UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27290
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KSW, INC.
(Exact name of the Registrant as specified in its charter)
Delaware 11-3191686
---------------- --------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
37-16 23rd Street, Long Island City, New York 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 361-6500
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The estimated aggregate market value of the voting stock held by non-affiliates
of the registrant on March 18, 2002 was $4,102,733.25 (based on a price of
$0.75 per share).
As of March 18, 2002, there were 5,470,311 shares of Common Stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
2
PART I
ITEM 1. BUSINESS.....................................................................3
ITEM 2. PROPERTIES...................................................................7
ITEM 3. LEGAL PROCEEDINGS............................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........9
ITEM 6. SELECTED FINANCIAL DATA.....................................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..................................................................16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................17
ITEM 11. EXECUTIVE COMPENSATION......................................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................24
i
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............25
SIGNATURES.............................................................................................F-23
ii
PART I
ITEM 1. BUSINESS
General. KSW, Inc., a Delaware corporation (the "Company" or "KSW"),
furnishes and installs heating, ventilating and air conditioning ("HVAC")
systems and process piping systems for institutional, industrial, commercial,
high-rise residential and public works projects. The Company does not pursue
projects under $500,000. Directly or indirectly through separate subsidiaries,
the Company also serves as a mechanical trade manager, performing project
management services relating to the mechanical trades. The Company operates its
contracting business through its wholly-owned subsidiary, KSW Mechanical
Services, Inc. ("KSW Mechanical").
Total revenues for 2001 were $ 51,005,000. Some of the Company's
ongoing projects include the following: The Children's Hospital at New York
Presbyterian, Harborside Financial Center in Jersey City, N.J., and the New
Federal Court House and U.S. Post Office/Courthouse, both in Brooklyn, NY. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's primary strategic objectives are to increase its revenues
and to become more competitive in its present business. The Company may use
additional funds, if available, to expand its business into new geographic areas
in the Northeastern United States or to acquire businesses which would be
complementary to its current lines of business. The Company may also pursue
acquisitions outside its current lines of business for greater diversification.
The Company's common stock is traded on the NASDAQ Electronic Bulletin Board
under the symbol "KSWW."
The Company provides heating, ventilation and air conditioning ("HVAC")
systems and process piping systems under direct contracts with owners of
buildings or subcontracts with general contractors or construction managers.
These contracts sometimes are awarded by competitive bids, since many of the
owners are public entities. Other contracts are obtained through negotiation
with private parties.
Traditionally, the Company's mechanical contracting and subcontracting
work made up as much as 90% of its total revenues. Because mechanical
contracting and subcontracting is a substantial portion of its business, the
Company intends to continue its concentration in this area.
The Company's management pioneered the concept of managing the
mechanical trade portion of construction. On larger complex projects (generally
those having a mechanical portion valued over $10 million), such as the ongoing
Children's Hospital Project at New York Presbyterian, it is often beneficial for
a general contractor or construction manager to lock in the costs of the
mechanical portion of the contract prior to completion of the contract
documents. By engaging the services of a trade manager, general contractors or
construction managers can more accurately evaluate design alternatives so that
the completed construction documents balance costs and project objectives. As a
3
mechanical trade manager, the Company or its subsidiary performs a construction
manager function for the mechanical trade portion of a project. The Company
divides the mechanical portion of the contract into bid packages for
subcontractors and equipment, negotiates subcontracts and coordinates the work.
This coordination makes a significant difference in keeping a project on
schedule and within budget.
As a mechanical trade manager, the Company may subcontract parts of a
large project to different subcontractors, thereby increasing competition on
projects and lowering bids by allowing smaller contractors to compete for the
subcontract work. Customers benefit by having a single source with the
responsibility for the cost, coordination and construction progress of the
mechanical portion of the projects.
The Company provides a guaranteed maximum price ("GMP") to the owners
for its scope of responsibility. The Company controls the GMP by obtaining
accurate maximum price quotes from potential suppliers and subcontractors,
requiring payment and performance bonds from major subcontractors and adding a
contingency allowance to these before quoting the GMP. The Company also works to
control costs because it is a mechanical contractor and can perform the
guaranteed work on its own. These costs are subject to certain risk factors
discussed below.
Although trade management is typically available only on large jobs,
the Company believes there is opportunity for expanding this line of business.
While trade management projects provide a net profit margin similar to that for
contracting projects, there is generally less risk associated with trade
management projects because there is a contingency fund which can be drawn from
if necessary. A contingency fund is a line item which the Company includes in
the GMP to account for any contingencies the Company may not have anticipated in
estimating the GMP. In the event the Company's costs exceed the relevant line
items quoted in the GMP, the Company may draw from the contingency fund to cover
such expenses. While there is no assurance that any cost overrun will not exceed
this contingency, they have not done so to date.
Operations. The Company obtains projects primarily through negotiations
with private owners, construction managers and general contractors, and by
competitive bidding and negotiations in response to advertisements by federal,
state and local government agencies. The Company submits bids after a detailed
review of the project specifications, an internal review of the Company's
capabilities, equipment, personnel availability, and an assessment of whether
the project is likely to meet the targeted profit margins. After computing the
estimated costs of the project to be bid, the Company adds its desired profit
margin before submitting a bid.
The Company believes it has been successful in the competitive bidding
process because it is selective in the projects on which it bids and has highly
skilled personnel familiar with the local market. The Company strives to avoid
costly bidding errors by becoming thoroughly familiar with all aspects of a
project and developing a comprehensive project budget using its proven cost
estimation system. Projects are divided into phases and line items indicating
4
separate labor, equipment, material, subcontractor and overhead cost estimates.
As a project progresses, the Company's project managers are responsible for
planning, scheduling and overseeing operations and reviewing project costs
against the estimates. The Company's costs have been and may in the future be
impacted by lower than expected labor productivity and higher than expected
material costs.
The Company has received letters of approval as an authorized bidder by
various government agencies, including the New York City Transit Authority, the
New York City Health and Hospitals Corporation, the New York City School
Construction Authority, the New York City Housing Authority and the New York
State Dormitory Authority.
Markets. The Company competes for business primarily in the New York
City metropolitan area. However, the Company has performed work outside of that
area in the past.
Backlog. The Company has a backlog (anticipated revenue from the
uncompleted portions of awarded projects) of orders totaling approximately $
52,000,000 as of December 31, 2001, compared to $ 62,000,000 at December 31,
2000.
A portion of the Company's anticipated revenue in any year is not
reflected in its backlog at the start of the year because some projects are
started and completed the same year. The Company believes that its backlog is
firm, notwithstanding provisions contained in some contracts which allow
customers to modify or cancel the contracts at any time, subject to certain
conditions, including reimbursement of costs incurred in connection with the
contracts and the possible payment of cancellation fees.
Competition. The mechanical contracting market is highly competitive.
There are many larger regional and national companies with resources greater
than those of the Company. However, some of these large competitors are
unfamiliar with the New York City metropolitan area. The Company competes in New
York City with respect to such companies because of its reputation in the area
and its knowledge of the local labor force. There are many smaller contractors
and subcontractors in the New York City metropolitan area. The Company believes
there are barriers to entry for smaller competitors, including bonding
requirements, relationships with subcontractors, suppliers and union workers.
Regulation. The construction industry is subject to various
governmental regulations from local, state and federal authorities. The Company
is impacted by state and federal requirements regarding the handling and
disposal of lead paint, but the impact cannot be predicted at this time since it
varies from project to project. The Company must also comply with regulations as
to the use and disposal of solvents and hazardous wastes, compliance with which
are a normal part of its operations. The Company does not perform asbestos
abatement but has occasionally subcontracted that part of a contract to duly
licensed asbestos companies with the Company being named as an additional
insured on the asbestos company's liability insurance policy. The Company has
5
not incurred any liability for violation of environmental laws. The Company must
also comply with rules and regulations promulgated by the Occupational Safety
and Health Administration.
Employees. At December 31, 2001, the Company had 48 permanent, full
time employees. The Company also employs field employees who are union workers.
The number of union workers employed varies at any given time, depending on the
number and types of ongoing projects and the scope of construction work under
contract. The Company hires union labor for specific work assignments and can
reduce the number of union workers hired at will with no penalties.
The Company pays for benefits payable to union employees through the
payment of funds to a trust established by the union. The Company's obligation
is to pay a percentage of the wages of union workers to the trust fund. Thus,
the Company does not accrue liabilities for pension and medical benefits to
union retirees. The Company provides its full time permanent employees with
medical insurance benefits and a discretionary matching 401(k) plan. The Company
has in the past matched 25% of the employees' 401(k) contributions.
Dependence Upon Customers. The Company seeks large, multi-year
contracts. At any given time, a material portion of the Company's contracting
business may be for one large contract for one customer.
For the year ended December 31, 2001, work under contracts with three
customers: Tishman Construction Co., J.A. Jones Construction Group, LLC., and
Bovis Lend Lease, Inc., amounted to 23%, 16%, and 14% of the Company's total
revenues, respectively.
Historically, a considerable portion of the Company's revenue has been
generated from contracts with federal, state and local governmental authorities.
Consequently, a reduction in public sector contracts for any reason, including
an economic downturn or a reduction in government spending, could have a
material adverse effect on the Company's results of operations. At any one time,
the Company's contracts with federal, state and local governmental authorities
may or may not represent a material portion of its revenues.
