 Total Comprehensive Income 110,000 BALANCE, DECEMBER 31, 2006 50,000 1,590,000 10,000 1,650,000 COMPREHENSIVE INCOME Net Income - 460,000 - Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $5,000 Deferred Income Tax) - - 15,000 Total Comprehensive Income 475,000 Sale of 200 Shares to an Employee for Cash 10,000 - - 10,000 BALANCE, DECEMBER 31, 2007 $ 60,000 $ 2,050,000 $ 25,000 $ 2,135,000 See accompanying Notes to Financial Statements. (5)
  40. 40. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Contracts $ 17,955,000 $ 12,630,000 Cash Paid to Suppliers and Employees (17,134,000) (12,345,000) Interest Paid (145,000) (140,000) Income Taxes Paid (173,000) (65,000) Cash Provided by Operating Activities 503,000 80,000 CASH FLOWS FROM INVESTING ACTIVITIES Payments for Purchase of Equipment and Vehicles (410,000) (180,000) Proceeds from Sale of Equipment and Vehicles 50,000 20,000 Increase in Cash Value of Life Insurance (30,000) (10,000) Advances of Note Receivable - Officers (20,000) (50,000) Purchase of Investments (235,000) (100,000) Proceeds from Sale of Investments 80,000 200,000 Proceeds on Joint Venture Distribution 10,000 - Investment in Joint Venture - (40,000) Cash Used by Investing Activities (555,000) (160,000) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Long-Term Borrowings 330,000 100,000 Payments on Long-Term Debt (150,000) (80,000) Net Proceeds from (Payments on) Short-Term Borrowings (210,000) 200,000 Proceeds from Life Insurance Policy Loans 10,000 - Proceeds from Sale of Common Stock 10,000 - Cash Provided by (Used in) Financing Activities (10,000) 220,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (62,000) 140,000 Cash and Cash Equivalents - Beginning of Year 245,000 105,000 CASH AND CASH EQUIVALENTS - END OF YEAR $ 183,000 $ 245,000 See accompanying Notes to Financial Statements. (6)
  41. 41. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES Net Income $ 460,000 $ 105,000 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation 350,000 300,000 (Gain) Loss on Sale of Equipment (15,000) 10,000 Realized (Gain) Loss on Sale of Securities 20,000 10,000 Income from Joint Venture (35,000) (10,000) Accretion on Securities Held-to-Maturity (10,000) - Deferred Income Taxes 42,000 5,000 (Increase) Decrease in: Contract Accounts Receivable (725,000) 150,000 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts (150,000) 60,000 Inventories (75,000) (20,000) Other Current Assets (90,000) (30,000) Increase (Decrease) in: Accounts Payable 176,000 (375,000) Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 330,000 (80,000) Accrued Expenses 125,000 (10,000) Income Taxes Payable 100,000 (35,000) Cash Provided by Operating Activities $ 503,000 $ 80,000 See accompanying Notes to Financial Statements. (7)
  42. 42. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company's Business and Operating Cycle The Company operates primarily as a general contractor in heavy and industrial construction in Florida. The work is performed under cost-plus-fee contracts, fixed price contracts, fixed price contracts modified by incentive and penalty provisions and unit price contracts. These contracts are obtained through a competitive bidding process and vary in size and duration. The contracts are undertaken by the Company alone or in partnership with other contractors through joint ventures. The Company, as conditions for entering into construction contracts, has provided surety bonds on the majority of its contracts. These bonds are collateralized by the related contracts. The length of the Company’s contracts varies but is typically less than two years. Accordingly, assets to be realized and liabilities to be liquidated within the operating cycle are classified as current assets and liabilities. Estimates and Assumptions 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. Revenue and Cost Recognition Revenues from fixed-price, modified fixed-price and unit price construction contracts are recognized on the percentage-of-completion method, only after the contract attains a 10% completion stage, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method, or ratably over the term of the project, depending upon the terms of the individual contract. Because of inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used will change. (8)
