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Slide 1: Current Issues in Construction and Surety Bonding Excelleration 2009 Lykes Insurance Learning Series July 22, 2009
Slide 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
Slide 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
Slide 4: Also Here Today • John Suarez 813.464.2020, johnsuarez@westfieldgrp.com Bond Manager, Surety Operations Westfield Insurance, Tampa www.westfieldinsurance.com
Slide 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? Working capital with surety adjustments Liabilities to equity Job schedules Required financial statement disclosures • How does a Surety look at your information? – – – – • SBA bonding changes in the American Recovery and Reinvestment Act of 2009 (stimulus package) • Surety information checklist
Slide 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
Slide 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
Slide 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
Slide 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
Slide 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)
Slide 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
Slide 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, AsianAmerican, Native-American, American Woman, or ServiceDisabled Veteran (minimum 10% disability) who are US citizens and residents of Florida – http://dms.myflorida.com/other_programs/office_of_supplier_diversity_osd/certification/
Slide 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
Slide 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.
Slide 15: Sample GRAT Results •Shareholder contributes 35% of company in nonvoting 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
Slide 16: Zero-Out GRAT Calculation
Slide 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.
Slide 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)
Slide 19: Key Financial Ratios for Sureties • An example of a working capital calculation by a Surety.
Slide 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.
Slide 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”
Slide 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
Slide 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
Slide 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.
Slide 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
Slide 26: LarsonAllen LLP • Appendix – Information about LarsonAllen and LarsonAllen’s Construction and Real Estate Group
Slide 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, OwnerOperated 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
Slide 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.
Slide 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.
Slide 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
Slide 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
Slide 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 1st Qtr Revenues from construction contracts Cost of revenues Subcontractors and material Labor Equipment Other costs Total cost of revenues Gross Profit Operating expenses Business development and promotion Bad debts Depreciation and amortization Donations Dues and subscription Insurance expense Licenses and taxes Miscellaneous expenses Rent Office & postage Office salaries Payroll taxes Professional fees Repairs & maintenance Travel and entertainment Utilities and telephone Total operating expenses Income from operations Other income / (expense) Interest expense Gain on sale of assets Interest income and other gains and losses Total other income/(expense) Net Income / (Loss) Cash Flows Net Income / (Loss) Add back depreciation and amortization Net (increase) decrease in accounts receivable Net increase (decrease) in accounts payable Debt paydown Net Cash Flow $ $ 3,137,250 $ Forcasted 2nd Qtr 4,012,750 $ Forecasted 3rd Qtr 4,884,500 $ Forecasted 4th Qtr 1,492,000 2009 Total $ 13,526,500 Percent of Sales 100.0% 2,755,808 145,043 2,900,850 236,400 3,513,053 184,898 3,697,950 314,800 4,277,185 225,115 4,502,300 382,200 1,279,460 67,340 1,346,800 145,200 11,825,505 622,395 12,447,900 1,078,600 87.4% 4.6% 0.0% 0.0% 92.0% 8.0% 6,000 15,000 