On most of its projects, the Company is required to provide a surety
bond. The Company's ability to obtain bonding, and the amount of bonding
required, is primarily based upon the Company's net worth, working capital and
the number and size of projects under construction. The larger the project
and/or the number of projects under contract, the greater the requirements are
for bonding, net worth and working capital. The Company generally pays a fee to
the bonding company of an amount less than 1% of the amount of the contract to
be performed. Since inception, the Company has not encountered difficulties in
obtaining Payment and Performance Bonds nor has the bonding company been
required to make a payment on any bonds issued for the Company.
6
Other Matters. The Company does not own any patents, patent rights, or
similar intellectual property, and none are material to its business. The
Company's business is not subject to large seasonal variations. During 2000 the
Company spent $125,000 on investigating the feasibility of entering the
commercial fuel cell energy business. The Company expended no funds for research
and development in 2001 and anticipates none in 2002.
ITEM 2. PROPERTIES
Pursuant to a Modification of Lease Agreement, dated as of May 1, 1998,
the Company leases an office and warehouse space in Long Island City, consisting
of 18,433 square feet. The lease has an annual rent of $173,000. The lease has
two five year options with yearly rent increases of approximately 2%. The lease
is a triple net lease and thus the Company will pay any increases on real estate
taxes over the base year taxes, maintenance, insurance and utilities. The
Company has exercised the first five year option under the Modification of Lease
Agreement, which extends the lease term through June 2004.
The Company also leases a building and a storage yard in Bronx, New
York, consisting of a 14,000 square foot building, including 4,000 square feet
of offices, 10,000 square foot of shop space and an adjacent 5,000 square foot
storage yard. This lease is a triple net lease. The Company pays rent of
$103,000 per year, plus taxes (currently $20,000 per year), maintenance,
insurance and utilities. The lease will expire on December 31, 2002. See
"Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings
which could have a material adverse effect on its financial position or results
of operations, other than item (b) below. The following are the material
lawsuits in which the Company is a party:
a. Co-op City. In February 1999, the Company sued the general contractor
and its bonding company in New York State Supreme Court, Queens County,
to recover the sum of $5,770,919. Included is a claim for unanticipated
costs incurred through 1998 in the sum of $3,662,734, and claims to
recover for work beyond the scope of the Company's contract. Discovery
has been completed and the action placed on the trial calendar. The
case should be tried within the next twelve months. While the Company
and its counsel believe the lawsuit has merit, there is no guaranty the
claim will ultimately be successful, or that the full amount of damages
sought will be awarded.
b. Helionetics Creditors Committee v. Barnes, et. al. On April 26, 1999,
the Company and six current or former officers and directors were named
in a lawsuit in U.S. Bankruptcy Court, Central District of California,
instituted by the Creditors Committee of Helionetics, Inc., the
7
Company's former parent. The complaint alleges that the December 28,
1995 Distribution by Helionetics of KSW, Inc. stock to Helionetics'
shareholders was a fraudulent conveyance, and seeks compensatory
damages of $10,890,000, plus punitive damages. The December 28, 1995
distribution of stock was made pursuant to a Form 10 Registration
Statement filed with and declared effective by the Securities and
Exchange Commission. The Company believes that the lawsuit is without
merit and is aggressively defending the case. On March 15, 2001, the
Court denied a motion for summary judgment filed by the Company and its
directors, except the Court dismissed the case against director Robert
Brussel. The Court found that there were issues of fact requiring trial
on the merits. On May 30, 2001, the Court granted partial summary
judgment as to the Company's officers and directors, dismissing
Plaintiff's fraudulent conveyance causes of action relating to the
distribution. On October 11, 2001, the Court dismissed all causes of
action against the Company's officers and directors which relate to the
distribution itself. The Committee's remaining claims are against the
Company and allege (i) that the Company aided and abetted and conspired
with Helionetics, Inc. in the breach of a fiduciary duty in that the
distribution allegedly was made in violation of California Corporations
Code and (ii) that the redemption by the Company of 333 shares of the
Company's stock held by Helionetics, Inc. as part of the distribution
was a fraudulent conveyance. A hearing will be held within the next
three months to determine valuation issues including the issue of
Helionetics solvency on the date of distribution.
c. Stroock & Stroock & Lavan, LLP. On February 13, 2001, the Company
commenced an action in the Superior Court of the State of California,
County of Los Angeles against its former counsel, Stroock & Stroock &
Lavan, LLP ("Stroock") for malpractice in connection with Stroock's
representation of the Company in connection with the transactions which
form the basis for the Helionetics Creditors Committee Action described
in item (b) above. The Complaint also alleges malpractice in connection
with Stroock's representation of the Company and three of its Directors
and Officers in the Helionetics Creditors Committee Action. Subsequent
to the filing of this action in California, Stroock sued the Company
and three of its directors in New York State Supreme Court seeking "not
less than $300,000" for legal fees allegedly due in connection with
Stroock's representation of the Company in the Helionetics Creditors
Committee Action described in item (b), above. The Company moved to
dismiss this case on the grounds that California is the proper venue
for the parties' disputes and that any claims for legal fees relate to
the Company's malpractice action in California. On October 24, 2001,
the Court granted the Company's motion to the extent of staying the New
York action pending the determination of the California Action, on
condition that the Company does not object to Stroock's assertion of a
counterclaim for legal fees in the California malpractice action. The
8
California Superior Court denied Stroock's motion to delay discovery
until after the Creditors' Committee action and discovery is now
underway.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ's Electronic
Bulletin Board under the symbol "KSWW."
At March 18, 2002, the Company had 5,470,311 shares of KSW Common Stock
issued and outstanding held by approximately 5,800 shareholders of record.
Currently, the Company intends to retain earnings, if any, for future
growth, and does not anticipate paying dividends on its Common Stock in the
foreseeable future. The Company did not pay dividends in 2000 or 2001.
The following information on high and low trading ranges is provided
for 2001 and 2000 based on intraday trading information:
2001 2000
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First............................... $ 1.37 $ .62 $ 3.38 $ 1.31
Second.............................. $ 1.01 $ .56 2.75 1.69
Third............................... $ .92 $ .47 2.50 1.69
Fourth.............................. $ .92 $ .59 2.13 1.25
9
ITEM 6. SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the years ended December 31, 2001, 2000, 1999, 1998, and 1997 is
derived from, and is qualified by reference to, the financial statements for
those years, audited by Marden, Harrison & Kreuter CPAs, P.C. each of which is
included herein or in prior year's annual reports on Form 10-K, and should be
read in conjunction with such financial information.
For The Year Ended December 31,
-------------------------------
(Dollars in thousands, except share and per share amounts)
2001 2000 1999 1998 1997
Income Statement:
Revenues......................... $51,005 $52,548 $44,847 $39,631 $66,184
Direct costs..................... 49,153 48,249 38,029 36,434 62,005
Gross profit..................... 1,852 4,299 6,818 3,197 4,179
Operating expenses............... 4,547 4,728 4,308 4,397 4,030
Selling, general, administration,
depreciation, interest and 3,329 4,565 5,451 3,831 4,020
income tax expenses...........
Income (loss) before income taxes
(2,695) (429) 2,510 (1,200) 149
Net (loss) income................ (1,477) (266) 1,367 (634) 159
Net (loss) income per share - Basic
(.27) (.05) .25 (.12) .03
Net (loss) income per share -
Diluted....................... (.27) (.05) .25 (.11) .03
Number of shares used in computation
Basic............................ 5,470,311 5,468,991 5,468,644 5,463,505 5,528,311
Diluted.......................... 5,470,311 5,641,050 5,468,644 5,655,195 5,796,893
Balance Sheet Data:
Total assets..................... 27,620 28,263 26,147 21,273 26,269
Working capital.................. 5,213 6,996 7,023 5,194 5,809
Current liabilities.............. 18,149 17,255 14,912 11,388 15,700
Long-term liabilities............ 19 51 40 57 70
Stockholders' equity............. 9,452 10,957 11,195 9,828 10,499
Other Data:
Current ratio.................... 1.29:1 1.41:1 1.47:1 1.46:1 1.37:1
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 2001, 2000 and 1999.
Overview
The Company's contracts most often involve work periods in excess of
one year. Revenue on uncompleted fixed price contracts is recorded under the
"percentage of completion" method of accounting. The Company begins to recognize
profit on its contracts when it first incurs direct costs. Contract costs
include all direct material and labor costs and those other direct costs related
to contract performance including, but not limited to, subcontractors' costs and
supplies. General and administrative costs are charged to expense as incurred.
Pursuant to construction industry practice, a portion of billings, generally not
exceeding 10%, may be retained by the customer until the project is completed
and all obligations of the contractor are performed. The Company has not been
subject to a material loss in connection with such retentions, although at times
legal procedures have been required to collect retentions due the Company.