  43. 43. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue and Cost Recognition (Continued) Contract costs include all direct material, subcontractors, labor costs, and equipment costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revenues are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted for as changes in estimates in the current period. Profit incentives are included in revenues when their realization is reasonably assured. Claims are included in revenues when realization is probable and the amount can be reliably estimated. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Concentrations of Credit Risk The Company performs credit evaluations of its customers and subcontractors and may require surety bonds. Liens are filed, when permissible, on construction contracts where collection problems are anticipated. As of December 31, 2007 and 2006, accounts receivable are due from customers in the Midwest and are not concentrated in a particular industry. The Company’s cash balances are maintained in two bank deposit accounts. The balances of these accounts may be in excess of federally insured limits. Concentrations in Operations The Company currently buys substantially all its materials from one supplier. Although there are a limited number of suppliers of such materials in the industry, management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in construction and adversely affect operating results. Cash and Cash Equivalents Cash equivalents are securities held for cash management purposes having maturities of three months or less from date of purchase. (9)
  44. 44. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contracts Receivable Contracts receivable from performing construction are based on contracted prices. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit valuation and specific circumstances of the customer. Investments in Securities The Company’s investments in securities are classified in two categories and accounted for as follows: Securities to be Held-to-Maturity Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. Securities Available-for-Sale Securities available-for-sale, consisting of securities not classified as trading securities nor as securities to be held to maturity, are reported at fair value. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary have resulted in write-downs of the individual securities to their fair value. The related write-downs have been included in earnings as realized losses. Unrealized holding gains and losses, net of tax, on securities available-for- sale are reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Inventories Inventories consist of construction materials and supplies that have not been assigned and charged to specific contracts and are stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are carried at cost, less accumulated depreciation. The Company depreciates property and equipment using the straight-line method over the estimated lives of the assets. The estimated useful lives are as follows: Buildings 30 Years Equipment 5-10 Years Vehicles 5-7 Years Office Equipment 3-10 Years (10)
  45. 45. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-Lived Assets Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the asset's carrying amount over the fair value of the asset. Certain long-lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell. Income Taxes Deferred tax assets and liabilities are recorded for future tax consequences attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Principally, these differences relate to depreciation of property and equipment, the allowance for uncollectible accounts receivable and certain accrued expenses. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. NOTE 2 CONTRACT ACCOUNTS RECEIVABLE AND CONTRACT CONCENTRATIONS Contract accounts receivable consist of the following as of December 31: 2007 2006 Completed Contracts, Including Retainages of Approximately $215,000 and $140,000, Respectively $ 2,025,000 $ 1,550,000 Contracts in Process, Including Retainages of Approximately $165,000 and $120,000, Respectively 1,300,000 980,000 3,325,000 2,530,000 Less: Allowance for Uncollectible Accounts 100,000 30,000 Total, Net $ 3,225,000 $ 2,500,000 Contract revenues from two contracts in 2007 and one different contract in 2006, in Lee County, Florida and Collier County, Florida, represented approximately 25% and 24%, respectively, of total contract revenues for the years ended December 31, 2007 and 2006, respectively. No other contracts represented greater than 10% of the total contract revenues in 2007 and 2006. The contract accounts receivable from these contracts were $1,166,000 and $800,000 as of December 31, 2007 and 2006, respectively. (11)