10,250 375 1,125 12,750 250 500 19,750 6,250 84,000 15,750 15,000 2,500 1,250 6,000 196,750 39,650 6,000 15,000 10,250 375 1,125 12,750 250 500 19,750 6,250 84,000 15,750 5,000 2,500 1,250 6,000 186,750 128,050 6,000 15,000 10,250 375 1,125 12,750 250 500 19,750 6,250 84,000 15,750 5,000 2,500 1,250 6,000 186,750 195,450 6,000 15,000 10,250 375 1,125 12,750 250 500 19,750 6,250 84,000 15,750 5,000 2,500 1,250 6,000 186,750 (41,550) 24,000 60,000 41,000 1,500 4,500 51,000 1,000 2,000 79,000 25,000 336,000 63,000 30,000 10,000 5,000 24,000 757,000 321,600 0.2% 0.4% 0.3% 0.0% 0.0% 0.4% 0.0% 0.0% 0.6% 0.2% 2.5% 0.5% 0.2% 0.1% 0.0% 0.2% 5.6% 2.4% (25,000) (25,000) 14,650 $ (25,000) (25,000) 103,050 $ (25,000) (25,000) 170,450 $ (25,000) (25,000) (66,550) $ (100,000) (100,000) 221,600 -0.7% 0.0% 0.0% -0.7% 1.6% $ 14,650 $ 10,250 (5,000) 19,900 $ 103,050 $ 10,250 (5,000) 108,300 $ 170,450 $ 10,250 (5,000) 175,700 $ (66,550) $ 10,250 (5,000) (61,300) $ 221,600 41,000 (20,000) 242,600 $ For Internal Use Only
Slide 33: SAMPLE CONTRACTORS, INC. Schedule I - Forecasted Job Completion As of December 2, 2008 Job Number 101 102 103 104 105 106 107 108 109 110 111 112 113 114 Job 101 Job 102 Job 103 Job 104 Job 105 Job 106 Job 107 Job 108 Job 109 Job 110 Job 111 Job 112 Job 113 Job 114 Job Name Contract Amt 500,000 100,000 1,000,000 2,000,000 1,000,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 2,100,000 Estimated Cost 450,000 85,000 900,000 1,850,000 975,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 1,975,000 Gross Profit 50,000 15,000 100,000 150,000 25,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 125,000 GP % 10.0% 15.0% 10.0% 7.5% 2.5% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 6.0% 4th Qtr 2008 98% 79% 50% 98% 92% 100% 15% 5% 41% 50% 41% 92% 50% 5% 1st Qtr 2009 100% 100% 92% 100% 100% 100% 50% 29% 79% 92% 79% 100% 92% 29% 2nd Qtr 2009 100% 100% 100% 100% 100% 100% 92% 60% 100% 100% 100% 100% 100% 60% 3rd Qtr 2009 100% 100% 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 98% 4th Qtr 2009 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Slide 34: SAMPLE CONTRACTING COMPANY, INC. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION (REVIEWED) YEARS ENDED DECEMBER 31, 2007 AND 2006
Slide 35: SAMPLE CONTRACTING COMPANY, INC. TABLE OF CONTENTS YEARS ENDED DECEMBER 31, 2007 AND 2006 ACCOUNTANTS’ REVIEW REPORT FINANCIAL STATEMENTS BALANCE SHEETS STATEMENTS OF INCOME STATEMENTS OF STOCKHOLDERS’ EQUITY STATEMENTS OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2007 SCHEDULE OF CONTRACTS COMPLETED DURING 2007 SCHEDULE OF CONTRACTS IN PROGRESS AT DECEMBER 31, 2007 SCHEDULE OF CONTRACT COSTS AND GENERAL AND ADMINISTRATIVE EXPENSE 1 2 4 5 6 8 21 22 23 24
Slide 37: SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 ASSETS CURRENT ASSETS Cash and Cash Equivalents Securities Available-for-Sale Accounts Receivable: Current Billings on Contracts Retainages on Contracts Other Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Inventories Prepaid Expenses Deferred Income Taxes Total Current Assets PROPERTY AND EQUIPMENT Land Buildings Equipment Vehicles Office Equipment Total Less: Accumulated Depreciation Total Property and Equipment OTHER ASSETS Notes Receivable - Officers Investment in Joint Venture Securities Held-to-Maturity Cash Value of Life Insurance, Less Policy Loans of $30,000 and $20,000, Respectively Total Other Assets Total Assets $ 2006 $ 183,000 555,000 2,845,000 380,000 125,000 550,000 165,000 37,000 15,000 4,855,000 $ 245,000 400,000 2,240,000 260,000 40,000 400,000 90,000 32,000 12,000 3,719,000 75,000 420,000 1,875,000 280,000 145,000 2,795,000 1,435,000 1,360,000 75,000 420,000 1,590,000 240,000 120,000 2,445,000 1,110,000 1,335,000 70,000 75,000 260,000 80,000 485,000 6,700,000 $ 50,000 50,000 250,000 60,000 410,000 5,464,000 See accompanying Notes to Financial Statements. (2)