Results of Operations
The following table sets forth, as a percentage of net sales, certain
items of the Company's statement of operations for the periods indicated:
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in thousands)
Net Sales:
Contracts ........................ $ 50,973 99.9 $ 52,502 99.9 $ 44,506 99.2
Fees ............................. 32 .1 46 .1 341 .8
-------- ------- -------- ------- -------- -------
Total ............................ 51,005 100.0 52,548 100.0 44,847 100.0
Costs of sales ................... 49,153 96.4 48,249 91.8 38,029 84.8
-------- ------- -------- ------- -------- -------
Gross profit ..................... 1,852 3.6 4,299 8.2 6,818 15.2
Expenses
Selling, general,
administrative and interest
expenses .................... 4,547 8.9 4,728 9.0 4,308 9.6
-------- ------- -------- ------- -------- -------
Income/(loss) before provision for
income taxes ..................... (2,695) (53) (429) (.8) 2,510 5.6
Provision for income taxes ....... (1,218) (2.4) (163) (.3) 1,143 2.6
-------- ------- -------- ------- -------- -------
Net income/(loss) ................ $ (1,477) 2.9 $ (266) (.5) $ 1,367 3.0
======== ======= ======== ======= ======== =======
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KSW, INC.
COMPUTATION OF NET INCOME PER SHARE
(000's EXCEPT PER SHARE AMOUNTS)
BASIC DILUTED BASIC DILUTED BASIC DILUTED
2001 2001 2000 2000 1999 1999
---- ---- ---- ---- ---- ----
Weighted average common shares........ 5,470 5,470 5,469 5,469 5,469 5,469
Common stock & common stock equivalents
using the treasury stock method... 172
-------- -------- -------- -------- -------- --------
Total shares outstanding for purposes of
Calculating basic & diluted
earnings/(loss) per share......... 5,470 5,470 5,469 5,641 5,469 5,469
========= ========= ========= ======== ======== ========
Net income (loss) as reported......... $ (1,477) $ (1,477) $(266) $(266) $1,367 $ 1,367
========= ========= ========= ======== ======== ========
Net income (loss) per share-basic and
diluted........................... $(.27) $(.27) $(.05) $(.05) $ .25 $ .25
========= ========= ========= ======== ======== ========
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total revenue decreased by $1,543,000 or 2.9% to $51,005,000 for the
year ended December 31, 2001, compared to $52,548,000 for the year 2000. Total
revenue during the first half of 2001 was substantially less than the second
half due to the delayed start of several new projects which did not generate
substantial revenues until the third quarter of 2001. Revenue in the second half
of 2001 increased to $30,603,000, compared to $20,402,000 for the first half, a
50% increase. At December 31, 2001 the Company had backlog of $52,000,000.
Cost of sales increased by $904,000 or 1.9% from $48,249,000 for the
year ended December 31, 2000 compared to $49,153,000 for the year ended December
31, 2001, even though revenue decreased, due to the higher labor costs in the
first half of 2001 which are described in the following paragraph.
For the year ended December 31, 2001 the Company had a gross profit of
$1,852,000 or 3.6% compared to $4,299,000 or 8.2% for the year 2000. In the
fourth quarter of 2001 the gross profit was $1,248,000 or 8.8% compared to a
gross loss of $19,000 or 0.1% for the same period last year. Starting with the
third quarter of 2000 and continuing through the first half of 2001 the Company
experienced an erosion of its gross profit percentage due to lower than
anticipated productivity and higher labor costs on several projects. While there
continued to be some erosion during the completion of the projects in the third
and fourth quarter of 2001, they were more than offset by higher gross margins
on newer projects.
Selling, general and administrative expenses decreased by $181,000 or
3.8% from $ 4,728,000 for the year ended December 31, 2000 compared to
$4,547,000 for the year ended December 31, 2001. During the fourth quarter ended
December 31, 2001 selling, general and administrative expenses were $958,000
compared to $1,121,000 for the same period in 2000, a reduction of $163,000 or
12
14.5%. Included in the above expenses were legal fees of $401,000 in 2000
($119,000 in the fourth quarter) and $653,000 in 2001 ($280,000 in the fourth
quarter, of which $250,000 represents an accrual for anticipated future costs).
The reason for the reduction of selling, general and administrative costs in the
fourth quarter, in spite of the increased legal costs, was the commencement of
new trade management projects. On these projects, certain administrative costs
are job costed instead of being carried in selling, general and administrative
costs.
The income tax benefit for the year ended December 31, 2001 was
$1,218,000 or 45% of taxable loss compared to $163,000 or 38% of taxable loss
for the year ended December 31, 2000 The percentages were affected by certain
state and local taxes paid based on net worth.
As a result of all of the items mentioned above the Company lost
$1,477,000 in 2001 compared to a loss of $266,000 in 2000. During the fourth
quarter of 2001 the Company had a net profit of $163,000 compared to a net loss
of $650,000 in 2000.
During the year ended December 31, 2001 the Company earned 23%, 16% and
14% of its revenue from its three largest customers. The Company bids on large
multi-year contracts which can account for more than 10% of its contract revenue
in any given year.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenue increased by $7,701,000 or 17.2% to $52,548,000 for the
year ended December 31, 2000, compared to $44,847,000 for the same period in
1999. The increase in revenue was due to an increase in the value of jobs booked
which is reflected in the increase in backlog at the beginning of 2000,
$60,000,000, as compared to the backlog at the beginning of 1999, $36,000,000,
an increase of 67%. In addition, the Company received new work of $50,000,000
and increases during the year to existing contracts in the form of change
orders. Since most of the work is multi-year contracts only a portion of the
available work was completed during the year 2000, the balance is reflected in
the Company's backlog of $62,000,000 as of December 31, 2000.
Cost of sales increased by $10,220,000 or 26.9% to $48,249,000 for the
year ended December 31, 2000 compared to $38,029,000 for the comparable period
in 1999 primarily as a result of the increases in revenue noted above and the
additional labor costs discussed below.
The gross margin decreased to 8.2% for the year ended December 31, 2000
compared to 15.2% for the year 1999 due to lower than expected productivity and
higher labor costs due to full employment in the industry and the competition
for the limited workforce available. This was especially true during the fourth
quarter of 2000 when the Company had a gross loss of $19,000. The Company has
factored these additional labor costs into its bidding process; however, during
13
the fourth quarter of 2000 the Company was still working on older projects which
were experiencing labor overruns.
Selling, general and administrative expenses increased by $420,000 or
9.7% to $4,728,000 as compared to $4,308,000 in 1999; however, as a percentage
of revenue they decreased to 9.0% of revenue as compared to 9.6% last year. The
increases in selling, general and administrative expenses were due to $401,000
expensed for legal and consulting fees during 2000 for the Helionetics and Co-Op
City lawsuits described in Item 3. In addition, the Company spent $125,000
during 2000 investigating the feasibility of installing systems utilizing fuel
cell energy and other alternative sources. Without these costs the selling,
general and administrative costs would have decreased by $106,000 or 2.5% and
would have been 8.0% of revenue compared to 9.6% in 1999.
The income tax benefit for 2000 was $163,000 (38% of loss before taxes)
as compared to a tax provision of $1,143,000 in 1999 (46% of income before
taxes). This was due to certain state and local taxes paid during 2000 which
were based on net worth.
As a result of all the items previously mentioned, there was a net loss
of $266,000 in 2000 compared to a net profit of $1,364,000 in 1999. During the
fourth quarter 2000 the Company had a net loss of $650,000 due to the items
mentioned above.
During 2000 the Company earned 20%, 19% and 15% of its revenue from its
three largest customers.
Liquidity and Capital Resources
The Company is currently providing value engineering assistance, which
assists owners and developers in reducing costs while maintaining quality, on
several important projects now in development. As a result, the Company believes
that it is positioned to obtain new contracts and generate increased revenues
over the next year.
The Company's current bonding limits are also sufficient given the
volume and size of the Company's contracts. The Company's surety may require
that the Company maintain certain tangible net worth levels and may require
additional guarantees if the Company should desire increased bonding limits.
The Company believes its current cash resources are adequate to fund a
moderate increase in sales volume in the next year. However, the Company's
capital resources may not be sufficient to sustain a substantial increase in
growth. The Company's management has had experience in expanding into new
geographic areas with the Company's predecessors; however, to date the Company
has conducted its operations exclusively in the New York City metropolitan
region.
The Company currently has a $2,000,000 line of credit with Merrill
Lynch, which expires on December 31, 2002. The line of credit calls for
borrowing at 3% over the 30 day dealer commercial paper rate. This borrowing
rate at December 31, 2001 was approximately equal to prime. As of December 31,
14
2001, there was $190,000 of outstanding loans against the facility.
The Company currently has no significant capital expenditure
commitments.
Forward Looking Statements
Certain statements contained under "Item 1. Business" and this "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other statements contained herein regarding matters that are
not historical facts, continue "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995). These forward
looking statements generally can be identified as statements that include
phrases such as "believe", "expect", "anticipate", "intend", "plan", "forsee",
"likely", "will" or other similar words or phrases. Such forward-looking
statements concerning management's expectations, strategic objectives, business
prospects, anticipated economic performance and financial condition, and other
similar matters involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of results to differ materially from any future results,
performance or achievements discussed or implied by such forward-looking
statements. This document describes factors that could cause actual results to
differ materially from expectation of the Company. All written and oral
forward-looking statements attributable of the Company or persons acting on
behalf of the Company are qualified in their entirety by such factors. Such
risks, uncertainties, and other important factors include, among others:
o The Company has in the past experienced erosion in gross profit margins
due to lower than anticipated labor productivity and higher labor costs
due to shortages of skilled labor. While the Company employs a
comprehensive labor tracking system and has striven to maintain
productivity levels, there is no assurance that these factors will not
affect productivity in the future.
o Recent federal government tariff increases on foreign steel imports are
likely to raise the costs of piping, which is the primary material
supplied by the Company on projects, and which may impact the Company's
profit margins.
o A prolonged economic downturn could result in a decrease in
construction spending in the private and public sections which could
reduce the Company's revenues in years subsequent to 2002.
o The Company relies on certain customers for a significant share of our
revenues. The loss of any of these customers could adversely affect the
Company's business and its operating results.
o The Company faces intense competition due to the highly competitive
nature of the mechanical contracting market that could limit its
ability to increase its market share and its revenues.