  46. 46. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) The carrying amounts of investment securities as shown in the accompanying balance sheets and their approximate fair values at December 31 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities Available-for-Sale: December 31, 2007 Equity Securities $ 523,000 $ - $ - $ 555,000 U.S. Government and Agency Securities - - - - Total $ 523,000 $ - $ - $ 555,000 December 31, 2006 Equity Securities $ 388,000 $ - $ - $ 400,000 U.S. Government and Agency Securities - - - - Total $ 388,000 $ - $ - $ 400,000 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities to be Held-to-Maturity December 31, 2007 U.S. Government and Agency Securities $ 260,000 $ - $ - $ 260,000 State and Municipal Securities - - - - Total $ 260,000 $ - $ - $ 260,000 December 31, 2006 U.S. Government and Agency Securities $ 250,000 $ - $ - $ 250,000 State and Municipal Securities - - - - Total $ 250,000 $ - $ - $ 250,000 (12)
  47. 47. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) The following table shows the gross unrealized losses and fair value of Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31. Less than 12 Months Fair Value Unrealized $ - $ - Marketable Equity Securities - - Corporate Obligations - - US Government Obligations $ - $ - Total 12 Months or Greater Fair Value Unrealized Marketable Equity Securities $ 555,000 $ 32,000 Corporate Obligations - - US Government Obligations 260,000 - Total $ 815,000 $ 32,000 Investment losses under one year old are expected to be recoverable in future periods and are not deemed by management to be unrecoverable. Investment losses in excess of 1 year are also expected to be recoverable in future periods as market values have recovered considerably during 2007 and the Company has the intent and ability to hold these investments until further market recovery occurs. The unrealized losses on the Company’s investments in U.S. Government Securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2007. (13)
  48. 48. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) The scheduled maturities of debt securities to be held-to-maturity and securities available- for-sale at December 31, 2007 are as follows: Securities to be Securities Held-to-Maturity Available-for-Sale Amortized Fair Amortized Fair Cost Value Cost Value Due in One Year or Less $ - $ - $ - $ - Due from One Year to Five Years Due from Five to Ten Years Due after Ten Years 260,000 260,000 523,000 555,000 Total $ - $ - $ - $ - Gross realized gains and losses on sales of securities available-for-sale are: 2007 2006 Gross Realized Gains: U.S. Government and Agency Securities $ - $ - Gross Realized Losses: U.S. Government and Agency Securities (20,000) (10,000) Total $ (20,000) $ (10,000) The determination of other comprehensive income (loss) for the years ended December 31 is as follows: 2007 2006 Increase (Decrease) in Unrealized Gains (Losses) on Securities Available-for-Sale $ 20,000 $ 6,000 Tax Benefit (Expense) (5,000) (1,000) Net-of-Tax Amount 15,000 5,000 Reclassification Adjustment - - Tax Benefit (Expense) - - Net-of-Tax Amount - - Other Comprehensive Income (Loss) $ 15,000 $ 5,000 (14)
  49. 49. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 4 COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS 2007 2006 Costs Incurred on Uncompleted Projects $ 3,550,000 $ 2,850,000 Estimated Gross Profit 400,000 240,000 Contract Revenues Earned 3,950,000 3,090,000 Less: Billings to Date 3,850,000 2,810,000 Total $ 100,000 $ 280,000 Reported in the accompanying balance sheets as follows: 2007 2006 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts $ 550,000 $ 400,000 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts (450,000) (120,000) Total $ 100,000 $ 280,000 NOTE 5 BACKLOG The Company's backlog on signed contracts as of December 31, 2007 and 2006 is as follows: 2007 2006 Contract Revenues: Backlog Balance, Beginning of Year $ 4,500,000 $ 2,000,000 New Contracts and Contract Adjustments 21,200,000 15,000,000 Contract Revenue Earned (18,500,000) (12,500,000) Backlog Balance, End of Year $ 7,200,000 $ 4,500,000 Contract Costs: Backlog Balance, Beginning of Year $ 3,980,000 $ 1,720,000 New Contracts and Contract Adjustments 18,770,885 13,310,000 Contract Costs Incurred (16,280,000) (11,050,000) Backlog Balance, End of Year $ 6,470,885 $ 3,980,000 The Company has additional contract revenue backlog of $93,000 with associated costs of $65,000 on one contract signed and contract revenue backlog of $8,600,000 with associated costs of $7,480,000 on one contract awarded, but not signed, during the period January 1, 2008 through March 4, 2008. As of December 31, 2007 and 2006, contract costs of approximately $655,000 and $850,000 included in the above cost backlog are for subcontractors. (15)