Slide 38: SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS (CONTINUED) DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note Payable - Bank Current Maturities of Long-Term Debt Accounts Payable: Current Retainage Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Accrued Expenses Income Taxes Payable Total Current Liabilities LONG-TERM LIABILITIES Long-Term Debt (Less Current Maturities) Deferred Income Taxes Total Long-Term Liabilities Total Liabilities STOCKHOLDERS' EQUITY Common Stock - No Par Value; 100,000 Shares Authorized, 50,200 and 50,000, Respectively, Shares Issued and Outstanding Retained Earnings Unrealized Gains on Securities Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 2006 $ 590,000 193,000 1,640,000 600,000 450,000 475,000 110,000 4,058,000 $ 800,000 117,000 1,564,000 500,000 120,000 350,000 10,000 3,461,000 407,000 100,000 507,000 4,565,000 303,000 50,000 353,000 3,814,000 60,000 2,050,000 25,000 2,135,000 6,700,000 $ 50,000 1,590,000 10,000 1,650,000 5,464,000 See accompanying Notes to Financial Statements. (3)
Slide 39: SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 AMOUNT PERCENT CONTRACT REVENUES EARNED CONTRACT COSTS CONTRACT GROSS PROFIT $ 18,500,000 16,280,000 2,220,000 100.0 % 88.0 12.0 2006 AMOUNT PERCENT $ 12,500,000 11,050,000 1,450,000 100.0 % 88.4 11.6 GENERAL AND ADMINISTRATIVE EXPENSE INCOME FROM OPERATIONS OTHER INCOME (EXPENSE) Income from Joint Venture Gain (Loss) on Sale of Equipment Investment Income Interest Expense Realized Gain (Loss) on Sale of Securities Total Other Income (Expense) INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME $ 1,340,000 880,000 7.2 4.8 1,135,000 315,000 9.1 2.5 35,000 15,000 10,000 (145,000) (20,000) (105,000) 775,000 315,000 460,000 0.2 0.1 0.1 (0.8) (0.1) (0.6) 4.2 1.7 2.5 $ 10,000 (10,000) (140,000) (10,000) (150,000) 165,000 60,000 105,000 0.1 (0.1) (1.1) (0.1) (1.2) 1.3 0.5 0.8 See accompanying Notes to Financial Statements. (4)
Slide 40: SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) Common Stock BALANCE, JANUARY 1, 2006 COMPREHENSIVE INCOME Net Income Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $1,000 Deferred Income Tax) Total Comprehensive Income BALANCE, DECEMBER 31, 2006 COMPREHENSIVE INCOME Net Income Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $5,000 Deferred Income Tax) Total Comprehensive Income Sale of 200 Shares to an Employee for Cash BALANCE, DECEMBER 31, 2007 $ $ 50,000 Retained Earnings $ 1,485,000 Unrealized Gains (Losses) on Securities $ 5,000 Total $ 1,540,000 - 105,000 - - - 5,000 110,000 50,000 1,590,000 10,000 1,650,000 - 460,000 - - - 15,000 475,000 10,000 60,000 $ 2,050,000 $ 25,000 10,000 $ 2,135,000 See accompanying Notes to Financial Statements. (5)
Slide 41: SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Contracts Cash Paid to Suppliers and Employees Interest Paid Income Taxes Paid Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Payments for Purchase of Equipment and Vehicles Proceeds from Sale of Equipment and Vehicles Increase in Cash Value of Life Insurance Advances of Note Receivable - Officers Purchase of Investments Proceeds from Sale of Investments Proceeds on Joint Venture Distribution Investment in Joint Venture Cash Used by Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Long-Term Borrowings Payments on Long-Term Debt Net Proceeds from (Payments on) Short-Term Borrowings Proceeds from Life Insurance Policy Loans Proceeds from Sale of Common Stock Cash Provided by (Used in) Financing Activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and Cash Equivalents - Beginning of Year CASH AND CASH EQUIVALENTS - END OF YEAR $ 2006 $ 17,955,000 (17,134,000) (145,000) (173,000) 503,000 $ 12,630,000 (12,345,000) (140,000) (65,000) 80,000 (410,000) 50,000 (30,000) (20,000) (235,000) 80,000 10,000 (555,000) (180,000) 20,000 (10,000) (50,000) (100,000) 200,000 (40,000) (160,000) 330,000 (150,000) (210,000) 10,000 10,000 (10,000) 100,000 (80,000) 200,000 220,000 (62,000) 245,000 183,000 $ 140,000 105,000 245,000 See accompanying Notes to Financial Statements. (6)