15
o The Company's continued ability to obtain bonding is critical to its
ability to bid on most public work and on certain types of private
projects. The inability to obtain bonding in the future could adversely
impact the Company's revenues.
o During the construction period, owners or general contractors may
request that the Company perform certain work which is a change to or
in addition to the original contract. Such work often requires months
to obtain formal change orders (including dollar amounts). Change
orders are often the subject of dispute and, sometimes litigation. Slow
receipt on collections may also result from general contractor or owner
financial difficulties. The failure of an owner or general contractor
to issue change orders or make payments could delay receipt of revenue
and require litigation to collect sums due the Company.
o Although the Company's operations are not directly affected by
inflation, both New York City and New York State have large debt
service burdens. Inflationary pressures have tended to result in a
reduction in capital spending by both state and local agencies; such
capital expenditure reductions in turn could have a negative impact on
the Company's revenues.
o The attack of September 11, 2001 has reportedly had an adverse effect
on public budgets and the availability of private funds for
construction. If these effects continue, any reduction in construction
spending could have a negative impact on the Company's revenues in
years subsequent to 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative
instruments. As of December 31, 2001, the Company has invested $644,000 in
managed stock funds selected by Merill Lynch.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are submitted in Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of the Company is divided into three classes,
with each class serving for three years or until their successors have been
elected. The officers serve at the pleasure of the Board of Directors.
Information as to the directors and executive officers of the Company and the
proposed directors is as follows:
Name Age Title
- ---- --- -----
Floyd Warkol 54 Chief Executive Officer, President, Secretary and
Chairman of theBoard of Directors
Burton Reyer 67 Vice President and Director
Robert Brussel 59 Chief Financial Officer and Director
Stanley Kreitman 68 Director
Daniel Spiegel 76 Director
Mr. Floyd Warkol has been principally employed as Chairman of the Board
since December 15, 1995 and as President, Secretary and Chief Executive Officer
of KSW and as Chairman and Chief Executive Officer of its subsidiary KSW
Mechanical Services, Inc. since January 1994. Mr. Warkol's term expires on the
date of the 2004 Annual Meeting.
Mr. Burton Reyer has been principally employed as Vice President and
Director of KSW and as President and Chief Operating Officer of its subsidiary
KSW Mechanical Services, Inc. since January 1994. Mr. Reyer's term expires on
the date of the 2004 Annual Meeting.
Mr. Robert Brussel has been principally employed as Chief Financial
Officer and Director of KSW and Chief Financial Officer of its subsidiary KSW
Mechanical Services, Inc. since January 1994. Mr. Brussel's term expires on the
date of the 2003 Annual Meeting.
Mr. Daniel Spiegel has been a Director of KSW since January 1996. He
had been principally employed as Senior Vice President of Tishman Realty &
Construction Company, Inc. from 1970 until March 1995. He is presently a
consultant to various construction-related companies. Mr. Spiegel's term expires
on the date of the 2002 Annual Meeting.
Mr. Stanley Kreitman was elected to the Board of Directors on May 18,
1999. Since 1994, Mr. Kreitman has been Chairman of Manhattan Associates, an
investment firm and is a Board member of the N.Y.C. Department of Corrections.
17
He is a published author and lecturer on business investment matters. He is a
member of the Board of Directors of Medallion Funding Corp. (NASDAQ), Ports
Systems Corp. (AMEX) and CCA Industries, Inc. (NASDAQ). Mr. Kreitman's term
expires on the date of the 2002 Annual Meeting.
Committees of the Board of Directors. A Compensation Committee approves
the salary, incentives and benefit plans for directors, officers and other
employees, and the granting of options and other compensation matters. The
Compensation Committee consists of nonemployee Directors, Stanley Kreitman and
Daniel Spiegel. An Audit Committee, also composed of nonemployee Directors,
oversees actions taken by the Company's independent auditors and reviews the
Company's financial controls.
Classified Board of Directors. The Company's Board of Directors is
divided into three classes of Directors serving staggered three-year terms.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC") and the National Association of Securities
Dealers, Inc. Executive officers, directors and stockholders of more than ten
percent of the Company are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on review of the
copies of such forms furnished to the Company and written representations from
certain reporting persons, the Company believes that during the year ended
December 31, 2001, its executive officers, directors and stockholders of more
than ten percent of the Company complied with all applicable Section 16(a)
filings requirements.
18
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth remuneration paid to executive officers
of the Company for the years ended December 31, 2001, 2000 and 1999.
Annual
------
Compensation
------------
Name and Principal Position Year Salary Bonus
--------------------------- ----- ------ -----
Floyd Warkol 2001 $420,000 $0
Chairman of the Board, President, 2000 $420,000 $0
Secretary and Chief Executive Officer 1999 $420,000 $252,605
Burton Reyer 2001 $240,000 $0
Vice President 2000 $240,000 $0
1999 $240,000 $146,245
Robert Brussel 2001 $145,000 $30,000
Chief Financial Officer 2000 $145,000 $30,000
1999 $135,000 $37,500
James Oliviero 2001 $160,000 $30,000
General Counsel and Director of Investor 2000 $160,000 $30,000
Relations 1999 $150,000 $37,500
The Company and KSW Mechanical entered into a two-year employment
contract and a noncompetition agreement with Mr. Warkol for the term of January
1, 1999 through December 31, 2000. The employment contract provided for base
annual compensation of $420,000. In addition, Mr. Warkol was entitled to
receive, each year, an amount equal to 9.5% of the Company's annual profits,
before taxes, which are in excess of $250,000. For the purposes of computing the
amount due Mr. Warkol, annual pretax profits excluded the effect of any income
or expense on the Co-op City project, and excluded any bonuses due to Mr. Warkol
or Mr. Reyer. Mr. Warkol was entitled to medical insurance, disability insurance
with payments equal to 60% of base compensation, a $1 million policy of life
insurance payable as directed by the employee (at a cost of $3,595 per year) and
a car with a chauffeur. Mr. Warkol was entitled to terminate his employment for
"good reason," i.e., a substantial change in the nature or status of his
responsibilities or the person to whom he reported in which event he was
entitled to receive full pay and benefits for the remainder of the term of the
contract. The Company was not entitled to discharge Mr. Warkol for disability
until he had been disabled for 180 consecutive days. Mr. Warkol's estate was
19
entitled to two months pay in the event of his death. Mr. Warkol agreed that he
will not compete in the mechanical contracting business in the New York City
metropolitan area for the term of his employment agreement and for two years
thereafter.
The Company and KSW Mechanical entered into a two-year employment
contract and a noncompetition agreement with Mr. Reyer for the term January 1,
1999 through December 31, 2000. The employment contract provided for base annual
compensation of $240,000. In addition, Mr. Reyer was entitled to receive an
amount each year, equal to 5.5% of the Company's annual profits, before taxes,
which are in excess of $250,000. For the purposes of computing the amount due
Mr. Reyer, annual pretax profits excluded the effect of any income or expense on
the Co-op City project and shall exclude any bonuses due Mr. Reyer and Mr.
Warkol. Mr. Reyer was entitled to medical insurance, disability insurance with
payments equal to 60% of base compensation and a $500,000 policy of life
insurance payable as directed by the employee. Mr. Reyer was entitled to
terminate his employment for good reason, i.e., a substantial change in the
nature or status of his responsibilities or the person to whom he reports, in
which event he is entitled to receive full pay and benefits for the remainder of
the term of the contract. The Company was not entitled to discharge Mr. Reyer
for disability until he has been disabled for 180 consecutive days. Mr. Reyer's
estate was entitled to two months pay in the event of his death. Mr. Reyer
agreed that he will not compete in the mechanical contracting business in the
New York City metropolitan area for the term of his employment agreement and for
two years thereafter.
The Company has not entered into new employment agreements with Mr.
Warkol or Mr. Reyer. During 2001 and 2002, Mr. Warkol and Mr. Reyer continued in
the same capacities and continue to receive the same financial renumeration as
under the prior employment agreements.
Options Granted. The Company adopted the 1995 Stock Option Plan of KSW,
Inc. (the "Stock Option Plan") on December 15, 1995, and the Stock Option Plan
was approved by the KSW stockholders by unanimous written consent on December
15, 1995. The Stock Option Plan is administered by a Committee appointed by the
Board of Directors (each herein called the "Compensation Committee"). All key
employees of, consultants to, and certain non-employee Directors of the Company,
as may be determined by the Compensation Committee from time to time, are
eligible to receive options under the Stock Option Plan.