  50. 50. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 6 JOINT VENTURE On June 30, 2005, the Company entered into a 40% interest joint venture with ABC Contractor on the Metropolitan Industrial Complex in Charlotte County, Florida. The joint venture is recorded on the equity basis and at December 31, 2007 and 2006, the balance consisted of the original investment of $40,000 plus unremitted joint venture income. Summary financial data of the joint venture is as follow: 2007 2006 ASSETS Cash $ 45,000 $ 30,000 Contract Receivables - Current Billings 126,500 90,000 Contract Retainage 25,000 5,000 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 1,000 5,000 Total Assets $ 197,500 $ 130,000 LIABILITIES AND PARTNERS' EQUITY Accounts Payable - Regular $ 10,000 $ 5,000 Accounts Payable - Retainage - - Total Liabilities 10,000 5,000 Partners' Equity Sample Contracting Company, Inc 75,000 50,000 ABC Contractor 112,500 75,000 Total Partners' Equity 187,500 125,000 Total Liabilities and Partners' Equity $ 197,500 $ 130,000 OPERATIONS Contract Revenues $ 300,000 $ 200,000 Contract Costs 167,500 140,000 Gross Profit 132,500 60,000 Non-Contract Expenses 45,000 35,000 Net Income $ 87,500 $ 25,000 The contract has been completed in January 2008. The joint venture anticipates the investment will be distributed to the partners in mid-2008. (16)
  51. 51. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 7 NOTE PAYABLE - BANK The Company has a bank line of credit available through May 1, 2008 for maximum working capital borrowings of $2,000,000. The borrowings are secured by inventories, accounts receivable, general intangibles and property and equipment. The interest rate is 1.0% over prime. The Company's stockholders have personally guaranteed the borrowings. The line of credit agreement contains covenants related to certain financial ratios. Payable to: Security 2007 2006 Installment Note, Bank, 10% Interest; Accounts Monthly Principal and Interest Receivable, Installments of $10,200 through Inventory, August 2008 Property and Equipment $ 186,000 $ 285,000 Installment Note, Bank, Interest at Prime Plus 1.5%; Monthly Principal Installments of $5,500 Plus Interest Certain through June 2010 Equipment 297,000 - Mortgage Note - Bank, 9% Interest; Monthly Principal and Interest Installments of $2,433 through Mortgage on December 2012 Real Estate 117,000 135,000 Total 600,000 420,000 Less: Current Portion 193,000 117,000 Long-Term Portion $ 407,000 $ 303,000 The shareholders have personally guaranteed the above borrowings. Maturity requirements on long-term debt as of December 31, 2007 are as follows: Year Ending December 31, Amount 2008 $ 193,000 2009 165,800 2010 89,300 2011 91,400 2012 60,500 Total $ 600,000 (17)
  52. 52. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 8 OPERATING LEASE AGREEMENTS The Company leases office facilities from a shareholder under a noncancelable operating lease. The lease is for five years with an option to renew under the same terms for an additional five years. Total rent expense under this operating lease was $36,000 for 2007 and 2006. Future minimum rent commitments under this facility lease are as follows: Year Ending December 31, Amount 2008 $ 36,000 2009 36,000 2010 6,000 Total $ 78,000 The Company rents certain construction equipment for specific construction contracts under short-term rental arrangements. Rent expense under these operating leases was $625,000 and $565,000 for the years ended December 31, 2007 and 2006, respectively. NOTE 9 INCOME TAXES The provision for income taxes for the years ended December 31, 2007 and 2006 consists of the following: 2007 2006 Current: Federal $ 211,000 $ 42,000 States 62,000 13,000 Deferred 42,000 5,000 Total Provision for Income Taxes $ 315,000 $ 60,000 The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income for the years ended December 31, 2007 due to the following: 2007 2006 Tax Expense of 34% $ 263,500 $ 57,700 Increase (Decrease) in Income Taxes Resulting from: Benefit of Income Taxed at Lower Rates - (6,000) Tax Credits (4,000) (2,000) Nondeductible Expenses 8,500 1,100 State Income Taxes, Net of Federal Tax Benefit 47,000 9,200 Valuation Allowance - - Total $ 315,000 $ 60,000 (18)
