Lykes Excelleration Surety 7 22 09

Current Issues in
Construction and Surety
Bonding
Excelleration 2009
Lykes Insurance Learning Series

July 22, 2009

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

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

Also Here Today
• John Suarez
813.464.2020, johnsuarez@westfieldgrp.com

Bond Manager, Surety Operations

Westfield Insurance, Tampa

www.westfieldinsurance.com

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

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

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

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

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

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)

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

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/

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

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.

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

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.

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)

Key Financial Ratios for Sureties
• An example of a working capital calculation by a
Surety.

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.

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”

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

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

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.

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

LarsonAllen LLP

• Appendix
– Information about LarsonAllen and
LarsonAllen’s Construction and Real Estate
Group

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

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.

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.

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

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

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

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%

SAMPLE CONTRACTING COMPANY, INC.

FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION

(REVIEWED)

YEARS ENDED DECEMBER 31, 2007 AND 2006

TABLE OF CONTENTS

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

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)

BALANCE SHEETS (CONTINUED)

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

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

(3)

STATEMENTS OF INCOME

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

(4)

STATEMENTS OF STOCKHOLDERS’ EQUITY

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

(5)

STATEMENTS OF CASH FLOWS

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

(6)

STATEMENTS OF CASH FLOWS (CONTINUED)

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) -
(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)
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

(7)

NOTES TO FINANCIAL STATEMENTS

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)


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)



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)



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)


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)


(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)


(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)


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
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)


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)


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)


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)


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)


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)

SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2007

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)

SCHEDULE OF CONTRACTS COMPLETED DURING 2007

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)

SCHEDULE CONTRACTS IN PROGRESS AT DECEMBER 31, 2007

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)

SCHEDULE OF CONTRACT COSTS AND
GENERAL AND ADMINISTRATIVE EXPENSE

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)

SAMPLE S CORP CONTRACTING COMPANY, INC.


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)

Lykes Excelleration Surety 7 22 09

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