A total of 750,000 shares were originally authorized for issuance under
the Stock Option Plan. At the Company's Annual Meeting held on June 27, 1996 the
shareholders approved an amendment to the Stock Option Plan to increase by
350,000 shares the aggregate number of shares of Common Stock available for
future options to 490,000 shares. Prior to 1997, the Company had granted options
with respect to 610,000 shares at an exercise price of $1.50 per share to
certain eligible participants under the Stock Option Plan (of which 535,000 were
issued to officers and directors of the Company and its subsidiaries). In 1999,
20
the Company issued a total of 55,000 stock options to three key employees and to
a Director, Stanley Kreitman, exercisable at $1.50 per share.
The exercise price of an incentive stock option and a nonqualified
stock option is fixed by the Compensation Committee on the date of grant;
however, the exercise price under an incentive stock option must be at least
equal to the fair market value of the KSW Common Stock on the date of grant.
Stock options are exercisable for a duration determined by the
Compensation Committee, but in no event more than ten years after the date of
grant. Options shall be exercisable at such rate and times as may be fixed by
the Compensation Committee on the date of grant. The aggregate fair market value
(determined at the time the option is granted) of the KSW Common Stock with
respect to which incentive stock options are exercisable for the first time by a
participant during any calendar year (under all stock option plans of the
Company and its subsidiaries) shall not exceed $100,000. To the extent that this
limitation is exceeded, such excess options shall be treated as nonqualified
stock options for purposes of the Stock Option Plan and the Internal Revenue
Code of 1986, as amended (the "Code").
At the time a stock option is granted, the Compensation Committee may,
in its sole discretion, designate whether the stock option is to be considered
an incentive stock option or nonqualified stock option plan. Stock options with
no such designation shall be deemed an incentive stock option to the extent that
the $100,000 limit described above is met.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of KSW Common Stock already owned by
the option holder, or by such other method as the Compensation Committee may
permit from time to time. However, a holder may not use previously owned shares
of KSW Common Stock that were acquired pursuant to the Stock Option Plan, or any
other stock plan that may be maintained by the Company or its subsidiaries, to
pay the purchase price under an option, unless the holder has beneficially owned
such shares for at least six months.
Stock options become immediately exercisable in full upon the
retirement of the holder after reaching the age of 65, upon the disability or
death of the holder while in the employ of or service with the Company, upon a
Change of Control (as defined in the Stock Option Plan), or upon the occurrence
of such special circumstances as in the opinion of the Compensation Committee
merit special consideration. However, no options may be exercised earlier than
six months following the date of grant.
Stock options terminate at the end of the tenth business day following
the holder's termination of employment or service. This period is extended to
one year in the case of the disability or death of the holder, and in the case
of death, the stock option is exercisable by the holder's estate.
21
The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange,
re-classification or substitution. In the event of any other change in the
corporate structure or outstanding shares of KSW Common Stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Company shall obtain such consideration for granting options under
the Stock Option Plan as the Compensation Committee in its discretion may
request. Each option may be subject to provisions to assure that any exercise or
disposition of KSW Common Stock will not violate the securities laws. No option
may be granted under the Stock Option Plan after December 15, 2005.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding options at any time withdraw or amend the
terms and conditions of outstanding options. Any amendment which would increase
the number of shares issuable pursuant to the Stock Option Plan or change the
class of individuals to whom options may be granted shall be subject to the
approval of the stockholders of the Company within one year of such amendment.
No options were granted during 2001.
The following table shows the number of options which have been
exercised during the past fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Underlying
Shares Acquired Unexercised Options/SARs Value of Unexercised in-the-Money
Name on Exercise (#) Value Realized ($) at Fiscal Year-End (#) Options/SARs at Fiscal Year-End ($)
- ---- --------------- ------------------ ---------------------- -----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Floyd Warkol...... 0 0 300,000 0 N/A N/A
Burton Reyer...... 0 0 150,000 0 N/A N/A
Robert Brussel.... 0 0 25,000 0 N/A N/A
James Oliviero.... 0 0 20,000 0 N/A N/A
Daniel Spiegel 0 0 20,000 0 N/A N/A
Stanley Kreitman 0 0 13,333 6,667 N/A N/A
PERFORMANCE GRAPH
The following graph compares the cumulative total returns for our
common stock for the five year period ending December 31, 2001 with the NASDAQ
Market Index and an index of all Publicly traded companies in the Plumbing,
Heating and Air-Conditioning industry (SIC Code 1711) (the "Peer Index"). Total
return equals change in stock price plus dividends paid and assumes the
investment of $100 in the Company's common stock and in each index on January 1,
1997 and that all dividends are reinvested. The information has been obtained
from sources believed to be reliable, but neither its accuracy nor its
completeness is guaranteed. The performance graph is not necessary indicative of
future investment performance.
5/09/97 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
KSW, INC. 100.00 120.71 35.71 47.86 51.43 26.79
PEER INDEX 100.00 118.78 83.15 53.47 19.45 16.13
NASDAQ MARKET INDEX 100.00 125.21 176.60 311.48 195.78 156.06
Source: Media General Financial Services, Inc.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership of KSW Common Stock by (i) those persons known to the Company to
beneficially own 5% or more of the Company's Common Stock, (ii) each of the
Company's directors, proposed directors and executive officers and (iii) all of
the Company's directors, proposed directors and executive officers as a group.
As used in this table, "beneficial ownership" means the sole or shared power to
vote, or to direct the voting of a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose, or direct the
disposition of a security). Accordingly, the number of shares may include shares
owned by or for, among others, the wife, minor children or certain other
relatives of such individual, as well as other shares as to which the individual
has the right to acquire within 60 days after such date.
Number of Percentage
Shares Ownership
------ ---------
Name of Beneficial Owner
- ------------------------
Floyd Warkol 844,000 (1) 15.4%
Meadow Lane
Purchase, NY 10577
Burton Reyer 380,080 (2) 6.9%
17 Foxwood Road
Kings Point, NY 11024
Allen & Company 312,500 5.7%
711 Fifth Avenue
New York, NY
Robert Brussel 33,500 *
365 Woodmere Blvd.
Woodmere, NY 11598
Stanley Kreitman 0 *
375 Park Avenue (Suite 1606)
New York, NY 10022
Daniel Spiegel 5,000 *
351 Twin Lakes Road
Teconic, CT 06079
All executive officers 1,262,580 23.1%
and directors as a group (5 persons)
- -------------------------
* Less than one percent.
23
(1) Includes 50,000 shares owned by the Floyd and Barbara Warkol Charitable
Foundation, of which Mr. Warkol is a Trustee.
(2) Includes 1,540 shares owned by Mr. Reyer's wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Floyd Warkol, President of the Company, and a charitable foundation he
controls, jointly are the shareholders of a corporation which owns the property
that the Company leases in Bronx, New York. The lease payments on such property
were $103,000 for 2001. See "Properties."
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial statement and financial statement schedules.
See Index to consolidated financial statements and financial statement
schedules on page F-1 of this form 10-K.
3. Exhibits
EXHIBIT INDEX
No. Description
--- -----------
3.1^^ Amended and Restated Articles of Incorporation of the
Registrant
3.2^ Amended and Restated By-Laws of the Registrant
10.1^ Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Floyd Warkol and the
Registrant
10.2^^ Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Burton Reyer and the
Registrant
10.3+ Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., the
Registrant and Floyd Warkol
10.4+ Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., the
Registrant and Burton Reyer
10.5++ Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services, Inc.
the Registrant and Floyd Warkol
10.6++ Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services, Inc.
the Registrant and Burton Reyer
10.7++ Form of Modification of Lease Agreement dated as of May 1,
1998
21.1^ List of Subsidiaries
^ Previously filed as an exhibit to the Company's Registration Statement on Form
10, filed on November 24, 1995.
^^ Previously filed as an exhibit to Amendment No. 1 to the Company Registration
Statement on Form 10, filed on December 28, 1995.
+ Previously filed as an exhibit to the Company's Annual Report on Form 10-K,
filed on March 27, 1996.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K,
filed on March 30, 1999.
(b) Reports on Form 8-K.
The Company did not file Current Reports on Form 8-K during the fourth
quarter of 2001.
25
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent auditors' report F-2
Consolidated financial statements:
Consolidated balance sheets F-3-4
Consolidated statements of operations F-5
Consolidated statements of comprehensive income F-6
Consolidated statements of stockholders' equity F-7
Consolidated statements of cash flows F-8-9
Notes to consolidated financial statements F-10-22
F-1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
37-16 23rd Street
Long Island City, New York 11101
We have audited the accompanying consolidated balance sheets of KSW, Inc. and
subsidiary as of December 31, 2001 and 2000, and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the years ended December 31, 2001, 2000 and 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of KSW,
Inc. and subsidiary as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.
Marden, Harrison & Kreuter
Certified Public Accountants, P.C.