  53. 53. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 9 INCOME TAXES (CONTINUED) The components of the deferred income tax asset and liability as of December 31, 2007 and 2006 are as follows: 2007 2006 Deferred Income Tax Liability: Property and Equipment $ 100,000 $ 50,000 Deferred Tax Asset, Net: Allowance for Uncollectible Accounts Receivable, Deferred Tax Asset $ 40,000 $ 14,000 Accrued Expenses, Deferred Tax Liability (18,000) - Net Unrealized Appreciation on Securities Available-for-Sale, Deferred Tax Liabilities (7,000) (2,000) Deferred Tax Asset, Net $ 15,000 $ 12,000 NOTE 10 QUALIFIED RETIREMENT PLAN The Company has adopted a profit sharing plan for non-union employees meeting the eligibility requirements. Contributions to the Plan are at the discretion of the Company's Board of Directors. Contribution expense for the years ended December 31, 2007 and 2006 was $50,000 and $40,000, respectively. NOTE 11 BUY-SELL AGREEMENT The stockholders and the Company have a buy-sell agreement. In the event of a stockholder’s death, the Company has the option to redeem the applicable shares of common stock at a price determined under the terms of the agreement. The Company carries $1,000,000 of life insurance on each stockholder to partially or completely fund this agreement. Any remaining balance is to be paid in five equal annual installments with interest at 8%. NOTE 12 RELATED PARTY TRANSACTIONS The Company has made advances to officers of $20,000 and $50,000 in 2007 and 2006, respectively. These advances are unsecured and bear interest at prime. Interest income was $5,000 and $4,000 for the years 2007 and 2006, respectively. (19)
  54. 54. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 13 COMMITMENTS AND CONTINGENCIES The Company maintains and pays certain of its insurance under retrospective insurance policies. As of December 31, 2007, the Company has an outstanding irrevocable letter of credit expiring December 31, 2007, of $500,000 issued in favor of the Company's workers compensation insurance carrier. The Company is a defendant on claims relating to matters arising in the ordinary course of their construction business. Certain of the claims are insured but subject to varying deductibles and certain of the claims are uninsured. The amount of liability, if any, from the claims cannot be determined with certainty, however, management is of the opinion that the outcome of the claims will not have a material adverse impact on the Company’s financial position. A claim for $180,000 has been filed against the Company and its bonding company arising out of the failure of a subcontractor of the Company to pay its suppliers. In the opinion of counsel and management, the outcome of this claim will not have a material effect on the Company's financial position, results of operations or cash flows. The Company has commitments for purchases of equipment at December 31, 2007 of $120,000. . (20)
  55. 55. SUPPLEMENTARY INFORMATION
  56. 56. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2007 (SEE ACCOUNTANTS' REVIEW REPORT) Gross Profit On Jobs Performed In 2007 Amounts From Jobs Performed In 2007 Recognized Recognized In In 2007 2006 Cost Of Revenues Revenues Gross Gross Earned Earned Profit Profit Contracts Completed During 2007 $ 14,550,000 $ 12,730,000 $ 1,820,000 $ 1,000,000 Contracts In Progress At Year End 3,950,000 3,550,000 400,000 - $ 18,500,000 $ 16,280,000 $ 2,220,000 $ 1,000,000 (21)
  57. 57. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF CONTRACTS COMPLETED DURING 2007 (SEE ACCOUNTANTS' REVIEW REPORT) Contract Totals Before January 1, 2007 Year Ended December 31, 2007 Contract Cost of Gross Revenues Cost of Gross Revenues Cost of Gross Job # Contract Price Revenues Profit Earned Revenues Profit Earned Revenues Profit 1 Completed Job $ 10,000,000 $ 8,000,000 $ 2,000,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 2 Completed Job 5,000,000 4,730,000 270,000 - - - 5,000,000 4,730,000 270,000 3 Completed Job 4,550,000 4,000,000 550,000 - - - 4,550,000 4,000,000 550,000 $ 19,550,000 $ 16,730,000 $ 2,820,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 $ 14,550,000 $ 12,730,000 $ 1,820,000 (22)
  58. 58. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE CONTRACTS IN PROGRESS AT DECEMBER 31, 2007 (SEE ACCOUNTANTS' REVIEW REPORT) Year Ended December 31, 2007 At December 31, 2007 Cost & Billings Estimated In Excess Total Estimated Earnings In Of Cost & Contract Estimated Gross Revenues Cost of Gross Billings Excess Of Estimated Job # Contract Price Cost Profit Earned Revenues Profit To Date Billings Earnings 4 Underbilled Job $ 7,850,000 $ 7,056,885 $ 793,115 $ 2,780,972 $ 2,500,000 $ 280,972 $ 2,230,972 $ 550,000 $ - 5 Overbilled Job 3,300,000 2,964,000 336,000 1,169,028 1,050,000 119,028 1,619,028 - 450,000 $ 11,150,000 $ 10,020,885 $ 1,129,115 $ 3,950,000 $ 3,550,000 $ 400,000 $ 3,850,000 $ 550,000 $ 450,000 (23)