Slide 42: SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2007 AND 2006 (SEE ACCOUNTANTS' REVIEW REPORT) 2007 RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES Net Income Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation (Gain) Loss on Sale of Equipment Realized (Gain) Loss on Sale of Securities Income from Joint Venture Accretion on Securities Held-to-Maturity Deferred Income Taxes (Increase) Decrease in: Contract Accounts Receivable Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Inventories Other Current Assets Increase (Decrease) in: Accounts Payable Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Accrued Expenses Income Taxes Payable Cash Provided by Operating Activities $ 350,000 (15,000) 20,000 (35,000) (10,000) 42,000 (725,000) (150,000) (75,000) (90,000) 176,000 330,000 125,000 100,000 503,000 $ $ 460,000 $ 2006 105,000 300,000 10,000 10,000 (10,000) 5,000 150,000 60,000 (20,000) (30,000) (375,000) (80,000) (10,000) (35,000) 80,000 See accompanying Notes to Financial Statements. (7)
Slide 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 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)
Slide 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) 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)
Slide 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) 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-forsale 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 Equipment Vehicles Office Equipment (10) 30 Years 5-10 Years 5-7 Years 3-10 Years
Slide 46: 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 Completed Contracts, Including Retainages of Approximately $215,000 and $140,000, Respectively Contracts in Process, Including Retainages of Approximately $165,000 and $120,000, Respectively Less: Allowance for Uncollectible Accounts Total, Net $ 2,025,000 1,300,000 3,325,000 100,000 3,225,000 $ 2006 1,550,000 980,000 2,530,000 30,000 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)
Slide 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) The carrying amounts of investment securities as shown in the accompanying balance sheets and their approximate fair values at December 31 are as follows: Amortized Cost Securities Available-for-Sale: December 31, 2007 Equity Securities U.S. Government and Agency Securities Total December 31, 2006 Equity Securities U.S. Government and Agency Securities Total Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 523,000 523,000 $ - $ - $ 555,000 555,000 $ $ $ $ $ 388,000 388,000 $ - $ - $ 400,000 400,000 $ $ Gross Unrealized Gains $ Gross Unrealized Losses $ Amortized Cost Securities to be Held-to-Maturity December 31, 2007 U.S. Government and Agency Securities State and Municipal Securities Total December 31, 2006 U.S. Government and Agency Securities State and Municipal Securities Total Fair Value $ $ 260,000 260,000 $ $ - $ $ - $ $ 260,000 260,000 $ $ 250,000 250,000 $ $ - $ $ - $ $ 250,000 250,000 (12)
Slide 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 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 Unrealized Fair Value $ $ $ Total 12 Months or Greater Unrealized Fair Value $ 555,000 $ 32,000 260,000 $ 815,000 $ 32,000 $ - Marketable Equity Securities Corporate Obligations US Government Obligations Marketable Equity Securities Corporate Obligations US Government Obligations Total 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)
Slide 49: 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 availablefor-sale at December 31, 2007 are as follows: Securities to be Held-to-Maturity Amortized Fair Cost Value $ $ Securities Available-for-Sale Amortized Fair 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 Total - - $ 260,000 - $ 260,000 - $ 523,000 - $ 555,000 - Gross realized gains and losses on sales of securities available-for-sale are: 2007 Gross Realized Gains: U.S. Government and Agency Securities Gross Realized Losses: U.S. Government and Agency Securities Total $ $ $ 2006 - (20,000) (20,000) $ (10,000) (10,000) The determination of other comprehensive income (loss) for the years ended December 31 is as follows: 2007 Increase (Decrease) in Unrealized Gains (Losses) on Securities Available-for-Sale Tax Benefit (Expense) Net-of-Tax Amount Reclassification Adjustment Tax Benefit (Expense) Net-of-Tax Amount Other Comprehensive Income (Loss) $ $ 20,000 (5,000) 15,000 15,000 $ $ 2006 6,000 (1,000) 5,000 5,000 (14)