White Plains, New York
February 1, 2002
F-2
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(in thousands)
----------------------------
2001 2000
------------- -------------
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 715 $ 3,499
Marketable securities 641 2,541
Accounts receivable, net 17,639 13,704
Retainage receivable 2,549 3,263
Costs and estimated earnings in excess
of billings on uncompleted contracts 26 138
Deferred income taxes 1,067 227
Prepaid expenses and other receivables 725 879
-------- ---------
Total current assets 23,362 24,251
Property and equipment, net 333 337
Other assets:
Goodwill, net 3,514 3,667
Deferred income taxes and other 411 8
-------- ---------
Total assets $ 27,620 $ 28,263
======== =========
F-3
2001 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Loans payable $ 190 $ -
Accounts payable 11,375 8,823
Retainage payable 1,774 1,781
Accrued payroll and benefits 747 1,148
Accrued expenses 374 680
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,689 4,823
-------- ---------
Total current liabilities 18,149 17,255
Long-term liabilities 19 51
-------- ---------
Total liabilities 18,168 17,306
-------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock 54 54
Additional paid-in capital 9,729 9,729
Retained earnings (deficit) (328) 1,149
Accumulated other comprehensive income:
Net unrealized holding gain (loss) on available for sale securities (3) 25
-------- ---------
Total stockholders' equity 9,452 10,957
-------- ---------
Total liabilities and stockholders' equity $ 27,620 $ 28,263
======== =========
See notes to consolidated financial statements.
F-4
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
------------------------------------------------
2001 2000 1999
----------- ---------- -----------
Revenues:
Contracts $ 50,980 $ 52,201 $ 44,379
Fees 32 46 341
Interest and other (7) 301 127
----------- ---------- -----------
Total revenues 51,005 52,548 44,847
Direct costs 49,153 48,249 38,029
----------- ---------- -----------
Gross profit 1,852 4,299 6,818
----------- ---------- -----------
Selling, general and administrative expenses 4,499 4,706 4,279
Interest expense 48 22 29
----------- ---------- -----------
4,547 4,728 4,308
----------- ---------- -----------
Income (loss) before income taxes (2,695) (429) 2,510
Income tax expense (benefit) (1,218) (163) 1,143
----------- ---------- -----------
Net income (loss) $ (1,477) $ (266) $ 1,367
============ =========== ===========
Net income (loss) per common share - basic $ (.27) $ (.05) $ .25
=========== =========== ===========
Net income (loss) per common share - diluted $ (.27) $ (.05) $ .25
=========== =========== ===========
Weighted average common shares outstanding -
basic 5,470,311 5,468,991 5,468,644
Weighted average common shares outstanding -
diluted 5,470,311 5,641,050 5,468,644
See notes to consolidated financial statements.
F-5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
------------------------------------------------
2001 2000 1999
---------- --------- ---------
Net income (loss) $ (1,477) $ (266) $ 1,367
Other comprehensive income:
Net unrealized holding gain (loss) arising
during the year (28) 25 -
-------- ------- -------
Total comprehensive income (loss) $ (1,505) $ (241) $ 1,367
========= ======== =======
See notes to consolidated financial statements.
F-6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000AND 1999
(in thousands, except share data)
---------------------------------
Common Stock, $.01 par, Additional Retained Net unrealized holding
25,000,000 shares authorized Paid-In Earnings gain (loss) on available
----------------------------
Shares Amount Capital (Deficit) for sale securities Total
------ ------ ------- --------- ------------------- -----
Balances, December 31, 1998 5,468,644 $ 54 $ 9,726 $ 48 $ - $ 9,828
Net income - - - 1,367 - 1,367
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1999 5,468,644 54 9,726 1,415 - 11,195
Exercise of stock options 1,667 - 3 - - 3
Net loss - - - (266) - (266)
Unrealized gain on available for sale
securities - - - - 25 25
--------- --------- --------- --------- --------- ---------
Balances, December 31, 2000 5,470,311 54 9,729 1,149 25 10,957
(266)
Net loss - - - (1,477) - (1,477)
Unrealized loss on available for sale
securities - - - - (28) (28)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 2001 5,470,311 $ 54 $ 9,729 $ (328) $ (3) $ 9,452
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-7
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
2001 2000 1999
------------ ------------ ------------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ (1,477) $ (266) $ 1,367
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 304 323 326
Deferred income taxes (1,243) (197) 900
Increase in allowance for
doubtful accounts - - 40
Changes in assets (increase) decrease:
Accounts receivable (3,935) (3,098) (1,434)
Retainage receivable 714 859 (375)
Costs and estimated earnings in excess
of billings on uncompleted contracts 112 200 54
Prepaid expenses and other receivables 154 (661) 9
Changes in liabilities increase (decrease):
Accounts payable 2,552 2,553 806
Retainage payable (7) 7 (468)
Accrued payroll and benefits (401) (17) 739
Accrued expenses (306) 311 180
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,134) (511) 2,267
Long-term liabilities (32) (19) (17)
--------- ------- --------
Net cash provided by (used in)
operating activities (4,699) (516) 4,394
--------- ------- --------
Cash flows from investing activities:
Sale (purchase) of marketable securities 1,872 (2,516) -
Purchase of property and equipment (147) (123) (147)
--------- ------- --------
Net cash provided by (used in)
investing activities 1,725 (2,639) (147)
--------- ------- --------
See notes to consolidated financial statements.
F-8
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
2001 2000 1999
---------- -------- --------
Cash flows from financing activities:
Exercise of stock options - 3 -
Increase in loans payable 190 - -
-------- ------- -------
Net cash provided by financing activities 190 3 -
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (2,784) (3,152) 4,247
Cash and cash equivalents, beginning of year 3,499 6,651 2,404
-------- ------- -------
Cash and cash equivalents, end of year $ 715 $ 3,499 $ 6,651
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 48 $ 22 $ 29
Income taxes $ 12 $ 690 $ 35
See notes to consolidated financial statements.
F-9
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(1) Principles of consolidation and nature of operations:
The consolidated financial statements for the years ended December 31,
2001, 2000 and 1999 include the accounts of KSW, Inc. and its
wholly-owned subsidiary, KSW Mechanical Services, Inc., collectively "the
Company." All material intercompany accounts and transactions have been
eliminated in consolidation.
The Company furnishes and installs heating, ventilating and air
conditioning systems and processes piping systems for institutional,
industrial, commercial, high-rise residential and public works projects,
primarily in the State of New York. The Company also serves as a
mechanical trade manager, performing project management services relating
to the mechanical trades and as a constructability consultant.
(2) Summary of significant accounting policies:
(A) Cash and cash equivalents:
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. At
December 31, 2001 and 2000, there were no cash equivalents.
(B) Revenue and cost recognition:
Revenue is primarily recognized on the "percentage of completion"
method for reporting revenue on long-term construction contracts
not yet completed, measured by the percentage of total costs
incurred-to-date to estimated total costs at completion for each
contract. This method is utilized because management considers the
cost-to-cost method the best method available to measure progress
on these contracts. Revenues and estimated total costs at
completion are adjusted monthly as additional information becomes
available and based upon the Company's internal tracking systems.
Because of the inherent uncertainties in estimating revenue and
costs, it is reasonably possible that the estimates used will
change within the near term.
Contract costs include all direct material and labor costs and
those other indirect costs related to contract performance
including, but not limited to, indirect labor, subcontract costs
and supplies. General and administrative costs are charged to
expense as incurred.
The Company has contracts that may extend over more than one year,
therefore, revisions in cost and profit estimates during the
course of the work are reflected in the accounting period in which
the facts, which require the revisions, become known.
Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
F-10
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(2) Summary of significant accounting policies - cont'd:
(B) Revenue and cost recognition - cont'd:
Revenues recognized in excess of amounts billed are recorded as a
current asset under the caption "Costs and estimated earnings in
excess of billings on uncompleted contracts." Billings in excess
of revenues recognized are recorded as a current liability under
the caption "Billings in excess of costs and estimated earnings on
uncompleted contracts."
In accordance with construction industry practice, the Company
reports in current assets and liabilities those amounts relating
to construction contracts realizable and payable over a period in
excess of one year.
Fees for the management of certain contracts are recognized when
services are provided.
(C) Marketable securities:
Marketable securities, consisting of managed security accounts,
are classified as "available-for-sale" securities and are stated
at fair value. Realized gains and losses, determined using the
specific identification method, are included in earnings.
Unrealized holding gains and losses are reported as a separate
component of stockholders' equity.
(D) Allowance for doubtful accounts:
The Company establishes an allowance for uncollectible trade
accounts receivable based on historical collection experience and
management's evaluation of collectibility of outstanding accounts
receivable. The allowance for doubtful accounts is $200 as of
December 31, 2001 and 2000.
(E) Property and equipment:
Property and equipment is stated at cost. Depreciation is computed
over the estimated useful lives, generally five years, of the
assets using the straight-line method. Leasehold improvements are
amortized over the lesser of the estimated useful lives of the
assets to which they apply or the related lease term. Repairs and
maintenance are charged to operations in the period incurred.
(F) Goodwill:
Goodwill, which represents the excess of cost over the fair value
of net assets acquired, is amortized using the straight-line
method over 30 years.
The Company assesses the recoverability of goodwill periodically
by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected
undiscounted cash flows. The amount of goodwill impairment, if
any, is charged to operations in the period in which goodwill
impairment is determined by management. At December 31, 2001, 2000
and 1999, no impairment of goodwill was determined by management.
F-11
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(2) Summary of significant accounting policies - cont'd:
(F) Goodwill - cont'd:
Goodwill at December 31, 2001 and 2000 is as follows:
2001 2000
---------- ----------
Goodwill $ 4,990 $ 4,990
Less: accumulated amortization 1,476 1,323
------- -------
Goodwill, net $ 3,514 $ 3,667
======= =======
Amortization expense for the years ended December 31, 2001, 2000
and 1999 amounted to approximately $153 per year.