  59. 59. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF CONTRACT COSTS AND GENERAL AND ADMINISTRATIVE EXPENSE YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 AMOUNT PERCENT AMOUNT PERCENT CONTRACT COSTS Materials $ 5,250,000 28.4 % $ 4,500,000 36.0 % Labor 4,625,000 25.0 3,000,000 24.0 Subcontract Expense 3,325,000 18.0 1,236,000 9.9 Employee Benefits 1,295,000 7.0 810,000 6.5 Payroll Taxes 465,000 2.5 310,000 2.5 Equipment Rental 625,000 3.4 565,000 4.5 Gas, Fuel, Oil 375,000 2.0 354,000 2.8 Depreciation 320,000 1.7 275,000 2.2 Total Contract Costs $ 16,280,000 88.0 % $ 11,050,000 88.4 % GENERAL AND ADMINISTRATIVE EXPENSE Salaries and Wages, Office $ 768,000 4.2 % $ 646,000 5.2 % Payroll Taxes 40,000 0.2 39,000 0.3 Employee Benefits 75,000 0.4 70,000 0.6 Retirement Plan Contribution 50,000 0.3 40,000 0.3 Office Facilities Expense 300,000 1.6 300,000 2.4 Office Supplies and Expense 7,000 0.0 5,000 0.0 Provision for Uncollectible Accounts 70,000 0.4 10,000 0.1 Depreciation 30,000 0.2 25,000 0.2 Total General and Administrative Expense $ 1,340,000 7.2 % $ 1,135,000 9.1 % (24)
  60. 60. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF CONTRACT COSTS AND GENERAL AND ADMINISTRATIVE EXPENSE YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 2006 AMOUNT PERCENT AMOUNT PERCENT CONTRACT COSTS Materials $ 5,250,000 28.4 % $ 4,500,000 36.0 % Labor 4,625,000 25.0 3,000,000 24.0 Subcontract Expense 3,325,000 18.0 1,236,000 9.9 Employee Benefits 1,295,000 7.0 810,000 6.5 Payroll Taxes 465,000 2.5 310,000 2.5 Equipment Rental 625,000 3.4 565,000 4.5 Gas, Fuel, Oil 375,000 2.0 354,000 2.8 Depreciation 320,000 1.7 275,000 2.2 Total Contract Costs $ 16,280,000 88.0 % $ 11,050,000 88.4 % GENERAL AND ADMINISTRATIVE EXPENSE Salaries and Wages, Office $ 768,000 4.2 % $ 646,000 5.2 % Payroll Taxes 40,000 0.2 39,000 0.3 Employee Benefits 75,000 0.4 70,000 0.6 Retirement Plan Contribution 50,000 0.3 40,000 0.3 Office Facilities Expense 300,000 1.6 300,000 2.4 Office Supplies and Expense 7,000 0.0 5,000 0.0 Provision for Uncollectible Accounts 70,000 0.4 10,000 0.1 Depreciation 30,000 0.2 25,000 0.2 Total General and Administrative Expense $ 1,340,000 7.2 % $ 1,135,000 9.1 % (24)
  61. 61. SAMPLE S CORP CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (SEE ACCOUNTANTS' REVIEW REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company elected to be taxed as an S Corporation for federal and state income tax purposes and, therefore, is not taxed as a separate entity. As such, the Company's taxable income or loss is included in the stockholders' individual income tax return, based on their stock ownership. Therefore, no provision for income taxes related to the Company's income is included in the financial statements. The Company recognizes income from long-term construction contracts on the percentage- of-completion method for both financial and tax reporting purposes. Income for tax purposes from some long-term contracts are deferred using other available tax accounting methods. The Company’s S Corporation income tax returns depreciate property and equipment using accelerated lives and methods of depreciation. The depreciation and certain accrued liabilities are allowed as expenses in different years. The cumulative amounts of these differences between tax and financial statement methods of accounting are summarized as follows as of December 31, 2008: 2008 2007 Retained Earnings, Accompanying Financial Statements $ 3,053,108 $ 1,723,529 Accelerated Depreciation for Tax Purposes (1,787) (14,759) Nonqualified Deferred Compensation 55,300 36,600 Allowance for Doubtful Accounts 70,000 25,000 Tax Return Accumulated Undistributed Income $ 3,176,621 $ 1,770,370 The anticipated shareholder Federal tax asset on deferred items at December 31, 2008 and 2007 is $42,000 and $16,000, respectively. It is expected that a distribution of $50,000 will be made in 2009 to provide the shareholder funds needed for his 2008 individual income tax liability. The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2008. There was no impact to the Company's financial statements as a result of the implementation of FIN 48. (8)

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