Slide 50: 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 Costs Incurred on Uncompleted Projects Estimated Gross Profit Contract Revenues Earned Less: Billings to Date Total $ 2007 3,550,000 400,000 3,950,000 3,850,000 100,000 $ 2006 2,850,000 240,000 3,090,000 2,810,000 280,000 $ $ Reported in the accompanying balance sheets as follows: 2007 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Total $ 550,000 (450,000) 100,000 $ 2006 400,000 (120,000) 280,000 $ $ NOTE 5 BACKLOG The Company's backlog on signed contracts as of December 31, 2007 and 2006 is as follows: 2007 Contract Revenues: Backlog Balance, Beginning of Year New Contracts and Contract Adjustments Contract Revenue Earned Backlog Balance, End of Year Contract Costs: Backlog Balance, Beginning of Year New Contracts and Contract Adjustments Contract Costs Incurred Backlog Balance, End of Year $ 4,500,000 21,200,000 (18,500,000) 7,200,000 $ 2006 2,000,000 15,000,000 (12,500,000) 4,500,000 $ $ $ $ 3,980,000 18,770,885 (16,280,000) 6,470,885 $ $ 1,720,000 13,310,000 (11,050,000) 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)
Slide 51: 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 ASSETS Cash Contract Receivables - Current Billings Contract Retainage Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Total Assets $ 45,000 126,500 25,000 1,000 197,500 $ 30,000 90,000 5,000 5,000 130,000 2006 $ $ LIABILITIES AND PARTNERS' EQUITY Accounts Payable - Regular Accounts Payable - Retainage Total Liabilities Partners' Equity Sample Contracting Company, Inc ABC Contractor Total Partners' Equity Total Liabilities and Partners' Equity OPERATIONS Contract Revenues Contract Costs Gross Profit Non-Contract Expenses Net Income $ 300,000 167,500 132,500 45,000 87,500 $ 200,000 140,000 60,000 35,000 25,000 $ $ 10,000 10,000 $ 5,000 5,000 75,000 112,500 187,500 197,500 $ 50,000 75,000 125,000 130,000 $ $ The contract has been completed in January 2008. The joint venture anticipates the investment will be distributed to the partners in mid-2008. (16)
Slide 52: 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: Installment Note, Bank, 10% Interest; Monthly Principal and Interest Installments of $10,200 through August 2008 Installment Note, Bank, Interest at Prime Plus 1.5%; Monthly Principal Installments of $5,500 Plus Interest through June 2010 Mortgage Note - Bank, 9% Interest; Monthly Principal and Interest Installments of $2,433 through December 2012 Total Less: Current Portion Long-Term Portion $ Security Accounts Receivable, Inventory, Property and Equipment 2007 2006 $ 186,000 $ 285,000 Certain Equipment 297,000 - Mortgage on Real Estate 117,000 600,000 193,000 407,000 $ 135,000 420,000 117,000 303,000 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, 2008 2009 2010 2011 2012 Total Amount 193,000 165,800 89,300 91,400 60,500 600,000 $ $ (17)
Slide 53: 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, 2008 2009 2010 Total Amount 36,000 36,000 6,000 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 Current: Federal States Deferred Total Provision for Income Taxes $ 211,000 62,000 42,000 315,000 $ 2006 42,000 13,000 5,000 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 263,500 (4,000) 8,500 47,000 315,000 2006 57,700 (6,000) (2,000) 1,100 9,200 60,000 Tax Expense of 34% Increase (Decrease) in Income Taxes Resulting from: Benefit of Income Taxed at Lower Rates Tax Credits Nondeductible Expenses State Income Taxes, Net of Federal Tax Benefit Valuation Allowance Total $ $ $ $ (18)
Slide 54: 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 Deferred Income Tax Liability: Property and Equipment Deferred Tax Asset, Net: Allowance for Uncollectible Accounts Receivable, Deferred Tax Asset Accrued Expenses, Deferred Tax Liability Net Unrealized Appreciation on Securities Available-for-Sale, Deferred Tax Liabilities Deferred Tax Asset, Net $ 100,000 $ 2006 50,000 $ 40,000 (18,000) (7,000) 15,000 $ 14,000 (2,000) 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)
Slide 55: 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)
Slide 56: SUPPLEMENTARY INFORMATION