(G) Income taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement No. 109, the asset and liability method is used in
accounting for income taxes. Deferred taxes are recognized for
temporary differences between the bases of assets and liabilities
for financial statement and income tax purposes. The temporary
differences relate primarily to different accounting methods used
for depreciation and amortization of property and equipment,
goodwill, allowance for doubtful accounts and net operating loss
carryforwards. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that some or all of the
deferred tax assets will not be realized through future
operations.
(H) Net income (loss) per share:
Net income (loss) per share-basic is computed based on the
weighted average number of shares of common stock outstanding. Net
income (loss) per share-dilutive reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or otherwise
resulted in the issuance of common stock and is computed similarly
to "fully diluted" net income (loss) per share that was reported
under previous accounting standards. Dilutive potential common
shares do not have a significant dilutive effect.
(I) Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
F-12
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(2) Summary of significant accounting policies - cont'd:
(J) Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Under SFAS 123,
companies are encouraged, but not required, to adopt a fair value
based method of accounting for stock compensation awards. As
permitted by SFAS 123, the Company has elected to continue to
measure compensation cost using the intrinsic value based method
as prescribed in Accounting Principles Board opinion No. 25,"
Accounting for Stock Issued to Employees" and to provide the
disclosures required by SFAS 123 (see Note 13(A)).
(3) Marketable securities:
The cost and fair value of the marketable securities, classified as
available-for-sale securities at December 31, 2001, was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
Managed stock funds $ 644 $ - $(3) $ 641
======== ==== ==== ======
The cost and fair value of the marketable securities, classified as
available-for-sale securities at December 31, 2000, was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
Stock based mutual funds $ 500 $ 15 $ $ 515
Bond based mutual funds 1,017 10 - 1,027
Certificates of deposits 999 - - 999
-------- ---- --------- ---------
$ 2,516 $ 25 $ - $ 2,541
======== ==== ========= =========
For the years ended December 31, 2001 and 2000, gross unrealized gains on
the sale of available-for-sale securities were $-0- and $25,
respectively. For the years ended December 31, 2001 and 2000, gross
unrealized losses on the sale of available-for-sale securities were $3
and $-0-, respectively. The change in net unrealized holding gains
(losses) is $(28) and $25 for the years ended December 31, 2001 and 2000,
respectively.
F-13
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(4) Retainage receivable:
At December 31, 2001 and 2000, approximately $336 and $183, respectively,
of the retainage receivable is not collectible within one year.
(5) Construction contracts:
Information with respect to contracts in progress at December 31, 2001
and 2000 is as follows:
2001 2000
------------ ------------
Expenditures on uncompleted contracts $ 28,408 $ 37,625
Estimated earnings thereon 4,144 1,402
-------- ---------
32,552 39,027
Less billings applicable thereto 36,215 43,712
-------- ---------
$ (3,663) $ (4,685)
========= ==========
Included in the accompanying consolidated balance sheets under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 26 $ 138
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,689) (4,823)
-------- ---------
$ (3,663) $ (4,685)
========= ==========
F-14
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(6) Property and equipment:
Property and equipment at December 31, 2001 and 2000 consists of the
following:
2001 2000
------------ ------------
Machinery and equipment $ 676 $ 559
Furniture and fixtures 624 597
Leasehold improvements 828 825
------- --------
2,128 1,981
Less accumulated depreciation and amortization 1,795 1,644
------- --------
Net property and equipment $ 333 $ 337
======= ========
Depreciation and amortization expense relating to property and equipment
was approximately $151, $170 and $173 for the years ended December 31,
2001, 2000 and 1999, respectively.
(7) Income taxes:
The components of income tax expense (benefit) are as follows:
2001 2000 1999
---------- --------- ----------
Current
Federal $ - $ (16) $ 119
State and local 54 50 124
-------- ------- -------
54 34 243
-------- ------- -------
Deferred
Federal (760) (122) 565
State and local (512) (75) 335
-------- ------- -------
(1,272) (197) 900
-------- ------- -------
Total $ (1,218) $ (163) $ 1,143
========= ======== =======
A reconciliation of the statutory Federal income tax rate to the
provision for income taxes is as follows:
2001 2000 1999
---------- --------- ----------
Statutory Federal income tax rate (benefit) (34)% (34)% 34%
State and local taxes, net of Federal tax benefit (11) (7) 12
Adjustment of prior year over accrual - 3 -
------- ------ --------
(45)% (38)% 46%
======= ======= ======
F-15
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(7) Income taxes - cont'd:
The 2001 and 2000 tax benefits on state and local taxes is offset by
current provisions based on net worth.
The details of deferred tax assets and liabilities are as follows:
2001 2000
----------- -----------
Deferred income tax assets:
Property and equipment $ 278 $ 283
Allowance for doubtful accounts 92 92
Net operating loss carryforward 1,585 227
------ -------
Total deferred income tax assets 1,955 602
Deferred income tax liabilities:
Amortization of goodwill (486) (405)
------ -------
Deferred income tax asset, net $1,469 $ 197
====== =======
For the years ended December 31, 2001 and 2000, the Company incurred net
operating loss carryfowards of approximately $2,900 and $600,
respectively, which expire through the year ending December 31, 2016. At
December 31, 2001, $1,067 of the net current portion of deferred income
tax assets is recorded as a current asset, and $402 net long-term
deferred income tax asset is included in long-term assets in the
accompanying balance sheet. At December 31, 2000, $227 of the net current
portion of deferred income tax assets is recorded as a current asset and
$30 net deferred income tax liability is included in long-term
liabilities in the accompanying balance sheet.
(8) Accumulated other comprehensive income:
At December 31, 2001 and 2000, accumulated other comprehensive income,
which consists of unrealized holding gains on available for sale
securities, is as follows:
2001 2000
--------- ---------
Beginning balance $ 25 $ -
Current period change (28) 25
-------- --------
Ending balance $ (3) $ 25
========= ========
(9) Commitments and contingencies:
(A) Performance bonds:
The Company is contingently liable to a surety under a general
indemnity agreement. The Company agrees to indemnify the surety
for any payments made on contracts of suretyship, guaranty or
indemnity. Management believes that all contingent liabilities
will be satisfied by performance on the specific bonded contracts
involved.
F-16
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(9) Commitments and contingencies - cont'd:
(B) Operating leases:
The Company is obligated under non-cancelable operating leases,
including a lease with its chief executive officer, for office
space with future rental payments at December 31, 2001 as follows:
Year ending
December 31 Non-affiliated Related Party Total
----------- -------------- ------------- -----
2002 $ 176 $ 103 $ 279
2003 180 - 180
2004 91 - 91
----- ----- -----
$ 447 $ 103 $ 550
===== ===== =====
In accordance with the lease agreement, the Company has the option
to extend its non- affiliated lease an additional five years from
June 2004 through June 2009.
Rent expense for the years ended December 31, 2001, 2000 and 1999
amounted to approximately $276, $272 and $282, respectively,
including $103 to a related party in each year.
(C) Employment agreements:
KSW Mechanical Services, Inc. has entered into employment
agreements with two of its officers for the period January 1999
through December 2000. These agreements provide for aggregate base
annual compensation of $660 each year plus 15% of income before
taxes in excess of $250. The officers are also entitled to medical
insurance, disability insurance and life insurance. The Company
has not entered into new employment agreements with these
individuals. During 2001, they continued in the same capacities
and continued to receive the same financial remuneration as under
the prior employment agreements. During 2001, officers' combined
compensation was a base salary of $660. No bonuses were paid in
2000 and 2001.
(D) Environmental regulation:
The Company must comply with certain Federal, state and local
regulations involving contract compliance as well as the disposal
of certain toxins. In management's opinion, there have been no
violations of laws, which could have a material adverse impact on
the financial condition of the Company.
F-17
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(9) Commitments and contingencies - cont'd:
(E) Legal:
The Company is not aware of any pending or threatened legal
proceedings, which could have a material adverse effect on its
financial position or results of operations, other than item (b)
below. The following are the material lawsuits in which the
Company is a party:
(a) Co-op City. In February 1999, the Company sued the general
contractor and its bonding company in New York State Supreme
Court, Queens County, to recover the sum of $5,771. Included
is a claim for unanticipated costs incurred through 1998 in
the sum of $3,663, and claims to recover for work beyond the
scope of the Company's contract. Discovery has been
completed and the action placed on the trial calendar. The
case should be tried within the next twelve months. While
the Company and its counsel believe the lawsuit has merit,
there is no guaranty the claim will ultimately be
successful, or that the full amount of damages sought will
be awarded. At December 31, 2001 and 2000, approximately
$1,937 of billings applicable to the base contract is
included in accounts and retainage receivable relating to
this contract.
(b) Helionetics Creditors Committee v. Barnes, et al. On April
26, 1999, the Company and six current or former officers and
directors were named in a lawsuit in U.S. Bankruptcy Court,
Central District of California, instituted by the Creditors
Committee of Helionetics, Inc., the Company's former parent.
