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UNDERWATER ENGINEERING SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016 Note 8 - Commitments and Contingencies (cont'd.) Legal Proceedings Liabilities for Toss contingencies arising from claims, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 2017 and 2016, in the opinion of management and legal counsel, the outcome of such proceedings and litigation will not have a material adverse effect on the Company's financial statements. State and Local Government Contracts Under the terms of state and local contracts, periodic overhead audits are required and, as a result, certain costs may be questioned as not being allowable expenditures under the terms of the contracts. Such audits could lead to reimbursement to the applicable governmental agency. Based upon its experience with prior overhead audits, which have not resulted in any material disallowances, management believes that any such disallowances as a result of these audits would be immaterial. Financing Arrangements The Company has joint and several liabilities as co -borrowers under a financing arrangement with its related parties. The related parties may borrow up to $32,500,000 with a maturity date of September 30, 2020. Additionally, the agreement provides for a sublimit for standby letters of credit for up to $1,500,000. The line of credit contains several covenants requiring among other items, specific levels of debt service and collateral coverage. The line is secured by the assets of the related parties excluding real estate. If the related parties default on this line of credit, the Company is liable for the then outstanding balance. At December 31, 2017 and 2016, the balances outstanding against this line of credit were $3,100,000 and $6,350,000, respectively. Surety The Company is contingently liable to its surety under a general indemnity agreement. Under this agreement, the Company agrees to indemnify the surety for payments made on its behalf. The Company believes that all contingent liabilities will be satisfied by its performance on the specific contracts covered by the agreement. Note 9 - Subsequent Events The Company has evaluated all events or transactions that occurred after December 31, 2017 through March 29, 2018, which is the date that the financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure. 14