Slide 57: SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2007 (SEE ACCOUNTANTS' REVIEW REPORT) Amounts From Jobs Performed In 2007 Recognized In 2007 Cost Of Revenues Earned Gross Profit On Jobs Performed In 2007 Recognized In 2006 Revenues Earned Contracts Completed During 2007 Contracts In Progress At Year End Gross Profit Gross Profit $ 14,550,000 3,950,000 $ 12,730,000 3,550,000 $ 1,820,000 400,000 $ 1,000,000 - $ 18,500,000 $ 16,280,000 $ 2,220,000 $ 1,000,000 (21)
Slide 58: SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF CONTRACTS COMPLETED DURING 2007 (SEE ACCOUNTANTS' REVIEW REPORT) Contract Totals Contract Job # 1 2 3 Contract Completed Job Completed Job Completed Job Price $ 10,000,000 5,000,000 4,550,000 $ 19,550,000 $ Cost of Revenues 8,000,000 4,730,000 4,000,000 $ 16,730,000 $ $ Gross Profit 2,000,000 270,000 550,000 2,820,000 $ $ Before January 1, 2007 Revenues Earned 5,000,000 5,000,000 $ $ Cost of Revenues 4,000,000 4,000,000 $ $ Gross Profit 1,000,000 1,000,000 $ Year Ended December 31, 2007 Revenues Earned 5,000,000 5,000,000 4,550,000 $ 14,550,000 $ Cost of Revenues 4,000,000 4,730,000 4,000,000 $ 12,730,000 $ $ Gross Profit 1,000,000 270,000 550,000 1,820,000 (22)
Slide 59: 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 & Estimated Billings In Excess Of Cost & Estimated Earnings Total Contract Job # Contract Price Estimated Cost Estimated Gross Profit Revenues Earned Cost of Revenues Gross Profit Billings To Date Earnings In Excess Of Billings 4 5 Underbilled Job Overbilled Job $ 7,850,000 3,300,000 $ 7,056,885 2,964,000 $ 793,115 336,000 1,129,115 $ 2,780,972 1,169,028 3,950,000 $ 2,500,000 1,050,000 3,550,000 $ 280,972 119,028 400,000 $ 2,230,972 1,619,028 3,850,000 $ 550,000 550,000 $ 450,000 450,000 $ 11,150,000 $ 10,020,885 $ $ $ $ $ $ $ (23)
Slide 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 AMOUNT CONTRACT COSTS Materials Labor Subcontract Expense Employee Benefits Payroll Taxes Equipment Rental Gas, Fuel, Oil Depreciation Total Contract Costs PERCENT AMOUNT 2006 PERCENT 5,250,000 4,625,000 3,325,000 1,295,000 465,000 625,000 375,000 320,000 $ 16,280,000 $ 28.4 % 25.0 18.0 7.0 2.5 3.4 2.0 1.7 88.0 % 4,500,000 3,000,000 1,236,000 810,000 310,000 565,000 354,000 275,000 $ 11,050,000 $ 36.0 % 24.0 9.9 6.5 2.5 4.5 2.8 2.2 88.4 % GENERAL AND ADMINISTRATIVE EXPENSE Salaries and Wages, Office Payroll Taxes Employee Benefits Retirement Plan Contribution Office Facilities Expense Office Supplies and Expense Provision for Uncollectible Accounts Depreciation Total General and Administrative Expense $ 768,000 40,000 75,000 50,000 300,000 7,000 70,000 30,000 1,340,000 4.2 % 0.2 0.4 0.3 1.6 0.0 0.4 0.2 7.2 % $ 646,000 39,000 70,000 40,000 300,000 5,000 10,000 25,000 1,135,000 5.2 % 0.3 0.6 0.3 2.4 0.0 0.1 0.2 9.1 % $ $ (24)
Slide 61: 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 AMOUNT CONTRACT COSTS Materials Labor Subcontract Expense Employee Benefits Payroll Taxes Equipment Rental Gas, Fuel, Oil Depreciation Total Contract Costs PERCENT AMOUNT 2006 PERCENT 5,250,000 4,625,000 3,325,000 1,295,000 465,000 625,000 375,000 320,000 $ 16,280,000 $ 28.4 % 25.0 18.0 7.0 2.5 3.4 2.0 1.7 88.0 % 4,500,000 3,000,000 1,236,000 810,000 310,000 565,000 354,000 275,000 $ 11,050,000 $ 36.0 % 24.0 9.9 6.5 2.5 4.5 2.8 2.2 88.4 % GENERAL AND ADMINISTRATIVE EXPENSE Salaries and Wages, Office Payroll Taxes Employee Benefits Retirement Plan Contribution Office Facilities Expense Office Supplies and Expense Provision for Uncollectible Accounts Depreciation Total General and Administrative Expense $ 768,000 40,000 75,000 50,000 300,000 7,000 70,000 30,000 1,340,000 4.2 % 0.2 0.4 0.3 1.6 0.0 0.4 0.2 7.2 % $ 646,000 39,000 70,000 40,000 300,000 5,000 10,000 25,000 1,135,000 5.2 % 0.3 0.6 0.3 2.4 0.0 0.1 0.2 9.1 % $ $ (24)
Slide 62: 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 percentageof-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 Retained Earnings, Accompanying Financial Statements Accelerated Depreciation for Tax Purposes Nonqualified Deferred Compensation Allowance for Doubtful Accounts Tax Return Accumulated Undistributed Income $ 3,053,108 (1,787) 55,300 70,000 3,176,621 $ 2007 1,723,529 (14,759) 36,600 25,000 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)