The complaint alleges that the December 28, 1995
distribution by Helionetics of KSW, Inc. stock to
Helionetics' shareholders was a fraudulent conveyance, and
seeks compensatory damages of $10,890, plus punitive
damages. The December 28, 1995 distribution of stock was
made pursuant to a Form 10 Registration Statement filed with
and declared effective by the Securities and Exchange
Commission. The Company believes that the lawsuit is without
merit and is aggressively defending the case. On March 15,
2001, the Court denied a motion for summary judgment filed
by the Company and its directors, except the Court dismissed
the case against director Robert Brussel. The Court found
that there were issues of fact requiring trial on the
merits. On May 30, 2001, the Court granted partial summary
judgment as to the Company's officers and directors,
dismissing Plaintiff's fraudulent conveyance causes of
action relating to the distribution. On October 11, 2001,
the Court dismissed all causes of action against the
Company's officers and directors, which relate to the
distribution itself. The Committees' remaining claims are
against the Company and allege (i) that the Company aided
and abetted and conspired with Helionetics, Inc. in the
breach of fiduciary duty in that the distribution allegedly
was made in violation of California Corporations Code and
(ii) that the redemption by the Company of 333 shares of the
Company's stock held by Helionetics, Inc. as part of the
distribution was a fraudulent conveyance. A hearing will be
held within the next three months to determine valuation
issues, including the issue of Helionetics solvency on the
date of distribution.
F-18
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(9) Commitments and contingencies - cont'd:
(E) Legal - cont'd:
(c) Stroock & Stroock & Lavan, LLP. On February 13, 2001, the
Company commenced an action in the Superior Court of the
State of California, County of Los Angeles against its
former counsel, Strook & Stroock & Lavan, LLP ("Stroock")
for malpractice in connection with Stroock's representation
of the Company in connection with the transactions which
form the basis for the Helionetics Creditors Committee
Action described in Note 9(E)(b). The Complaint also alleges
malpractice in connection with Stroock's representation of
the Company and three of its Directors and Officers in the
Helionetics Creditors Committee Action. Subsequent to the
filing of this action in California, Stroock sued the
Company and three of its directors in New York State Supreme
Court seeking "not less than $300" for legal fees allegedly
due in connection with Stroock's representation of the
Company in the Helionetics Creditors Committee Action
described in Note 9(E)(b), above. The Company moved to
dismiss this case on the grounds that California is the
proper venue for the parties' disputes and that any claims
for legal fees relate to the Company's malpractice action in
California. On October 24, 2001, the Court granted the
Company's motion to the extent of staying the New York
action pending the determination of the California Action,
on condition that the Company does not object to Stroock's
assertion of a counterclaim for legal fees in the California
malpractice action. The California Superior Court denied
Stoock's motion to delay discovery until after the Creditors
Committee action and discovery is now underway.
(10) Concentration risks:
(A) Credit risk:
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and trade accounts and retainage receivables.
The Company maintains its cash and cash equivalents accounts at
balances, which exceed Federally insured limits for such accounts.
The Company limits its credit risk by selecting financial
institutions considered to be highly creditworthy. At December 31,
2001 and 2000, amounts in excess of federally insured limits
totaled approximately $495 and $3,394, respectively.
Trade accounts and retainage receivables are due from government
agencies, municipalities and private owners located in the New
York metropolitan area. The Company does not require collateral in
most cases, but may file claims or statutory liens against the
construction projects if a default in payment occurs. Trade
accounts and retainage receivables from the Company's three
largest customers totaled approximately $9,728 and $8,027 at
December 31, 2001 and 2000, respectively.
F-19
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(10) Concentration risks - continued:
(B) Labor concentrations:
The Company's direct labor is supplied primarily by unions through
collective bargaining agreements expiring through June 2002.
Although the Company's past experience was favorable with respect
to resolving conflicting demands with these unions, it is always
possible that a protracted conflict may occur which will impact
the renewal of the collective bargaining agreements.
(C) Contract revenue/significant customers:
The Company earned approximately 23%, 16% and 14% of its contract
revenue in 2001, 20%, 19% and 15% of its contract revenue in 2000,
and 23%, 20% and 18% of its contract revenue in 1999, from its
three largest customers.
(11) Retirement plans:
(A) Profit-sharing/401(k) plan:
The Company sponsors a profit-sharing/401(k) plan covering
employees not covered under collective bargaining agreements who
meet the age and length of service requirements of the plan. The
Company may make discretionary contributions to the plan. The
total of employee contributions may not exceed Federal government
limits. The Company expensed approximately $63, $62 and $51 as a
25% matching contribution for the years ended December 31, 2001,
2000 and 1999, respectively.
(B) Multiemployer pension plans:
The Company has made contributions to multiemployer pension plans
that cover its various union employees. These plans provide
benefits based on union members' earnings and periods of coverage
under the respective plans. It is not cost effective to accumulate
information regarding the pension expense under these plans.
(12) Line of credit - bank
On December 31, 2001, the Company renewed its line of credit in the
amount of $2,000 with Merrill Lynch for an additional year. The line of
credit calls for borrowings at 3% over the 30 day dealer commercial paper
rate. At December 31, 2001 and 2000 the borrowing base rate was
approximately equal to prime, and there was $190 and $-0-, respectively,
borrowed against this line.
F-20
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(13) Stockholders' equity:
(A) Stock option plan:
The Board of Directors of the Company adopted the 1995 Stock
Option Plan (the Plan). The Plan enabled the Company to offer an
incentive-based compensation system to its employees, officers,
directors and consultants.
A total of 750,000 shares were authorized for issuance under the
Plan. Options to purchase 610,000 shares of common stock at $1.50
per share were issued (of which, 535,000 shares were issued to
officers and directors of the Company and its subsidiary). The
Plan requires that the exercise price of options be set at not
less than the fair market value of the common stock on the date of
grants. In the case of the initial options, the price of $1.50 was
determined to be in excess of the fair market value in light of
the contingencies facing the Company prior to completion of this
Distribution. Options awarded vest one-third on each anniversary
of the date of grant and are fully vested three years after grant
and expire ten years from the date of the grant. Additional credit
towards vesting is given in the event of death (six months) or
disability (three months). Any shares which are subject to an
award but are not used because the terms and conditions of the
award are not met, or any shares which are used by participants to
pay all or part of the purchase price of any option may again be
used for awards under the Plan. The Plan provides that no shares
may be issued to officers or directors in excess of the 750,000
shares originally planned to be authorized unless the Company's
stockholders approve an increase in the number of shares which may
be used for that purpose. At the Company's annual meeting held on
June 27, 1996, the stockholders approved an amendment to the plan
to increase by 350,000 shares the aggregate number of shares of
common stock available for future options to 490,000 shares of
common stock.
Holders of shares issued pursuant to the Plan are entitled to
registration of such shares annually, subject to restrictions in
any underwriting agreement. During 2001, 2000 and 1999, -0-,
1,667, and -0- options, respectively, under the Plan were
exercised. During 2001 and 2000, no new options were granted.
During 1999, 55,000 options were issued to employees and a
director. At December 31, 2001, there were 650,000 exercisable
options outstanding, all of which have an exercise price of $1.50
per share.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation
cost for the Company's stock option plan been determined based on
the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's pro forma net income for 1999 would
have been $1,338 and the pro forma net income per share - basic
and diluted would remain at .25, unchanged.
F-21
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except share data)
----------------------------
(13) Stockholders' equity - cont'd:
(A) Stock option plan - cont'd:
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1999:
dividend yield of 0%; expected volatility of 54.67%; risk-free
interest rate of 7.00%; and expected lives of six years.
(B) Preferred stock:
The Company is authorized to issue 1,000,000 shares of preferred
stock. Through December 31, 2000, no shares of preferred stock
have been issued by the Company.
(14) Backlog:
At December 31, 2001, the Company had a backlog of $51,906. Backlog
represents the amount of revenue the Company expects to realize from work
to be performed on uncompleted contracts in progress at year end and from
contractual agreements on work which has not commenced.
(15) Impact of recently issued accounting standards:
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." These standards require that all business
combinations be accounted for using the purchase method and that all
goodwill not be amortized, but tested periodically for impairment and
provide guidelines for new disclosure requirements. The standards outline
the criteria for initial recognition and measurement of intangibles,
assignment of assets and liabilities including goodwill to reporting
units, and goodwill impairment testing. The provisions of SFAS No. 141
and SFAS No. 142 apply to all business combinations after June 30, 2001.
The provisions of SFAS No. 142 for existing goodwill and other intangible
assets are required to be implemented effective January 1, 2002.
Management believes that the implementation of SFAS No. 142 will result
in a significant write-down of goodwill upon adoption.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
March 19, 2001 its behalf by the undersigned, thereunto duly authorized.
KSW, INC.
By: /s/ Floyd Warkol
------------------------
Floyd Warkol
President, Chief Executive Officer,
Secretary and Chairman of the Board of
Directors
March 19, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Floyd Warkol
----------------------
Floyd Warkol
President, Chief Executive Officer,
Secretary and Chairman of the Board of
Directors
March 19, 2002
/s/ Burton Reyer
-----------------------
Burton Reyer
Vice President and Director
March 19, 2002
/s/ Robert Brussel
-----------------------
Robert Brussel
Chief Financial Officer and Director
March 19, 2002
/s/ Stanley Kreitman
Stanley Kreitman
Director
March 19, 2002
/s/ Daniel Spiegel
Daniel Spiegel
Director
March 19, 2002
F-23